Bitcoin is programmable money. Its protocol is crystal clear and every major technical event is predictable so that the economy can easily adjust around it.
The halving event every 4 years allows bitcoin miners to prepare accordingly on time for the rewarding shock that it produces. After the third halving occurred in 2020, miners could go through the process of receiving half the bitcoins per block with no major consequences.
The mining difficulty adjustment is not set in stone as the halving but it is surely designed to deal with a drop or rise in hash rate.
In the Bitcoin White Paper, Satoshi explains the mining difficulty adjustment as a tool
“To compensate for increasing hardware speed and varying interest in running nodes over time, the proof-of-work difficulty is determined by a moving average targeting an average number of blocks per hour. If they’re generated too fast, the difficulty increases.”
What is Bitcoin Hashrate?
Hashrate is the amount of computing power necessary to compete with other miners to win a block with currently 6.25 bitcoins. The more computing power miners generate, the more chances they have to be awarded a block (or 6.25 bitcoins).
The bitcoin network has a global block difficulty that adjusts every 2016 blocks (approximately 2 weeks) based on a target time of 10 minutes per block. The hash rate rises as more miners and equipment join the network. And it falls when miners disappear from the system, which is exactly what’s happening at the moment with the great Chinese miners migration.
What Happens When Hashrate Rises or Drops?
In other words, if hashrate rises and blocks are generated in less than the average 10 minutes (and it takes less than 2 weeks to find 2016 blocks), then the difficulty will increase. If the hashrate drops and blocks are generated in more than 10 minutes, then the difficulty will be reduced.
A big drop in hashrate inevitably leads to an increase in block generation times, resulting in lengthier Bitcoin transactions. Over the last few days, Bitcoin blocks took as much as 24 minutes to generate instead of the average target of 10 minutes.
China’s recent ban on bitcoin mining is causing a major migration of hashpower from the Asian country. It is estimated that hashrate in China used to be ~65% of the total global bitcoin hashpower before the ban. As we see this migration unfolding, the inevitable result is that hashrate drops, as it has already, and will probably continue to drop until the totality of mining facilities relocate elsewhere.
Bitcoin’s hashrate recently hit its all-time high, just back in April and again in May, as shown by the chart below:
Peaks occurred on April 15 with 198EH/s, and on May 13, 200EH/s. Since then it dropped by 40% to nearly 88EH/s as of June 28. Most Chinese Bitcoin pools like AntPool and F2Pool have experienced a drop of more than 50% in their hash rate.
During the same period, Bitcoin price hit its all time highs too. While it is not evidence-based that hashrate and price are strictly correlated, it is strongly believed that one mirrors the other in terms of network effect.
This will be the largest drop in hashrate throughout the history of Bitcoin mining, and this is why it’s been looked at very closely.
Previously, only in December 2012 hashrate dropped by a massive 38% from 29TH/s to 18TH/s in the range of only 20 days due to the advent of ASIC mining machines which implied a total change of facilities for miners.
Despite this extraordinary state of affairs, the bitcoin network continues to function with no major shocks and showing its proverbial resiliency. This is because the network is truly decentralized and the other mining facilities located elsewhere continue to function and fuel the network relentlessly.
Where Are Chinese Bitcoin Mining Farms Relocating?
The closest territory in consideration is Kazakhstan, where it would be easier to physically move existing facilities, but represents a precarious country due to its political instability.
Western countries would be more welcoming but it won’t be easy to find the perfect match between political background and cheap energy prices with little environmental impact. Countries like Iceland and regions like Scandinavia are already exhausted in energy production capacity, therefore bigger countries like the U.S. and Canada are the most likely candidates. Texas and Florida in particular could offer a reasonable alternative for miners due to hydro and wind power which allow cheaper electricity bills. Argentina represents another option due to wide availability of cheap government-subsidized electricity.
It will take a few months for the network to go back to its full capacity, but generally investors and supporters of the cryptocurrency do not seem too worried about upcoming disruptions.
Ultimately, Bitcoin was built to resist similar turmoil and many believe that in the long term, it will only make the network stronger.
