Bitcoin’s mining difficulty may be set to increase for the first time since China’s crackdown on crypto mining in May.
A rapid expansion of mining facilities in North America and the return of Chinese miners through overseas hosting sites are two major factors that will drive up mining difficulty, according to industry pros.
Mining difficulty is a metric to describe how hard it is to mine a block and get rewards in bitcoin. An increase in mining difficulty requires a miner to use more computing power to earn bitcoin, which reduces the miner’s profit margin. The more mining machines are online, the higher the mining difficulty and the more secure the Bitcoin network..
Mining difficulty has seen a continuous decrease since the Chinese central government called for local authorities to shut off bitcoin mining operations across the country on May 21. The latest bi-weekly difficulty level posted on July 17 is the fourth downward adjustment since the crackdown.
“For the first time since China’s hashrate went lights out, we’re anticipating next week’s adjustment to be positive, a roughly 1.75% increase,” according to Seattle-based mining Luxor’s newsletter on Saturday.
Even before China’s crackdown, big North American mining companies such as Marathon and Riot were already expanding their operations due to bitcoin’s historic bull run in early 2021, Luxor CEO Nick Hansen said.
“While we saw the big hashrate drop across the network during that time, other miners were also deploying new hardware,” Hansen said. “It was just drowned out by the disconnections in China.”
Marathon said it entered a binding letter of intent with the U.S.-based miner hosting services provider Compute North in May to run about 73,000 bitcoin miners as part of the hosting firm’s 300-megawatts (gw) data center in Texas. The Las Vegas-based company claimed its hashrate would reach 10.37 EH/s after all its mining machines are fully deployed.
“I am personally expecting a positive difficulty adjustment next month because the displaced miners (from China) have since found new homes and they aren’t coming offline anytime soon,” said Azam Roslan, senior sales associate at Wattum, a New York-based mining company that offers hosting and mining machine brokerage services.
Most of the growth that will drive up mining difficulty in the coming months would still be from the North American miners who planned expansion ahead of Beijing’s crackdown last year or in early 2021, Daniel Frumkin, researcher at Prague-based mining company Slush Pool, said.
“The Chinese miners that were forced offline in the crackdown and did not find capacity available right away are more likely to take more than three months to get back online because, in most cases, they have to collaborate on building out more infrastructure,” Frumkin said.
The positive adjustment could be the beginning of a drastic surge in hashrate in the coming year.
“I think we have reached that minimum low difficulty point and now we are going to start to grow unless there are other big government shakeups or changing bitcoin price,” Hansen said.
So while Beijing’s crackdown on crypto mining might be a disaster for Chinese miners, it could be a windfall for the miners in the rest of the world.
Mining companies in North America and central Asia have raked in wide profit margins due to the low mining difficulty. However, the window of opportunity is slowly closing on miners as mining companies across the world are scrambling to build out new hosting sites to run mining machines.
“We are a long, long way away from where we were before the crackdown, but my guess is that adjustments will be positive for a long time,” Frumkin said.
Hasen expects that in about 12 months hashrate would return to the level before China’s crackdown, based on the average lead time to build out new mining facilities to host both new machines and those that come from the Chinese miners.
“I do not think the positive adjustment is just a blip and we will see significant growth and probably exceed the all-time high before the crackdown given how much new capacities are being built,” Hansen said.