Dropping below shutdown price = mining difficulty? Misunderstood mining knowledge points you need to know

Here is an important but often misunderstood "mining" knowledge.

Original Title: "People Who Often Cry 'Mining Difficulty Is Coming' May Not Really Understand Bitcoin Mining"
Author: Huang Xuejiao
Editor: Mandy Wang Mengdie

As a journalist who has been following the mining industry for a long time, I have found that many people like to express their views and inferences on Bitcoin mining during extreme market conditions and industry turmoil, causing dissemination and panic among investors.

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However, in reality, a considerable portion of this is derived from erroneous conceptual deductions. Many people who think they understand the principles of mining or have had contact with the mining industry actually have only a partial understanding of some basic concepts of mining, and even have misconceptions.

For example, on March 12th, when BTC experienced a significant drop, the Bitcoin network did not produce a block for as long as 1 hour. Many people (including myself and some friends in the mining circle) thought it was due to mining machines being shut down or a sharp drop in computing power, leading to concerns that "mining difficulty" might be on the horizon.

However, in reality, the network not producing blocks for a long time has occurred before, which is simply a matter of luck where no mining machine collides to produce a hash result that meets the difficulty within 1 hour.

There are many similar examples where from miners to coin holders, due to a misunderstanding of the meaning of various data, many over-interpretations and even distortions have been made. If trading is guided by this, the risk is evidently high. In the eyes of professionals, this can be completely avoided.

Therefore, Odaily Star Daily, in collaboration with Poolin Mining Pool, has carefully compiled an important but often misunderstood "mining" knowledge. Come and see how many you know.

On the morning of March 18th, the 4th day after the major Bitcoin crash, everyone was fearing the arrival of "mining difficulty."

A piece of news stating "Bitcoin has dropped by about 40% this month, falling below 100 E" scared many people.

The statistics were provided by the well-known data analysis institution in the industry, Skew Markets, using data from the professional data website BitinfoCharts, which seemed reliable. However, experts could immediately tell that this data was highly exaggerated.

Upon reviewing the data source BitinfoCharts, subtracting and dividing the highest (133.29) and lowest (95.96) points of the month, the maximum drop within the month was calculated to be 28%. Therefore, the figure of 40% can be considered a significant exaggeration.

If Skew did not make a calculation error and concluded that Bitcoin dropped by 28% this month, can it represent the actual situation? In other words, is "network hashrate" a reliable data?

The fact is—no, because this "network hashrate" is derived from a formula, a theoretical value, and not real-time monitored data.

Typically, the industry uses the "difficulty calculation formula" as follows:

In reality, there is no record of how many mining machines are operating in the network, and miners cannot find any authoritative statistical methods.

According to the formula, the length of time it takes to mine a block determines the theoretical hashrate displayed on the block explorer. However, we must understand that Bitcoin's hash collision mining is a probability problem. The same hashrate may result in finding a block in 3 minutes or half an hour. Therefore, short-term theoretical hashrate does not necessarily reflect the actual increase or decrease in hashrate.

For example, if the normal output should be 144 blocks per day, but the actual number of blocks mined in a day is less than 144, whether it is due to a rapid decline in hashrate, this requires a longer time frame to observe. By examining the daily block output over a longer period, we can further confirm if the decline is due to hashrate decrease.

However, instant decisions cannot rely on data from a month or even half a year ago. Therefore, miners generally use the average hashrate over the past 7 days as a representation of hashrate for a certain period, balancing accuracy and efficiency.

Understanding these points, when you see headlines about Bitcoin's hashrate "plummeting" or "crashing" within a day, you will know better.

On the evening of March 12th, regarding the impact of the major Bitcoin crash on the mining industry, Pan Zhibiao, the founder of Biyin, boldly speculated: currently, there are 11 days until the next difficulty adjustment, but if the hashrate drops by 30% during this period, the difficulty adjustment period will be extended by 5 days, becoming 16 days. Therefore, miners must ensure at least half a month's cash flow (to wait for the network difficulty to drop to a suitable mining level).

Many people may be puzzled by this. Everyone knows that Bitcoin adjusts its difficulty every 14 days, so how can it be extended?

The reason is simple. The purpose of adjusting Bitcoin network difficulty is to maintain the average block time at 10 minutes per block, adjusting every 2016 blocks as a cycle.

The well-known 14-day adjustment is based on relatively stable network hashrate and little variation in block time around 10 minutes in the short term.

As mentioned above, if mining hashrate truly drops rapidly and mining machines cannot find the target hash value within the average time, the block time will also be lengthened, affecting the difficulty adjustment cycle.

To understand this issue, we need to know how the shutdown price is calculated.

The shutdown price refers to the point where the price of the coin drops to the level where the revenue of a particular mining machine equals the cost (i.e., zero net income).

When the price of the coin falls below this point, mining with that machine becomes unprofitable. Therefore, from an economic perspective, most miners should temporarily shut down and observe the market at this point.

During the crash on March 12-13, many old mining machines quickly reached their shutdown prices, while high-performance new-generation machines with 45-65W/T were still operating at a small profit of a few cents to a few dollars.

However, it has been observed that the Bitcoin hashrate has not significantly decreased in the past few days. According to estimates from several industry veterans, among the 100 E hashrate at the end of 2019, 50E came from old mining machines at the 15TH/s level. Clearly, these machines have not been completely decommissioned until now.

Are miners all mining at a loss?

From the calculation formula of the shutdown price, when "machine revenue - cost (mainly electricity) = 0," mining should be stopped. Under the same coin price at the same time, different electricity costs will affect the level of the shutdown price. Miners with lower electricity costs can withstand a drop in coin price, meaning their shutdown price is lower.

Therefore, when we say the shutdown price has been breached, it is based on the industry's common level of electricity costs. Miners with access to cheap electricity resources may still operate old machines.

If the electricity price is 0.24 yuan/kWh and the coin price is $5000, today's Antminer S9 still generates a small profit.

Even if miners intend to shut down, it is not that easy in practice. For example, many mining farms have already reported their electricity consumption to the relevant authorities, so it is not easy to suddenly shut down. For customers who cannot afford the electricity cost, both parties may choose to temporarily rent out the machines to mining farms to continue operations. For the mining farm owners, their electricity costs are much cheaper than those of the customers, so operating old machines may not necessarily result in losses.

Additionally, many people in social circles like to make statements such as "when BTC price falls to xxxx, all S9 machines will be squeezed out." This is also a very questionable statement. As mentioned earlier, S9-grade old mining machines still account for nearly half of the total network hashrate. If these machines shut down, the so-called "shutdown price" will also significantly decrease, making it less likely for everyone to shut down easily. This becomes a "prisoner's dilemma." In reality, it is not that easy to shut down all old mining machines.

Furthermore, many miners today choose to use financial instruments to survive the downturn in the industry. A short-term breach of the "shutdown price" does not necessarily affect the hashrate.

At the end of 2018, the mining community was once very enthusiastic about a mining optimization algorithm called Asicboost. As the name suggests, the optimization algorithm can increase mining efficiency.

According to data calculated by the Rawpool mining pool, adding this algorithm to the firmware of a machine can reduce energy consumption by more than 12.5%. The logic behind this reduction is that by utilizing the characteristics of the block data format, the machine cleverly reduces the number of times it receives data, thereby reducing operating power consumption.

According to public information, Asicboost was first proposed by two researchers, Timo Hanke and Sergio Lerner, in 2015 and subsequent patent applications. Possibly constrained by the patent, this technology was not widely used in the early stages.

Until October 2018, during a downturn in the coin price and when many mining machines were on the verge of shutdown, Bitmain announced that it would add Asicboost to models such as Antminer S9 and T9+.

Following the announcement, major mining pools quickly announced their compatibility with "AsicBoost mining."

According to the latest data from Asicboost.dance, the usage rate of Asicboost has been steadily increasing, rising from less than 5% penetration to nearly 70% now, meaning nearly 3/4 of the network is using "cheats."

During the major crash on March 12-13, many contract users who did not have time to replenish their positions were liquidated. This event also posed another major challenge to the speed of Bitcoin network transactions. Data shows that from the 12th to the 14th, the total number of unconfirmed Bitcoin transactions surged.

Generally, this situation tends to occur whenever there is market volatility.

At this time, if users do not want their transactions to be stuck for too long, they must increase the transaction fee to increase the probability of being prioritized by miners for inclusion in a block. However, even then, speed is not guaranteed.

In fact, directly providing a mining pool with a "small fee" can also speed up this process.

Currently, many mining pools, including Biyin, have introduced "transaction acceleration" services. Users who purchase this service will have their transactions placed at the front of the line for the next block to be mined by the pool. If the next block is successfully mined by that pool, the transaction will be confirmed immediately. If the pool does not mine the next block, it will increase the transaction fee for that transaction to incentivize other pools to prioritize it, thereby accelerating the transaction.

It is understood that users who purchase this service have an average transaction confirmation time of 25 minutes, similar to the time required for a regular transaction when the network is not congested. This service provides an additional option during periods of high transaction volume and network congestion.

Have you understood all of these "lesser-known facts"? The next time you see someone making baseless comments about mining, or expressing opinions that lack scrutiny, don't forget to share this article from Odaily Star Daily with them!

This article is authorized for reprint by ChainNews, article source: ChainNews（ID：chainnewscom）

Further Reading

• Riding the Mining Craze: New York Power Plant Installs 7,000 Miners, Producing 5.5 Bitcoins Daily

• How to Position GPU Mining in the Year of ETH and ETC Transformation? Insights from Industry Practitioners

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