A huge number of mining machines are on standby during the flood season, the computing power of the entire network has been restored, will the Bitcoin position change?

Author: Lai Daojun

Source: Laidao Blockchain

In 2018, the entire cryptocurrency market was in a bear market, and Bitcoin also fell from its high of $20,000 at the beginning of the year to a low of $3,000. As the Bitcoin bubble dissipated, the gold mining industry behind it, the decline of the mining machine market, also broke through the cost price of mining many times, and the mining farms with low competitiveness directly chose to shut down.

Data shows that the total computing power of the Bitcoin network dropped from a peak of 61E (1E=1000P, 1P=1000T) to 33E in December 2018, a decrease of 28E, close to 50% of the total computing power of the network. So how many mining machines are roughly equivalent to these reduced computing powers? Calculated based on the computing power of the mainstream mining machine Ant S9i 14T at the time: 28*1000*1000/14=2000000, which means that about 2 million mining machines are not profitable and are in a waiting state. As we all know, the cost of Bitcoin mining, in addition to hardware, is mainly electricity costs. Those mining machines that are waiting to be started are also shut down because the mining income cannot pay the electricity bill.

Now, the flood season in Yunnan, Guizhou and Sichuan in April and May has officially arrived, which means that the cost of electricity prices has dropped by more than half, to about 1-2 cents per kilowatt-hour. At this time, miners have completed large-scale migration and are ready to make a comeback during the flood season. So, is it reasonable for miners who are on the verge of survival to rely on the flood season? How will they affect the cryptocurrency market?

When Satoshi Nakamoto first created Bitcoin, he added the "prisoner's dilemma" to the network, that is, the more people who mine, or more precisely, the more computing power that joins the Bitcoin network, the greater the difficulty of mining. The total computing power reward is fixed, and the income per unit computing power is lower; conversely, the less computing power, the higher the income per unit computing power. (The income is relative to Bitcoin, not legal currency)

When the price of Bitcoin fiat currency continues to rise, miners continue to pour into the mining market, and competition will arise. If the growth rate of Bitcoin fiat currency price is lower than the growth rate of computing power, in fact, the miners' income will not increase but decrease, which makes miners very distressed because people are profit-seeking. Where there is profit, someone will intervene. If you don't do it, someone will naturally do it. When the price of Bitcoin fiat currency drops, it will fall into a vicious cycle. The price of fiat currency drops, and miners will only choose to shut down when the cost is reached. This cost is often the cost of electricity. This will cause the Bitcoin computing power to suddenly drop sharply, forming a panic that threatens the Bitcoin security model, and then the price of the currency continues to fall, and the computing power decreases again. We call these two situations the Bitcoin computing power death spiral.

In order to escape the death spiral, it is obviously impossible to rely solely on the internal automatic adjustment of the Bitcoin network. Therefore, we must rely on the external environment to jump out of this death spiral. In other words, in order to break this death balance, the external environment must stimulate the continued rise in the price of Bitcoin fiat currency.

The price increase requires breaking the balance between supply and demand. From this perspective, if we look at the model of whether the flood season will break the balance between supply and demand, we can know whether miners can jump out of the prisoner's dilemma and escape the death spiral in a short time.

In the Bitcoin supply model, supply is dynamically balanced. In the Bitcoin network, a block is generated approximately every 10 minutes, and the miner who mines this block receives the issuance reward from the Bitcoin network, which is currently 12.5 Bitcoins. Because miners are currently mining on a large scale, the reward is generally the common benefit of large mining pools. Since the flood season does not change the issuance rules, it has no effect on supply.

Let’s look at the demand, that is, the demand for Bitcoin itself. In the process of migrating the mine to the flood season area, a lot of costs are actually incurred, including migration costs (transportation, maintenance, machine wear and tear, etc.); migration to the destination, and then the cost of building infrastructure (mines, manpower, maintenance, electricity bill contracts, etc.)... You must know that these costs require upfront investment without any benefits.

Well, the first priority before starting the mining machine to mine is to recover the cost. The opening article says that nearly 50% of the mining machines are in standby mode. These mining machines are a batch that needs to recover the cost in a short period of time. According to rough estimates, there is a market selling pressure of at least 50% of the circulation every day, that is, 1800*1/2=900 bitcoins. In fact, the remaining 50% also needs to sell a large proportion of bitcoins to cover the electricity price.

Assuming that there is an additional selling pressure of 900 bitcoins, with other conditions unchanged, regardless of the size of the impact, the demand for bitcoin will actually decrease, which means that the cost recovery period of migration during the flood season will lead to a drop in the price of bitcoin.

The period of cost recovery in the early flood season actually exacerbates the process of the death spiral, which is something few people notice, or many people don’t care at all. In either case, it doesn’t matter. What’s important is the timing. The migration of miners to the flood area is the best time to change their positions.

With the rapid recovery of Bitcoin's computing power, there may be a short-term selling pressure, but the sharp increase in Bitcoin's computing power means that Bitcoin's security model has increased almost exponentially, which improves Bitcoin's robustness from a fundamental perspective and gives investors psychological confidence, which is a precious thing to jump out of the death spiral. In addition, after falling throughout 2018, Bitcoin began to stabilize gradually at the beginning of 2019, and the entire cryptocurrency market has also recovered.

If there are more uncertain risks before the flood season arrives, then the official arrival of the flood season will be the trigger point for the upward trend of the Bitcoin and other crypto markets in the medium and long term. Therefore, the subsequent position changes are counterintuitive and will increase instead of decrease. The points corresponding to this opportunity may never be found again in the subsequent development of Bitcoin.

Obviously, it is reasonable and the only option for miners to rely on the flood season to continue to pan for gold. However, it is their helpless move that happens to fuel the trend of the cryptocurrency market at the right time. The impact of the flood season is indeed worth looking forward to.