Quarter 2-2022 Had Slow Growth of Bitcoin Hashrate
[TL; DR]
The bitcoin mining sector experienced the highest level of profit in 2021.
During Q2-2022 the price of BTC decreased while the bitcoin difficulty increased.
There was a sluggish growth of hashrate in Q2-2022.
Due to the decrease in hashprice many miners exited the BTC mining sector.
keywords: bitcoin hashrate, hashprice, mining, miners, inflation, power rate
The bearish crypto market has affected many variables including the bitcoin difficulty, its hashrate and the hashprice, reducing the miners’ profit levels. Apart from the associated cost of mining bitcoin such as the price of energy and efficiency of the equipment, the decrease in the price of BTC means that the miners’ profit margins keep on getting less and less. Already, some miners using old mining machinery experience losses. This article covers the state of bitcoin hashrate, bitcoin difficulty, hashprice and profit margins. Nevertheless, before we continue let's define a few key terms.
Hashrate, hashprice and bitcoin difficulty
Hashrate is a measurement of the computing power required per second during the mining process. In other words, it is the computational power needed to add bitcoin blocks. Adding blocks is a key component of a proof-of-work blockchain as the miners compete with each other to solve the complex mathematical equations necessary for verifying transactions. And as we already know, the miner who adds a new block gets a share of the transaction fee as well as the block’s rewards. It is also important to note that the hashrate is inferred from the speed in which the miners add new blocks to the blockchain.
bitcoin mining difficulty or simply bitcoin difficulty is the level of complexity which miners should overcome to validate transactions on a blockchain. The bitcoin difficulty is strongly correlated to the computing powers of the miners per second or hashrate. Finally, the hashprice is the financial reward miners get per tera-hash. As a fact, tera-hash means one trillion per second.
The margin profit of mining bitcoin peaked in 2021, months after China banned bitcoin mining. This is because when China banned mining the bitcoin difficulty decreased resulting in higher hashprice. In essence, the reduction of mining activities in China meant lower competition among the miners. Thus, the spread between the hashprice and the bitcoin price increased significantly.
Now, the decrease in the price of bitcoin reversed the trend. From the end of Q1 into Q2, 2022 there was an increase in the spread between the price of BTC and bitcoin difficulty. In particular, the price of BTC dropped greatly while the bitcoin difficulty increased. This reduced the USD hashprice, leading to lower mining profit margins. Depending on the mining equipment used, in some cases, the cost of mining became greater than the revenue generated. Therefore, such miners closed down their mining operations.
Source: Bankrate
Constraints to hash rate growth
Definitely, there was a very slow growth in hashrate in Q2-2022 due to several factors. Unfortunately, some experts believe that the sluggish growth in the hashrate will continue up to the end of the year. The main factors affecting the hashrate are increasing cost of energy, the decreasing price of BTC as well as the credit crunch.
The above graph shows the slow growth of the hashrate since July 2021. As you can see, there was a fair sharp rise during 2021 compared to 2022. The period April to June shows a sluggish increase in the hashrate.
Inflation
Inflation has been on the rise in the United States during the second quarter of 2022 and it may continue. Actually, the United States Consumer Price Index (CPI) increased in May resulting in a shift in its economic policies. For example, the Federal Fund rate increased following a rise in inflation. Apart from the change in prices of bitcoin miners, the rates for energy also increased. Basically, there have been periodic increases in prices of energy, including electricity. Hashrate Index reports that miners are currently paying about 4.5 cents per kWh, which is beyond the expected rate of between 2.5-3.5 cents per kWh. While the power rates continue to increase the price of BTC keeps decreasing resulting in very low hashprice. The diagram below shows the average change in the price of energy in the United States.
As you can see from the graph, there is a very negligible yet constant increase in the price of energy since October 2018. Notably, during 2021 many miners managed to negotiate for long term power purchasing agreements (PPAs). However, the rise in inflation and the war in Ukraine have made it very difficult for other miners to get the PPAs. These factors together with a looming recession create a bleak picture of the crypto mining sector and the cryptocurrency environment in general.
Low hashprice
As a result of the increasing power rates and the decreasing price of BTC, the hashprice is at its lowest point since Q4 of 2020. Remember this is the period just before the onset of the bull run. The following chart shows the possibility of a continued decline in the hashprice.
You can see from the picture, the decrease of the hashprice since April 2022 to the end of Q2. As a fact, there was a 58% fall in the USD hashprice from $0.20/TH to $0.08/TH per day.
bitcoin difficulty
In quarter three, bitcoin difficulty increased. Consequently, the spread between BTC price and bitcoin difficulty increased. The poor mining economics of the second quarter led to the growth of the bitcoin difficulty. However, the difficulty did not grow at the same rate as in Q1. In fact, since Q4 of 2021, the bitcoin difficulty was growing at a decreasing rate. In Q4-2021, the difficulty was 28% before decreasing by 10% to close at 18% in Q1-2022. However, in Q2-2022 the bitcoin difficulty increased by 3.8%.
As we observe in the diagram, from the last quarter of 2021 as the bitcoin difficulty increased the hashrate decreased.Thus, from Q4-2021 to Q2-2022 there was divergence between the bitcoin difficulty and the hashprice.
Conclusion
According to Hashrate Index, a bitcoin mining analytics platform, the bitcoin mining profitability reached its lowest point in Q2-2022, since its multi-high in 2021.The main causes are the increase in inflation as well as the decreasing hashrate and hashprice. Also, there has been recession pressure following adjustments made to economic policies due to the rising inflation. Apparently, the rising power rate also contributed to the inflationary pressure this year. Negative changes in economic variables as well as the decreasing price of BTC have pushed many miners out of business as the marginal cost of mining continues to rise.
Author: Mashell C., Gate.io Researcher
This article represents only the views of the researcher and does not constitute any investment suggestions.
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