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This is a contributing article written by John Lee Quigley from HASHR8/COMPASS.

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Bitcoin miners are about to enter a golden period of mining profitably as difficulty drops despite elevated prices

Quick take;

• Bitcoin price has significantly increased since the last difficulty on October 21st
• Despite a higher bitcoin price, the upcoming difficulty adjustment is estimated to decline by roughly 15%
• The decline in difficulty corresponds with the end of the rainy season in Sichuan where huge amounts of mining hardware come offline and transition to coal-powered regions
• The next difficulty epoch will be an extremely lucrative period for Bitcoin miners as blocks will likely be much faster, bitcoin price may remain elevated, and input costs will significantly drop

Bitcoin miners are about to enjoy extremely lucrative mining conditions as both income and costs improve. At the time of writing, Bitcoin price has increased by roughly 21% since the daily open of the last difficulty adjustment on October 18th.

The next difficulty adjustment will take place in roughly a day and it is currently estimated to decline by 15%. Under usual circumstances, bitcoin price rises bring more hashrate online as the higher prices make mining profitable again for those miners who were sitting just below breakeven levels.  

However, the current difficulty epoch coincidentally corresponds with the end of the rainy season in China’s Sichuan province. The end of the rainy season results in significant amounts of hashrate coming offline as miners transition their ASIC hardware to coal-powered northern regions like Inner Mongolia and Xinjiang.

Read more: What is Hashrate? – Explaining the fuel behind Bitcoin Mining

Hashrate In Transit Causes Difficulty Drop

Sichuan has vast hydropower infrastructure. During the rainy season – which spans from roughly April to October –  Bitcoin miners secure low electricity rates in the region due to the surplus of hydropower energy generated.

However, when the rainy season finishes, rates significantly increase and Bitcoin miners transition their rigs to regions like Xinjiang and Inner Mongolia where competitive electricity rates can be secured. During the rainy season, the dominant share of Bitcoin hashrate output is generated from within China’s Sichuan province.

Data from a handful of leading mining pools last year can give us an indication of Sichuan’s dominance during the rainy season. During September and October of 2019, Sichuan was estimated to represent 32 to 37% of the entire hashrate in China.

As the 2019 rainy season ended, data suggested that the dominant share of hashrate transitioned to Xinjiang. In January 2020, roughly the middle of the dry season, Xinjiang was estimated to account for 36% of Chinese hashrate.

Bitcoin Miner Margins Widen

Miner profitability has significantly increased since the last difficulty adjustment. However, slower block times have held back revenue growth as miners append fewer blocks per day.

However, with Bitcoin difficulty to drop by around 15% in roughly one day, the input costs for mining will also drop considerably. In the aftermath, significant hashrate will come back online as a myriad of inefficient miners will be able to mine profitably again.

On top of this, the rigs currently in transition between Sichuan and Northern Chinese provinces will be also coming back online. Industry professionals estimate that the transition usually takes around one week.

All of this hashrate coming online will drastically reduce the block time and allow miners to earn more block rewards. Moreover, margins for efficient miners will significantly widen as bitcoin price remains elevated while input costs drop.