Bitcoin Mining Difficulty: A Self-Regulating System

Mining is the backbone of the Bitcoin network.

Without this utility, the network collapses on its back, just like a human who breaks their backbone. Mining ensures that the network is decentralized, and transactions go through with a supervising central entity. Miners, in their hundreds of thousands, keep the system fluid and accountable with their service.

But no one wants to work for free.
Yes, for miners to have the motivation to provide this valuable service, they need a fitting incentive. Block rewards and transaction fees are what interest most miners in this activity. Maybe one or two do it out of real belief in decentralization. But humans being humans, profitability has to be a primary consideration.

What Determines Mining Profitability?

Various factors come into play as relates to your bottom line from mining. The two main variables are:

1. The mining difficulty level.
2. The price of Bitcoin.

a. Mining Difficulty

More people, more problems.

Well, that is a non-typical application of this quote but still fitting. The more people try to mine Bitcoin, the more difficult it is. If you move into a town and open the only convenience store, you make easy profits and don’t struggle to sell your product.

Assume five other people open similar stores.

Naturally, it becomes challenging to make the same profits as before. Unless you can offer the consumer something the other stores don’t, you have to contend with the competition. 

Apply the same logic to mining 

As Bitcoin became more popular, mining got more difficult. There are only 21 million Bitcoins to prevent inflation. Bitcoin is a deflationary cryptocurrency because there is a finite amount.  

Therefore, to justify the mining difficulty, you need the best equipment available and the cheapest power you can find. Advanced Mining has both of these.

b. Bitcoin Price as a Factor

Let’s rope in the second variable, Bitcoin prices. To make the variable practical, let’s use a real-life gold mine as an example.

Picture a gold mine with 100 gold nuggets in it. Suppose you are the only one with access to mine, but in the outside world, few people care about gold. So, you mine the 100 nuggets and sell each for a paltry $1. 

Even if you manage to sell all the 100 nuggets, you only end up with one hundred dollars.

Now, take the same mine, but this time everyone is trying to mine the gold. In such a competitive environment, each nugget of gold will invariably become more expensive. Say $1,000 per nugget. If you manage to land a single nugget of gold, you have a thousand dollars in your pocket!

In the exact same way, the more people get involved in trying to mine and use Bitcoin, the higher prices go.

Even though it is more difficult to mine one Bitcoin, the rewards for mining that Bitcoin means that you still have the incentive to try and compete for the mining rewards.

Bitcoin Mining Difficulty Follows Price

These two factors are dynamic. The higher the mining difficulty, the less Bitcoin you get for a fixed amount of power. 

To justify the difficulty, prices tend to go up. The higher the price, the more people get interested in Bitcoin mining. As with any asset, more people get interested in it when prices are going up.

Therefore, mining difficulty follows prices.

But the drag effect is not necessarily instantaneous.

After the historic Bitcoin Bull Run of late 2017, peak mining difficulty actually came about seven months later. People don’t know how to time the market. This is because people saw the Bitcoin price skyrocket and got interested in mining. 

Even though the bear market made mining unprofitable for most, they still hoped that prices would recover and return to profitability.

Bitcoin mining equipment prices also follow prices. As Bitcoin prices went up in that period, the prices of mining equipment like Antminer went up.

Bitcoin Is a Self-Regulating System

When people see Bitcoin prices go up, they go into a frenzy buying equipment. The natural consequence is that mining difficulty goes up. 

If there is a drop in Bitcoin prices, people lose interest because people with high electricity rates become unprofitable and mining difficulty levels off with time. Even with lower prices, if you can keep mining as mining difficulty goes down, you will be able to mine more Bitcoin with the same amount of energy.

The drag effect prices have on mining difficulty leads to a self-regulating system. Bitcoin mining has been a self-regulating system for a decade, and there is no reason for this trend to change.

Mining follows the basic laws of supply and demand.

Yes, mining difficulty may lag, sometimes by months. However, if you find a mining solution with low electricity costs and low overhead, you can maintain profitability throughout.

Profitability for Efficient Bitcoin Miners

High-efficiency miners, with the resources to seek the best locations, energy rates, and scale mining capacity, are more likely to succeed. This bracket is where Advanced Mining fits.

The high efficiency miner can be able to make even more during periods of bear markets before mining difficulty drags to adjust to the new prices. Miners without the low power costs and high overhead will have to turn off their machines because low Bitcoin prices take them out of business. 

Having this endurance means that a high-efficiency miner can be in business all throughout the period.  As mining difficulty goes down, this is the best time to start mining Bitcoin. With smaller competition, resilient miners can mine more Bitcoin per fixed unit of power than before.

Mining is about surviving hard times. The self-regulating nature of Bitcoin mining means that low-efficiency miners are most vulnerable during bear markets. Just like natural selection in evolution, it is about survival for the fittest.

Human emotion has fueled many to go into Bitcoin mining with low efficiency during Bull Markets. When prices go down, such entities find themselves reeling into obscurity because their costs become too much.  During a price downturn, it can be the best time to buy into mining and Bitcoin from a high-efficiency miner. You can mine more Bitcoin when mining difficulty goes down and sell mined Bitcoin for good profits when prices rebound.

Advanced Mining as an Efficient Bitcoin Mining Company 

Advanced Mining is a high-efficiency miner. We did our research to ensure that we had the best locations for our data centers, minimizing both power costs and overhead.

When we started mining, Bitcoin prices were about $15,000. When prices cratered during the Bitcoin bear market, a lot of companies were forced out of businesses. Advanced Mining was able to survive one of the worst bear markets in Bitcoin’s short history, and there is no reason why we should not survive the next.

Even with the Coronavirus fueled Bitcoin selloff, Advanced Mining will survive and probably thrive. As some miners go out of business, our equipment will keep running and even benefit as mining difficulty goes down. 

Advanced Mining is well-positioned because we have no liabilities and have great liquidity. As some companies go out of business, Advanced Mining can go another level. We have gone through a bear market even when there was more panic within the Bitcoin community. 

At the moment, Advanced Mining has ordered over a million dollars worth of the latest Antminer mining equipment to ramp up operations further. This equipment is fully-paid for and coupled with cheap electricity rates, gives us a more competitive advantage.

To remain profitable during bear markets, we sourced out low power costs throughout North America. During periods of high Bitcoin prices, we can increase our hash power and pass profits to our customers. 

Join Advanced Miningtoday and be part of the future of Bitcoin mining!