The impact of seasonal mining fluctuations on Bitcoin

So-called seasonal mining fluctuations on the Bitcoin network have been causing quite a bit of controversy recently.

It is said that with the end of China's rainy season around August to October each year, cheap and abundant hydroelectric power will dry up, and many inefficient new mines will have to close their factories or relocate to other places in search of cheaper and more readily available energy, which has also led to migratory or nomadic mines.

Some have also argued that the network has a significant drop in hash rate and difficulty each year, roughly in line with seasonal drops in Chinese hydroelectric power. This certainly seems to be the case this fall, as many have speculated that the recent loss of around 48 Eh/s (30% of the network's total hash rate) was due to this phenomenon. But do data from other years support this view?

The recent difficulty adjustment at block 655,200 was the largest in Bitcoin’s history. Clark Moody’s dashboard shows that the block difficulty dropped by 16% based on the aforementioned loss of network hash rate.

Bitcoin Block Production Rate, Difficulty Adjustment, and Hash Rate

The Bitcoin protocol is fine-tuned and optimized for certain predictable outcomes through a set of carefully designed system rules and guidelines, which were made into free and open source software from the beginning.

The Bitcoin time chain is a series of blocks that validate, group and order transactions based on a set of pre-set rules. One of these rules is that blocks are added to the chain at a programmed rate of approximately every 10 minutes, 6 blocks per hour, and 144 blocks per day.

Block difficulty is generally proportional to the amount of computational work required by miners to generate a block. The difficulty of the Bitcoin genesis block was 1. Yesterday, the block difficulty was 19,997,335,994,446. At the time of writing, the difficulty is 16,787,779,609,932. This means that finding a block today is 16.7 trillion times more difficult than finding the first block. Block difficulty is a unitless Bitcoin network metric.

In order to maintain a 10-minute block production rate despite changes in the number of miners and hash rate, the protocol programmatically adjusts the block difficulty every 2016 blocks, or approximately every two weeks , which is often referred to as the “ Bitcoin block difficulty point .”

This difficulty adjustment algorithm allows for a stable average block generation rate even when the network hash rate fluctuates widely. Over time, and as more and more miners try their luck on the network, the block difficulty automatically adjusts upwards to compensate and stabilize block production.

As you can see from the chart above, after a drop in hash rate, block difficulty usually also drops, and vice versa. On average, if Bitcoin blocks are being created faster than once every 10 minutes (or slower), it means that there is more (or less) computing power available to Bitcoin than the difficulty threshold can handle. As more or fewer miners work on the blockchain, the block difficulty target number will be changed to compensate and ensure that a block is created every ten minutes.

While we can clearly see the decrease in difficulty on the linear graph, the decrease in hash rate and difficulty is not as obvious in the logarithmic graph above. In the history of the Bitcoin network, block difficulty has generally been on an upward trend, with only a few instances of difficulty decreasing. This is partly due to the improvement in the energy efficiency of mining equipment.

Over the past decade, there have been only a few months when the block difficulty was lower than it was at the beginning of the decade. This consistent growth is even more evident in the charts of the monthly and yearly average hash rate of the Bitcoin network. There has not been a single month in which the Bitcoin network hash rate has fallen year-over-year.

Seasonal fluctuations

So, now that we’ve established that Bitcoin’s hash rate surges over long enough time frames, is there a valid theory as to how seasonal fluctuations could lead to significant changes in the network’s hash rate?

As can be seen from the chart above, in 2020, 2019, and 2018, the average network hash rate showed a downward trend at the end of the year. What about other years?

Fall 2013

The Bitcoin network does not appear to have experienced downward difficulty adjustments in 2013. This positive upward trend could be due to the introduction of efficient ASIC miners during this time.

Fall 2014

The network saw some difficulty adjustments downward during late November 2014. However, for most of the season, the difficulty appears to have been increasing.

Fall 2015

The situation in 2015 was similar to that in 2013, except that more and better ASIC miners appeared at this time.

Fall 2016

There was a small difficulty adjustment around October 2016. At the same time, the growth rate of the network hash rate and difficulty slowed down in the same time frame, but the values ​​are still rising.

Fall 2017

The situation in 2017 is similar to that in 2016: the network hash rate growth stagnated, and the difficulty was adjusted downward several times. This is particularly noteworthy because the price of Bitcoin increased significantly during this time. However, these fluctuations may not be caused by miner migration. During the same seasonal time frame in 2017, some major miners were forking the network and finding other ways to manipulate the hash rate.

Fall 2018

The fall of 2018 was probably the most obvious seasonal trend, with both the network’s difficulty and hash rate dropping rapidly. Notably, the Bitcoin price also dropped from its all-time highs during this time. A large portion of the network, almost half, went offline seasonally. However, due to the nature of the difficulty adjustment algorithm, the peer-to-peer network continued to grow.

Fall 2019

The fall of 2019 wasn’t as dramatic as 2018, but it did see some significant difficulty adjustments and hash rate declines. Additionally, there was a similar setback in the growth of network hashrate during the same time frame.

Fall 2020

Centralization of mining is a common criticism of Bitcoin, and the narrative of seasonal closures of many Chinese ASIC mining companies seems to apply to the fall of 2020 as well. Where else can people enjoy abundant and cheap energy while having 48Eh/s of hashrate? After all, that’s the equivalent of 3 million mining units of an Antminer S9 ASIC.

So where does this difficulty reduction rank during the period of October and November?

Using on-chain data, we can see that the biggest drop in difficulty was in 2011, with even larger monthly drops, with several different difficulty adjustments. The November 2020 difficulty drop was the biggest drop we’ve seen in recent years, due to significant seasonal fluctuations in Chinese hydroelectric power companies. There were no difficulty drops between 2012 and 2015.

So how do these seasonal difficulty and hash rate fluctuations stack up to the entire Bitcoin network block history? The following histogram may provide us with some inspiration:

Bitcoin Mining Death Spiral?

Whenever Bitcoin's network hash rate or price drops, there is always a lot of speculation about the potential for a so-called "mining death spiral." They claim that if the price drops low enough, miners will decide to shut down the network, which will cause the network to lose a significant percentage of its hash rate, which will force some miners to close their profitable positions, driving down the market price and further driving this vicious feedback loop until a death spiral occurs. For a network like Bitcoin, this will cause miners to go on strike, blocks to stop being mined, the time chain to stop developing, and the entire Bitcoin will fail.

However, examples like Dogecoin ($DOGE) are still producing blocks, so this pessimistic theory may not apply to these types of distributed systems. There are many enthusiasts and other "miners of last resort" who will maintain these systems not only to maintain them, but also to maintain the faith.

So, let’s imagine what would happen if 50% of miners stopped and shut down mining at the difficulty adjustment block?

To find 2016 blocks, the remaining half of miners will need to take about twice as long. That’s about four weeks, or a month, to reach the next difficulty adjustment point. What impact will this have on the network?

In this case, the mempool will start to build up, and transactions will be delayed and fees will increase as people bid up the new, even more scarce block space. This is actually exactly what we saw in the days following the recent hashrate drop.

However, the Bitcoin network eventually adjusted the difficulty, as it has done every time in the past with block 2016. This difficulty adjustment algorithm is a very effective solution to several different challenges faced by the Bitcoin network, and it is because of these types of solutions that this self-regulating system will continue to improve moving forward.

Original author: Tyler Bain

Original link:

https://bitcoinmagazine.com/articles/how-do-seasonal-fluctuations-really-affect-bitcoin-mining