Bitcoin’s Mining Difficulty Showing No Signs Of Slowing Down

Bitcoin miners are squeezing every last drop of their equipment before the upcoming halving, expected to happen in April 2024.

What's happening: The hashrate on the Bitcoin network has witnessed a remarkable surge since early September. This has led to the Bitcoin network experiencing its sixth consecutive difficulty increase – a measure of how easily miners can discover a block of bitcoin.

In layman's terms, this all equates to a much more competitive bitcoin mining industry in recent months.

Last week, the difficulty rose by 5.07%, reaching a record high of 67.96 trillion.

• Crazy stat: The amount of hashrate that has come on the network in less than three months is more than a quarter of the total hashrate that came on the network since its launch on January 3rd, 2009.

What’s accelerating the rapid rise here? And why is Bitcoin mining suddenly getting increasingly competitive? Let’s take a quick look.

• Miner profitability: Recent appreciation in Bitcoin prices has increased the demand for blocks, raising the average fees miners earn for each block.

• Cooling temperatures: There’s a reason why many big miners are often in colder climates – these machines can’t overheat. With decreasing temperatures, miners have likely increased their operational time compared to the summer months.

• Next-gen miners are plugging in: The latest generation of stronger, faster, and more energy-efficient miners, which may have been waiting for infrastructure development before activation, are now joining the network given the recent jump in prices.

• Anticipation of halving: Miners are likely extracting the maximum value from their equipment before the block reward is halved from 6.25 BTC/block to 3.125 BTC/block. Miners with pending machines are hurrying to connect them to the grid to benefit from the higher payout rate while it lasts.

Why it matters: During the bear market, miners were forced to shift their focus to cost minimization. Now, with the underlying economics slightly shifting, we should expect to see a massive run-up in difficulty until the halving.

Overall, the increased mining activity reflects a stronger conviction and heightened competition among miners, aligning with Satoshi’s vision. This scenario showcases the dynamics of fair market practices in the evolving landscape of mining technology, energy, and scarcity.

It may not be inherently bullish, but it is undeniably a beautiful manifestation of the principles guiding the Bitcoin network. 😁 

What’s next: The next Bitcoin mining difficulty adjustment will come out in roughly 3 days, so be on the lookout.

How to play it? Over the last few years, investors have gravitated toward bitcoin mining pubco’s as a backdoor way to play the market. Marathon Digital (MARA), Hut 8 Mining (HUT), Riot Blockchain (RIOT), and HIVE Blockchain (HIVE) are what you can call the “majors” these days.

If you’re eager to take advantage of today’s market conditions with these companies, consider their YTD gains first.

• MARA: 372.65%

• HUT: 1,158.41%

• RIOT: 351.48%

• HIVE: 149.76%

• IREN: 355.04%

Can they go higher from here until the halving while BTC prices simultaneously catapult? Of course. But the chances of these stocks replicating such gains over these next 12 months are pretty slim.

One must remember that bitcoin mining is a race to the finish, literally (or until that last bitcoin block is mined, when miner rewards will be next to nothing, and when we’ll all be dead in the year 2140).

Similar to companies mining precious metals, Bitcoin mining is a highly capital-intensive business. When conditions are right, you can make some money. But when conditions are bad, it’s one of the worst business models in the world. Rigs are always advancing, rewards shrink, energy costs rise, and as we discussed above, competition is ever-increasing.

All of this says that we investors should expect a massive wave of consolidation. In fact, it’s already underway. But there’s still a lot more to come.

As investors, it is difficult to pinpoint the next takeover target. While several miners trade under a dollar and look like cheap acquisition targets for the majors, they’re also on the verge of bankruptcy, hanging on by a thread, and in loads of debt from their quest to stay competitive.

Another strategy is to long miners with limited debt and enough cash in the bank to survive the bad times, acquire competitors, and invest in growth. Healthy balance sheets will be critically important going forward. Some miners are even tapping into high-performance computing and AI as a revenue diversification strategy.

However you play it, one thing is for certain: Only a few of these miners will still be relevant in the years to come. Only the financially sound miners will survive.