Thread by @Leorzhang

I just published "Bitcoin MIning's Three Body Problem".

Mining is a complex inter-disciplinary phenomenon. While it has grown into a billion-dollar industry over the years, the invisible rules governing every aspect of it remain secretive to outsiders.

aniccaresearch.tech/blog/bitcoin-m…

From a macro perspective, we can identify three principal forces that drive the mining industry as a whole: the emission schedule, the climate cycle, and hardware iteration. Each influences a different component in the miner’s profit calculation.

The timing of the halving block overlaps with a transition in the climate cycle and hardware upgrade from 16nm to 10/7nm, all three forces were moving in conjunction going into the third halving.

Bitcoin has a emission schedule mandated by its protocol. Everyday a fixed supply of new coins gets created, and a varying % of that gets redistributed. Since miners are the only natural suppliers of Bitcoin, how profit margin changes determines the supply side dynamic.

The Climate Cycle is the byproduct of the geographical concentration of hashpower. The mining industry inadvertently benefited from a massive over-investment in hydropower in southwest China. Gradually, the industry structured its activities around these climate patterns.

While flood season brings massive capacity of cheap electricity, stability, the health of the facility, and the vicissitude of local policies are potential risks. The flood season not a magic switch that turns on and off to immediately cut down miners’ electricity bills.

Manufacturers are constantly in an arms race to produce the leading product. Improvement in machine efficiency has a significant impact on earnings, but it doesn't mean old machines retire right away. Arbitrage opportunities exist for resourceful miners.

Advanced machines means higher upfront capital expenditure, which in turn pushes mining to industrialize even more. More data centers will customize their infrastructure to tailor mining-specific requirements. Flare gas, immersion cooling, and in-house monitoring etc.

The mining industry is at crossroads. The entanglement of the three forces produces unpredictable short-term variances, but over the long-term as Bitcoin integrates deeper and wider with the rest of the economy, mining will become more competitive and resource-intensive.

Going forward, the thinning profit margin will force the miners to be more conscious about cash flow and risk management. Two major trends will shape the industry in the future: industrialization and financialization.

Special thanks to @nic__carter, @hasufl, and @Weinaynay for editing it. If you are interested in reading more about the industry, please subscribe to my blog The Anatomy of Hashpower:

aniccaresearch.tech

Artwork credit goes to my wife ❤️