- Hashrate growth slowing
- Profitability in satoshis directly correlated to hashrate
- Maturing of the mining space
This week, network difficulty increased 4.8% as total hashrate surpassed 200 EH/s for the first time ever. Yet breaking through mining profitability’s gloomy overcast is a bit of light. When measured in satoshis, the percent decrease in mining profitability is slowing.
Moreover, mining market dynamics are changing the game theory behind ASICs themselves. What was once a hashrate arms race is quickly becoming one of longevity.
Hashrate and profitability
Counterintuitively, the rate of hashrate growth year-over-year is actually declining over time as the marginal value of new hashrate added to the network continues to drop. In other words, each additional unit of hash dedicated to the network becomes a lower overall percentage of the network's hashrate.
The value of the marginal unit of hashrate is inversely correlated to profitability. If the marginal unit of hashrate has a smaller and smaller effect on network hashrate, then the profitability also decreases at a similar rate.
For example, take the change in year-over-year (YoY) hashrate growth from October 2018 of 454% compared to October 2021 at 13%. Although singular months, they adequately reflect the larger trend depicted below: the marginal unit of hashrate is having a smaller effect than previously.
A less aggressive hashrate growth has implications for the ASIC market, particularly around the economics of machine longevity.
ASICs are one of the few elastic goods associated with Bitcoin production. In economics, elasticity refers to the relationship of supply and demand in the context of multiple goods or market prices. For example, oil is considered an inelastic good because an increase in price does not generally change demand for the good.
For Bitcoin, an increase in the price does generally correspond to an increase in the demand for ASICs. So, a rise in demand for Bitcoin should induce more machines to come online.
However, each new ASIC is marginal to the last. Even if the industry responds to a general increase in demand for Bitcoin by creating more miners – as has occurred the last two years – the nature of hashrate growth will limit mining profitability’s downside when measured in satoshis.
So what does this mean for miners? Notwithstanding a large advancement in ASIC technology, ASICs may no longer be priced out by the next-generation machines but will rely on longevity to reach profitability. The lifetime of the ASIC will need to be stretched in order for it to recover the cost.
As the old adage goes, "time in the market, not timing the market."