Topic: When payout per block halves, how will that effect difficulty? (Read 3318 times)

No, not underestimating at all.  The size of the mine, once you get beyond 1PH, doesn't make much difference in your operating cost percentages (not raw dollars, but your running costs/profit margin percentages).  I'm removing the hardware from the equation because as it stands today, new bitmain hardware (as they're the only large manufacturer left selling to the public) will take close to 6 months to turn to positive ROI, even if your electricity is completely free.  Even at bulk discounts which is most likely less than 25% on orders of over 10,000 units will still take 4 months to turn positive ROI.  I can't see how anyone in their right mind would choose to start up a new large mining operation today with the halving looming about a year out.  If I were an investor, I'd run, not walk, away from something like that.

Regardless, you highlighted Mr. Lee's operation.  Looking at his numbers, if BTC price does not rise more than 20% within 90 days of the halving, even he will go out of business.  And, I would state his operation from the looks of it is exactly the type of operation you're referring to - in China, with the lowest power costs as well as the lowest real estate and workers wages.

Taking hardware out of the equation, maintenance alone is costing $1.416 per day to make roughly $2.35 per day at today's diff on an S5 (~30% profit).  Never mind any gear that's got higher power consumption, which I'd argue most mines are stuck with > 0.7/w gear. I'd estimate that at minimum, 95% of that maintenance cost is the cost of electricity.  Once the halving occurs that maintenance fee probably jumps close to or over $2.7 to make that same $2.35.  If BTC price doesn't jump 20% immediately (and stay there) on the day of halving, you're now operating at a loss.  Even if it does jump 20%, you're now just breaking even, which won't be enough for most large mines to justify staying open.

Having 5,000 miners or 50,000 miners, that maintenance fee percentage doesn't change much.  In fact it weighs much heavier on the power cost the larger you get, as your people and building fees become percentage-wise marginalized to nothing.  At the halving, anyone who doesn't already have 3-4 cent power is in dire straits, and anyone who hasn't already moved to somewhere that does will quickly find themselves out of business.

Even if you want to factor in more efficient equipment in Q3 this year, what kind of gains are we looking at?  Most I read/hear is the jump from .5 to .35 efficiency (~30% gain).  If you have a 50,000 miner farm, are you going to re-invest 150% of your existing hardware cost (you know all miners are more expensive when first released) to gain 30% after 4-6 months?

Agreed, hence my last sentence in my post.  The manufacturers will survive the halving no matter what happens, and will make the most profit, no doubt.

I think you underestimate some of these scale of some of these data center's.  Yes they have employee's but there are lots of perks.  They buy machines in huge bulk, so they get good deals.  Also a lot of them are going to china to start so they can lieraly drive a the miners to location from manufacture.

They can follow the electricity.   If they are able to get half of price of most "home miners" then they can operate at half the cost.  Even when btc is a lower price they still make profit. Granted at certain level they stop making profit but most "home miners" would have had to pull plug whall they still mine.

Also they do not rent on a lot they make so much they buy the building and buy equipment.  A lot are secretive and do not post much.

But here is one example of Mr. Lee's using - https://bitcointalksearch.org/topic/lee-group1980-the-sales-of-first-batch-hosted-antminer-s7psu-included-934581

Bitmain has big centers, KNC, etc.  Even with overhead they will be able to mine for less then almost all home miners.  Which means they have a better chance of surviving haling even if it's bad.

It all hinges on the price of BTC, period.

You're forgetting one thing - the "big guys" may have lower electric costs, but they do have some things the home/hobby miner doesn't have - monthly rent and employee costs (or partners who they need to profit share with).  If price does not move up at minimum 50% more than it is today within 90 days, it will be the larger mines who will need to drop out, not the smaller guys.

The big mines have a small window where they could ride out the halving if the price doesn't adjust upwards (that's my speculation of 90 days above).  But if no price increase, one of two things will happen - either they will no longer be able to afford their bills at all because they're now bringing in half as many coins per day, or they will get to a point where even though they may technically be turning a profit, it may not be enough to justify the continuation of mining.  You have to figure large mines are just like any other business - people running them are counting on the income to be their salary.  They need a certain paycheck to maintain their lives, so if this isn't going to work out anymore, they pull the plug and move onto the next venture, most likely not coming back or at very least quite a while.

Once a large mine decides to shut down, either in a datacenter or in a warehouse they're renting, they lose their access to that space and have to vacate premises.  At that point its a several month timetable to be able to ramp back up to where they were before, which makes it highly unlikely most of them will come back online, ever.

When a small home miner decides to shut down, he walks downstairs or out to his garage, and flips the power switch.  If he wants to come back online, he hits the power switch again, immediately, and he's back in the game.  He's already paying for his physical space as part of his regular mortgage or rent and has no need to vacate anything.

If price doesn't adjust upward of 50% or more, I think the only large mines that will be able to stay afloat will be the ones run by the chip manufacturers.  Mines who have to buy the hardware will find it too expensive to keep refreshing their technology to the more efficient miners as they come out.

I think it would be the "little guys" for lack of better term that have to quit if it happens.  If bad a lot of the big data centers have very very low electricity.

So if a data  center has 3-4 cent electricity they could stay in the game even when 6-8 cent were to high (just picking random numbers).   But it's hard to say if we don't get a price bump what will happen.

I think it's also important to remember that when the block reward halves, the rate at which blocks are solved doesn't change unless and until the hash rate changes. If lots of folks, big or small, decide it's too costly and drop out, two weeks (or so) later the difficulty will drop.

This self adjusting mechanism really make massive hash rate increases kinda self-defeating, and even if/when miners drop out, the difficulty drops to restore the rate with the remaining hash rate. Despite the name "mining" it's quite unlike any other kind mineral/oil/gas extraction process we know.

Were mainly talking about small miners shutting down in worst case.  The big data centers will still be pumping out coins at a massive rate.

I don't think we will see a big jump as these big data centers will remain on.  Hopefully we get a nice slow movement upwards. But it's a while till we see what happens.

One other thing to consider is as the miners who must sell to pay power costs shut down, the supply of BTC is further reduced.
So the halving reduces new BC sales in two ways. With fewer sellers, price may increase a little.

This may have been true during past periods of irrational exuberance when bitcoin looked like it was going to do a moon shot. Today bitcoin production is very much like any other commodity, with the price trending towards the cost of production.

But even if your conjecture was true,  the price of bitcoin and the cost of production converge.

In general, I agree with some of this. The wildcard however is the price of Bitcoin. If it rises "enough" between now and the halving, then there won't be much reduction in hashrate and hence no reduction in difficulty. I agree that if the Bitcoin price remains steady, then there will be a drop off in hash rate after the halving, and then a reduction in difficulty.

We also don't know how much the hash rate will increase between now and then due to things like:

https://bitcointalksearch.org/topic/--1072474

Some thoughts.  In mid 2016, when the block reward halves, I suspect the difficulty is likely to fall by about 25%.

Logically the fall must by less than 50%.  If the difficulty fall was 50% then blocks would be found at twice the current rate  meaning no-one would turn off their miners.

So we can assume a fall in difficulty of between say 20% to 30% as mining hardware with the most expensive running costs will be turned off.

Mining revue for the remaining miners will fall by about a third, rather than halve, as the difficulty will have fallen by say 25%.

Everyone knows a halving is coming so I would expect mining farms to act rationally and to have planned to maximize revenue before and after the change.  The miners who will be most affected are those with higher electricity costs.

With bitcoin the cost of production and the price are always linked. 

Bitcoin mining is nothing like say gold mining where more gold is mined as the price rises and there really is an actual cost of production.     

Bitcoin mining is more like a lottery where 2016 cash prices are distributed each fortnight.  With bitcoin mining whoever points the most hardware at the problem gets the most tickets in this lottery.  So mining spending will always follow the value of the 2016 'prizes' awarded each fortnight. 

In other words the value of a bitcoin drives the cost of production of a bitcoin, not the other way around. 

Why would anyone pay more for BTC than it costs to produce one ?

Why would anyone sell BTC for less than it costs to produce one ?

Therefore why shouldn't the price of BTC trend towards the cost of production ?

Impossible to speculate without knowing the second half of the equation, namely what the price of Bitcoin will be at the time of the halving... If the price of BTC is twice that it is today, then the dynamics will be identical to what they are today. If the price of BTC is the same as today.... Wow, could see a LOT of miners exiting.

Which would be scary, to think that that much idle hash power would exist, and the possibility for them to act in nefarious ways, for instance...

can't wait.  bitcoin has always been a hobby which never appropriately compensated financially for the time invested (i value time over money).  maybe then being a part will pay off in mental entertainment and pure interest.

Pretty much my thinking of the overnight effect as well.  The last period of the era date on the Wiki will give us an inkling when to expect that halving. 

If the value of the bitcoin is going to vary as a result of operational costs to miners, and it might have to if it's to survive, is there any parallel in the fiat world?  I mean aside from Poland not being able to buy its printed currency from the printing house in G.B. that time.

I think it actually is worse. Even if the electric company, and landlord, and employees, accepted Bitcoin would they want a 50% "pay cut" after the halving? As a miner your production of blocks remained the same, you just get 1/2 the reward.

I have this mental image of the "farm manager" going home on Friday, the halving happens over the weekend, and then he returns on Monday to realize that his "gold mine" has been reduced to a "trickle". Yes this is an overly dramatic view, but I can't think of a single other industrial enterprise where that kind of thing happens "overnight". I expect when the halving approaches, things will get crazy in the mining business.

This chart may be useful
https://bitinfocharts.com/comparison/difficulty-price-btc.html#log

I would say that it would be fair to say that cex's maintenance fee is roughly in line with their actual costs. I am sure they are/were making a profit off of their maintenance fees, however I would think their margins were pretty thin.

Additionally it would be a good guideline even with a small profit as miners would not want to keep their machines on just to essentially break even, they want to expect at least a small profit after costs to account for the risk they will have bad luck

depends on how much fiat one btc buys.  people still need to pay for electric and it doesn't look like they'll be taking btc as direct payment anytime soon. i think a lot of people will be selling their equipment in the weeks prior to the halving.

BTC mining technology was increasing by leaps and bounds at that point, so I do not think a direct comparison between then and 2016 can be made.  I think we're going to see some large mines shut down in 2016 as they lose their profitability, and the difficulty of the network generally lowering, but I don't expect anything drastic to happen.  Yet.

It would take one diff adjustment where transaction processing took longer, then after the adjustment it would be back to normal.  The whole idea of the diff is to maintain a 10-minute block rate, right?  If that's true, then if the diff drops big it should re-adjust downward enough to be able to return to a 10-minute block finding rate, thus transactions go back to normal.

I think the bigger risk is that they already have come up with the next best tech in mining and might already be mining on that.
By the time it hits the customer, it is too late.

So, miner manufacturers are making their most efficient miners unavailable except as bare ICs with which to design and build one's own miner or available as a 'buy a share of my farm running these efficient ASICs.'

Like Bitmain.  Many of us expected to buy an S5 post-Chinese New Year.  _Not available_, _Sold_Out_.  Now I'm wondering if it would be worth it at all!  I'm at a state of cashing in my mined bitcoins to pay the electric bill.  Profit is a slim margin helped by the non-burning of propane for heat this last winter.   Now I'm wondering if payoff of a new miner, after deducting electric costs and taxes, can ever be achieved!  Bitmain still offers C1's for sale but my C1 uses more power than I'd like.

Yes.  My point of showing the graph was that not many miners are quitting due to the low prices.

But, that won't be the case on the day reward halves - perhaps as early as Jan. 2, 2016.  That day it won't be a case of the home miner wondering 'Well maybe the price has dropped a little below the cost of mining but the price could go up and then I'll be kicking myself for not mining bitcoins that now would have a value greater than their mining cost'.  No.  The off switches will be flipped and home miners will wait for the value to rise to profitability.  Same with large commercial farms that are operating in a hotter climate with somewhat better electric costs.

An interesting question is what happens to the buying and selling of Bitcoins.  How long will transaction confirmations take then?  If traders are forced to pay large transaction fees just to get a reasonable confirmation period, Bitcoin will be less attractive to use.

CEX.io shutting down payments because the maintenance fee > earnings is not the same thing as the gear being unprofitable to run at all. That would only be the case if the maintenance fee they charge per GH/s is their actual cost.

If they sold off their gear to recoup expenses, there'd be a slight dip between when they shut down and when buyers turned those machines back on. Overall hashrate is affected by retired gear, not relocated gear.


That's a good point. I wasn't around for the last block halving so I don't really know what folks were doing then. It'd sure be nice if the coin price went up this time, though really I wouldn't be too upset if a lot of big farms had to shut down. It's fun when high rollers lose to the house.

It's all guesswork. The block reward has only been halved once so far, in the run-up to that we saw the price of Bitcoin increase. What will happen next time is anyones guess.

Maybe the invisible hand of the market place will make the value of BTC reflect cost of production versus reward. 

https://blockchain.info/charts/hash-rate  This doesn't seem to indicate that.

Why don't I think that? Because the price right now is better than it's been in months and there's still profit to be made. Once the block reward halves, the payout from mining will be cut in half while the costs will remain about the same, but the production cost of those 12.5 bitcoins won't have much effect on the perceived value of the other 16 million bitcoins already available. So no, we don't expect a drop in difficulty right now because approximately everyone is still actually making money from mining. "Using the same argument" doesn't apply to anything that happens before the halving unless the price of BTC were to halve overnight. When that did occur (or nearly so, second week of January) what happened to the diff? Pretty sure it was negative two changes in a row while people turned off gear that wasn't profitable anymore. And then the price went back up, and so did the diff. The diff increases on average if mining bitcoins is profitable on average. The diff decreases on average when profitability decreases. When the block halving occurs, the total supply of coins won't be changed substantially but the dollar value of solving a block will be halved so profitability will take a huge hit, masses of gear will be turned off and the diff will drop. Unless somehow the price also goes up quite a bit, which is not likely since, as mentioned, the total supply of coins won't be changed substantially so the supply/demand curves won't move very far. Unless bitcoin's perceived utility increases, the price will not.

after block halving the price of bitcoin will go to moon and more people will be interested in mining that will increase the difficulty also

Using the same argument, why don't you think that most of the miners are alreayd giving up(looking at the low prices ) ?
Shouldn't we also expect a drop in difficulty right now ?

Very rough math after looking at the Wiki (https://en.bitcoin.it/wiki/Controlled_supply) working with same expected rate of change (almost certainly wrong given that difficulty slope has changed so much this year) the fourth reward era of 25btc/block might occur on May 31 this year.  Then the first reward era of 12.5btc/block might be Jan. 2, 2016.   Again, the slope has gotten closer to level while it had been so very steep in earlier years so that 1/2/16 is probably much later, perhaps the spring?  The wiki page showing start of the last reward era of 25btc per will tell the tale and give a look at what we can expect regarding when that next era starts.

So, the immediate effect is return halves for the same work.  Miners are turned off.  Blocks are found much less frequently but the day to day cost of power remains the same and not only is the payoff per block halved to 12.5btc but the payouts are less frequent.  Sounds like a disaster.  The next difficulty then will be an quick drop.  Some miners are powered up again.  Blocks are found more quickly than expected and difficulty goes up after a short duration?

Difficulty will only drop if a lot of farms turn off their gear. It's likely that most folks will be mining at a loss for the first period after the halving. What sucks is, since mining only alters the total supply by a fraction at a time, the supply/demand curve won't be moved very much at all by the halving so it won't have much effect on the exchange rate.

Difficulty is almost always rising.  Profit has gone to a low level compared to last year.  Miners get more efficient.  To stay profitable one must have an efficient miner.  How many early ASIC miners have already been retired for lack of efficiency.

So, when payout per block halves, if profit has been cut to a more fine margin at the current rate of 25btc/block, what happens?  Will difficulty change allowing power for solving a block to be halved?  Or will we all need to either stop mining or mine at a loss?