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Bitcoin Mining – How the incentive structure in the network determines the course

The relationship between bitcoin mining and course is commonly underestimated. What role does bitcoin mining play in pricing? Why does the Bitcoin price rise historically in anticipation of a pending halving of the block reward? And is mining worth it for the individual? Investors should know about BTC mining.

The hash rate increases again. Currently, the accumulated computing power in the Bitcoin network is 51.5 million terahashes per second (Th / s). Compared with the mid-term low of around 35 million Th / s in December 2018, a significant increase in the hash rate can be observed in less than half a year.

Bitcoin hash rate 2018

However, the increase falls into a period when it was still unclear whether the Bitcoin price has already found its bottom. So how is it to be explained that mining farms resume operation without a price signal justifying it?

Reward Halving triggers accumulation

The puzzle solution lies in the Bitcoin Core Code. This provides namely, the so-called Coinbase Reward – that is, the largest part of the wage for the miners – to halve every four years. The economic shock effect of this so-called Coinbase Reward Halving is not to be underestimated. Imagine that the additional supply of an asset such as gold would not be constant, but diminish disinflationary from year to year. The price reactions would not be long in coming. Finally, the shortage of a value investment usually ensures its price rise. The ratio of existing supply (“stock”) and the annual amount added (“flow”) is called “stock-to-flow”.

Inflation rate of Bitcoin. Currently, 84 percent of all BTC are already gemint. Image source: BitcoinWiki

We’ve already determined that the Coinbase Rewards make up the majority of Bitcoin Miner’s revenue. However, no one claims that miners have to throw freshly mined BTC directly onto the market.

On the contrary, a common strategy is to liquidate only part of the mined BTC, for example, to cover the ongoing costs. The remainder of the BTC assets will typically remain in the pools’ cold storage until high rates warrant liquidation.

From May 2020, Reward Halving will make it twice as difficult to accumulate Bitcoin. If you start the hash rate today, you can expect to have a comfortable pad at BTC by next May.

Halving the Coinbase Reward to 6.25 BTC also halves the bitcoin inflation rate from the current 3.8 percent to about 1.8 percent. Bitcoin continues on the path of an increasingly scarce asset.

By the way: The fact that scraped BTC often remain with the miners first, additionally narrows the supply – and thus drives the price.

    Bitcoin’s inflation rate is projected to decline to 1.8% annually in May 2020 pic.twitter.com/AcmglWFFkK

 – CoinMetrics.io (@coinmetrics) April 15, 2019

For whom mining is worthwhile

The purpose of the mining is to ensure network integrity and not add wealth to a small group of mining pools. In most cases, mining is therefore not profitable. This is ensured by the Bitcoin Core Code with the dynamic adaptation of the Mining Difficulty, ie the difficulty of finding a new hash. According to the code, a block is to be found every ten minutes and used to emit the Coinbase Reward.

If this happens faster than average within ten minutes due to an overhasty hash rate, the difficulty automatically adjusts.

Nevertheless, it is possible in exceptional cases to build up a profitable mining business. This, it is suspected, has to do with electricity prices. Because mining rigs consume immense amounts of energy.

For example, suppose all miners work with Bitmain’s Antminer S9. Based on its specifications, it can be expected that miners will be able to mine profitably at electricity costs of $ 0.05 per kWh – as long as the Bitcoin price does not fall below $ 3,250.

Here is the crux: Power costs of 0.05 US dollars can only be found in a few locations worldwide. Even in China, the average is about $ 0.08. Only during the rainy season can mining farms use lump-sum contracts to push the electricity price below a critical level and earn a profit.

Incidentally, with about $ 0.35 per kWh, Germany is one of the record holders in this country; A profitable bitcoin mining is not possible.

Conclusion

Securing the network integrity of Bitcoin with the proof-of-work algorithm is awesome. Finally, in conjunction with the periodic reward halvings, it provides exactly the right incentives for all network participants. Both miners and investors accumulate knowledge about the cyclical course of the Bitcoin price in advance of a halving of the BTC inflation rate coins. This pushes the price northward and flushes both new miners and investors into the market. Everyone benefits from this: Investors and miners generate returns and the network gets bigger – and thus more secure.

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