Practical information: Analyzing the recovery of BTC mining industry from the computing power difficulty curve

In the previous article "Bitcoin Mining Knowledge and Profit Analysis", we introduced Bitcoin mining knowledge in detail for investors who have not yet come into contact with Bitcoin, especially those outside the circle. It includes the background and vision of Bitcoin, the price trend chart of Bitcoin in the past 10 years and the price trend forecast for the next 2-3 years, whether now is the golden age for Bitcoin mining, etc.

Next, we will analyze the BTC mining industry in more depth through historical data and charts. We intercepted the difficulty changes of each Bitcoin mining difficulty cycle (about 14 days) since April 27, 2017, and intercepted the Bitcoin price data of the same period based on the time node of difficulty change. By comparing and analyzing the relationship between computing power difficulty, coin price, output and output value, we try to find the inherent rules of Bitcoin mining and provide a reference for investment in mining.

Figure 1 Mining difficulty and BTC price curve from the same period of 2017 to date

First, the stage of computing power difficulty growth:

The computing difficulty has been increasing exponentially since April 27, 2017, and reached its peak on October 4, 2018. It increased from 521.9745 GH/s to a maximum of 7454.9686 GH/s, with a maximum increase of 1328.2%. During the same period, the price of Bitcoin experienced a roller coaster trend, rising from $1440.3 to $19891 on December 17, 2017, and then began a bubble burst trend, falling to $6590.4 on October 4, 2018, with a maximum increase of 1281.0%. The detailed market situation is that since Bitcoin closed at $5848 on June 27, 2018, it has been hovering in the range of $6100-6790 for most of the time until November 14, 2018, until it fell below $5848 on November 14, setting a new low.

As shown in Figure 1, the relationship between Bitcoin price and computing difficulty in the price increase and decrease phases before October 4, 2018 can be specifically explained as follows: the rise in Bitcoin price attracted a large number of miners to enter mining, which increased the computing power index and thus showed a positive correlation. However, during the period of Bitcoin price decline, the computing difficulty continued to rise because mining was still profitable, so the price drop did not affect mining activities and computing difficulty growth. Until a certain critical point, on October 4, 2018, the Bitcoin price fell to US$6590.4 and began to fluctuate in the above-mentioned range of 6100-6790. After that, the computing difficulty reached its peak, mining activities began to decrease, and the computing difficulty began to fall, indicating that mining machines were gradually shut down and miners were gradually withdrawing from the market.

The second stage of decreasing computing power difficulty:

It fell from 27454.9686 GH/s to 5106.4229 on December 19, 2018, with a maximum drop of 31.5%. During the same period, the price of the coin fell from $6590.4 to $3810, a drop of 42.1%. The specific market situation is that the price of the coin fell to a low of $3283.4 on December 15, 2018, and then began to rise. The decline in computing power difficulty during this stage is divided into slow decline and sharp decline. The slow decline was caused by some foresighted mining owners exiting the market, while the sharp decline was caused by the BTC sharp drop caused by the BSV fork BCH on November 14, 2018, which led to the mining accident, and was caused by the mining owners being forced to shut down.

In short, the price of the currency falls before the difficulty of computing power, and also rises before the difficulty of computing power. The price dominates the mining activities.

Third, the recovery phase of computing power difficulty:

During this period, the price of Bitcoin fluctuated between 3283 and 4320 USD, and showed a convergent triangle pattern with a gradually rising bottom, and the trading volume shrank. The duration was from December 15, 2018 to April 2, 2019. During most of the period, it fluctuated between 3400 and 4320 USD. The computing power difficulty began to recover slowly, indicating that miners began to make profits at this price. Some mining machines that were forced to shut down began to start up, so the cost of Bitcoin mining was around 3400 USD. At this stage, the old machines were restarted, and the new machines had not yet entered the market to start mining.

Due to the current price and machine sales price, the mining investment payback period of mining machines is generally more than 14 months (see below for details). After experiencing the mining disaster, miners behave more rationally. Except for the mining machine manufacturers who have started to deploy mining with their own mining machines and some old machines restarted, miners are generally in a wait-and-see stage. Mining activities are not active. Because both the increase in computing power difficulty and the mining industry cycle lag behind the changes in currency prices.

In short, I think that despite the arrival of the flood season, as long as the price of Bitcoin remains below the important range of 6100-6790, there will not be a large number of new miners coming in, and the computing power difficulty will not increase significantly. Only when the price rises back to the above range and fully improves the profit margin and investment payback period of mining, will miners be eager to move, mining activities will begin to become active, and the computing power difficulty will gradually return to the previous high point. When the price rises and the computing power difficulty reaches a new high, the mining activity ends the recovery stage and enters the fourth stage, and becomes truly active.

Figure 2 below shows the dynamic payback period of the Innosilicon T3 39T mining machine. The payback period for miners to purchase mining machines for mining is 462 days, about 15.4 months. This is one of the reasons why a large number of miners are waiting and watching the current price.

Figure 2 Dynamic payback period of the Innosilicon T3 39T mining machine (data source: SWHY CryptoFund mining income calculator)

The following figure further shows the relationship between computing difficulty and Bitcoin output and Bitcoin output value. It is obvious that as the computing difficulty index increases, the Bitcoin output index decreases. Since February 7, 2018, Bitcoin output has fallen below the 10^-4 order of magnitude and has been maintained below 1*10^-4BTC for a long time, and has been maintained below 0.5*10^-4BTC for most of the time. Similarly, Bitcoin output value has been affected by the dual factors of falling output and price. After March 5, 2018, it has been maintained below $1 for a long time, and has been maintained below $0.26 for most of the time.

Figure 3 Mining difficulty and BTC output value curve from the same period of 2017 to date

Before 2018, the output value of Bitcoin was affected by both output and price, and the price dominated the output value. However, with the increase in mining difficulty, the output gradually decreased exponentially, and the impact of output was almost negligible. Therefore, after 2018, the output value of Bitcoin will be almost determined by the price.

Therefore, the mining activities after 2018 will be decisively dominated by the price of Bitcoin.

In summary, Bitcoin mining is currently in a recovery period, and the best period for mining is when the Bitcoin price returns to $6,100-6,790. When this price will come, there has been a detailed analysis above, please refer to the above. At present, the form of purchasing mining machine property rights for mining does not yet have the conditions for large-scale investment after the mining disaster. The mining model of leasing computing power has become popular and active because it greatly reduces the investment cost and shortens the investment payback period. However, how to distinguish between real computing power and Ponzi scheme scams will be analyzed separately in the future.

Risk warning: This article is for communication and sharing only and does not constitute any investment advice or opinions .