The rich get richer: Who benefits from a record fall in Bitcoin mining difficulty, and could it be you?

According to the monitoring service, Bitcoin’s mining difficulty fell to 27.69T, down 5% from the previous value. The recalculation showed the biggest drop in the parameter this year and the third consecutive drop. A steady decrease in hash rate is one of the best indicators of the coming crypto winter, which leads to a redistribution of the mining market in favor of the larger players.

Why is mining difficulty important?

Mining is the mechanism by which new coins are created within the Bitcoin blockchain. In addition to mining new coins, the effect of mining is to keep the network running, so the economics of mining is critical to the network’s health. The more coins mined, the higher the difficulty and power of the network.

The difficulty of mining in the network is shown by the hash rate, the primary metric that reflects the network’s current state and degree of development. The hash rate shows whether the network is degrading and losing its miners or whether it is growing and developing. 

Unfortunately, the economic depression in the form of a crypto winter causes an outflow of miners, which in turn causes the loss of the network’s hash rate. This situation is quite unfavorable and often attracts close attention from people interested in Bitcoin’s future (experts, investors and crypto enthusiasts). Below, we will analyze the current situation of the hash rate drop and discuss its reasons.

What was it like last time?

Barring the failure of the Bitcoin mining difficulty chart in 2021 after China’s mining ban, the current hash rate decline is entirely consistent with the evolution of the crypto winter of 2018.

To continue this analogy, at that time, Bitcoin succeeded in bouncing back from the previous “barrier” at the $18,000 price line. Now, with the recalculation of the difficulty in falling rates, the bottom will be below that value. Nevertheless, so far, we see that $18,000 has served as the bottom of Bitcoin’s current decline this time, too.

So far, this crypto winter was remarkably similar to the last one in 2018.

Who benefits from this?

Crypto winter means a prolonged and severe drop in the value of cryptocurrencies. This time, crypto’s capitalization has been declining for nine months in a row, losing $2 trillion of its $3 trillion value. The current decline in Bitcoin has reached a dangerous point in the cost of production, forcing many miners to shut down low-performance ASIC miners. This is what we see on the graph as a drop in hash rate.

A decrease in the number of connected equipment affects the hash rate — the total processing power of the network, increasing the block mining time, which in turn leads to an automatic recalculation of network complexity. However, the drop in complexity reduces the level of BTC’s production cost, which acts as price support, stopping the sell-offs.

Thus, the beneficiaries of the crypto winter can be large miners with the most modern expensive equipment installed in regions with cheaper electricity. The current price of profitability of mining which would suit most miners is estimated at about $20,000.

What’s going on in the industry?

Bitcoin Mining Council released a new quarterly report on the current state of the Bitcoin mining industry.

At the end of the second quarter of 2022, the combined hash rate of Bitcoin Mining Council (BMC) members was 107.7 EH/s — more than 50% of the total. Compared to April-June 2021, the network’s computing power increased by 137% and power consumption by 63%. Mining efficiency for the year increased by 63%. Hash rate output per MW changed from 14.4 EH to 21.1 EH.

As you can see from this report, the big players are using the latest equipment and only increasing their market share in this challenging situation. Thus, the fall in price and the arrival of the crypto winter leads to a redistribution of the market and bankruptcies of the weakest players in this area. Mass sales of outdated equipment bring this segment of “losers” even more down. This is a perfect example of how the formula works: the rich get richer, and the poor get poorer.

Notably, according to the report, the share of “green” energy in miners’ consumption increased by 6% over the year and, for the first time, reached 59.5% (for BMC members it was even higher — 66.8%).