Thursday, January 9, 2022

Bitcoin Hash Rate Hits All-Time High Behind Price Rise, Private Pools in China

I probably don’t need to tell you that bitcoin’s price is up in the new year. But did you know that the bitcoin mining hash rate and difficulty are climbing too?

On January 5, 2020, Bitcoin’s hash rate struck a new all-time high of 117 exahashes per second (EH/s) (that is, miners are producing roughly 117,000,000,000,000,000,000 hashes every second in hopes of finding the next block for the network). Mining difficulty has risen in tandem, setting a new all time high of 13.79 T on the second day of the new year.

Further Reading: What Is Bitcoin Mining?

2020 is the year of Bitcoin’s third halving — an algorithmic event that cuts Bitcoin’s block reward (currently 25 BTC) in half. So, are miners racing to unearth as many bitcoin as possible before their yields are cut in half?

Maybe but probably not. There’s a less obvious, more nuanced explanation for the rise in hash rate: Established mining farms are now in a position to ramp up their operations.

Bitcoin Miners Chasing Hashes

“We see the majority of recent hash rate coming online from existing operations,” Ethan Vera, an operator at the North American Luxor Mining Pool, told Bitcoin Magazine. “The majority of hash rate increase is coming from China. F2Pool had a great week increasing their hash rate by about 1 exahash (about 5 percent [of total output]). Huobi and a few other pools also saw strong levels of hash rate increase.”

Some of this hash rate growth has come from operation of Bitmain’s Antminer S17+, a newly released, top-of-the-line ASIC mining device. But this is the only new hardware to hit the market in recent months. So, the majority of the additional hash rate is likely coming from older models that have become more economically viable to run as bitcoin’s price has appreciated in the new year, Vera believes. 

“We have a few partners that were not mining with their S9s when BTC was below $7,500, but have since turned them on,” he said, later adding that, typically, “hash rate follows price (amongst other things).”

When we take into account data from digital asset management firm CoinShares indicating that most bitcoin miners have a profitability threshold of $6,000 (that is, bitcoin’s price needs to be at least $6,000 for the majority of miners to net a profit with their setups), it stands to reason that hash rate is tracking price because, as Vera so concisely worded, “miners will mine when it’s profitable.”

The Luxor team “roughly agrees” with CoinShares’ $6,000 threshold. As bitcoin’s price approached this figure, Vera explained, miners turned off less efficient hardware to cut costs. But as the bitcoin price began to rise and these machines put them in the black, mining operators flipped them back on and the hash rate bounced. (We saw a similar scenario when bitcoin bottomed to $3,000 at the end of 2019; hash rate plummeted nearly 50 percent before regaining its footing as bitcoin’s price began rising in April 2019.)

“Given that is an average, there is quite a significant amount of variance, so as we approach that number we should see large hash rate fluctuations of miners turning off/on their machines,” Vera said.

With the price increasing, Vera thinks that “a good portion of miners would HODL more BTC as their margins increase” but that there are still “many miners [Luxor has] met that convert straight to RMB/USD regardless of their margin.”

Chinese Mining Pools Pick Up the Pace

But there’s an even more nuanced and convoluted reason still that the hash rate is rising. According to Vera, large mining farms, particularly in China, are providing hidden mining pools (aka anonymous pools) with materials for operations.

Luxor’s hypothesis stems from a rise in hash rate among these anonymous operators. Seeing this figure increase and putting two and two together with what it knows about the Chinese mining market, Luxor deduced that the larger mining pools are private miners adding a boost in operational capacity. 

“The amount of anonymous hash rate continues to increase. Likely the Chinese mega pools are providing large miners with private mining pools for their operations,” Vera said, adding that “from our knowledge, the major Western pools do not offer this product.”

This arrangement is a win-win for both parties: The Chinese mining pools collect a fee for providing the service, and the private miners get the benefit of a pooled hash rate while still remaining largely independent. 

This emerging trend ties into the recurrent trend of bitcoin mining’s concentration in China. According the CoinShares’ December 2019 mining report, the U.K. firm estimates that 65 percent of mining is concentrated in China; moreover, at the time of the report, 70 percent of all new hash rate that had come online since its report in June 2019 was coming from Chinese operators.

CoinShares’ data appears to examine hash rate that originates from China but not hash rate from other countries that contribute to Chinese mining pools. When factoring in hash rate that is imported from abroad, Vera said, the figure is alarmingly higher.

“From our analysis, China now controls roughly 90 percent of the BTC network on a mining pool level,” he said. 

As an operator of a North American mining pool himself, Vera obviously hopes that North American miners will keep their hash rate at home. Not only is there a decentralization argument here, but there’s a geopolitical one, as well. With U.S. and Iranian tensions escalating and the threat of long-standing economic sanctions against the Iranian regime looming, this could create a legal limbo for mining participants. 

As Bitcoin and its mining sector enjoy greater legitimacy among institutional players, the prospect of made-in-America mining pools may become more appealing if participants want to keep their profits clear of any sanctioned money.

“We think (and hope) you will start to see a shift away from non-U.S.-based mining pools from North American miners,” Vera said. “An interesting gray area of regulation is around mining with sanctioned countries (i.e., Iran). If you join a pool that also accepts hash rate from a sanctioned country, and a block is found from a miner in that region it could be a grey area. For large institutions we think this will become too large of a risk to take.”

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