TokenInsight Shine Light on Optimal Mining Equipment During Difficulty Increases

Research from CoinShares demonstrates both older hardware models and newer hardware models are currently profitable. However, analysis by TokenInsights has shown that older models are at a much greater risk of turning unprofitable due to their poor power efficiency.

Quick take;

  • Hardware with better power efficiency generally has a better ability to regain investment and show a profit in times when mining difficulty levels are increasing
  • Older hardware models have lower payback periods when difficulty levels remain static due to their low retail prices
  • Research from CoinShares indicates that both older models and newer hardware models are currently profitable but older models are at more risk of turning unprofitable in the event of price decreases

The most recent difficulty adjustment in the Bitcoin network resulted in difficulty levels hitting all-time highs. The difficulty adjustment took place at block height 578,592 on the 31st of May.

A report analysing the mining industry published by the Beijing-based TokenInsight team had already anticipated such increases in the difficulty rate. Their Q1 report noted that the difficulty level “is expected to exceed its previous record high of 7.46T [trillion]” during the second quarter. The TokenInsight team estimates that the difficulty level will finish the year in the range of 8.31 to 9.59 trillion based on the anticipated deployment of hardware.

Payback Periods During Static Difficulty

The TokenInsight report further delved into the optimal hardware to use when the difficulty level remains static compared with when it continues to increase at each adjustment. The research found that when difficulty levels remain static, hardware with poor power efficiency performed best. Products such as the AvalonMiner 841 and Antminer S9 had poor power efficiencies but had some of the lowest payback periods.

This equipment was typically outdated hardware on the verge of being removed from the market. The low prices at which this outdated hardware could be purchased was the main reason factoring into the low payback periods.

For example, the research reported the price of the AvalonMiner 841 – the hardware with the lowest payback period while difficulty levels remained static – at $127. There is a large price discrepancy when this is compared with the latest models such as the Antminer S17 which was priced around $2,300 when the report was released and is currently priced at $1,600.

Payback Periods During Dynamic Difficulty Adjustments

The dynamic completely changed when the difficulty was subject to percentage increases at each difficulty adjustment. While the lower priced equipment still had lower payback periods due to low prices, the ability of the cheaper hardware to breakeven was reduced.

With just a 1% difficulty increase at each adjustment, the more expensive hardware with improved power efficiency had a better ability to gain back investment. As the incremental difficulty percentage increase was raised, the older hardware with poorer power efficiency generally struggled to breakeven.

At a 2% increase at each difficulty adjustment, some of the outdated hardware models failed to gain back investment with the Antminer S9 and the Antminer T9+ both failing to breakeven. When the difficulty was raised to increasing 3% at each difficulty adjustment, all of the hardware analysed failed to breakeven.

However, in the case of 3% increases at each adjustment, the hardware with better power consumption demonstrated a better tendency to gain back investment. New models such as the Antminer S17 and Antminer S15 managed to gain back 79% and 91% of initial investment respectively. The AvalonMiner 841 seems to have been an anomaly of the group due to its low price and managed to gain back 90% before mining operations were shut down. However, other older hardware models such as the Antminer S9 and Antminer T9+ performed poorly in this case, only gaining back 59% and 25% of initial investment respectively.

Changing Mining Conditions

Conditions have certainly changed since the Q1 report was published. CoinShares recently released their latest bi-annual research report on the mining industry.

The research estimates the current market-wide cost of production of bitcoin to be $5,600 meaning miners are highly profitable at present. Miners who have been able to avail of significant discounts on hardware and who have accessed the lowest energy rates may have a cost of production of less than $3,500 per bitcoin.

Considering the recent relief rally in Bitcoin prices, we believe the mining industry is currently highly profitable, with both previous-generation hardware – though only at relatively cheap electricity costs (<¢5/kWh) – and next-generation hardware – even at relatively expensive electricity costs (>¢5/kWh) – currently able to generate a positive ROI”

CoinShares May 2019 Mining Report

While the difficulty rate has certainly increased since the TokenInsight report, the price increases have served to foster highly profitable conditions. This indicates the older hardware models are not as susceptible to the higher difficulty levels as they would be if difficulty levels increase but prices remained the same.

However, this places miners using outdated hardware in a more vulnerable position. Although they may be currently on track to avail of low payback periods, a price drop can easily place them in territory where it makes sense to shut down operations. Newer models with better power efficiency figures are in a much better position to remain profitable in the face of price drops.