Bitcoin (BTCUSD)

[Strategyone]

Kflawn,

Mining of bitcoin has a built in "difficulty" factor built into the payout calculations. This creates a system that has an auto adjustment that self corrects for cost of electricity and cost of equipment.

This difficulty factor is adjusted for bitcoin, every two weeks or 2,016 blocks mined. The difficulty factor is just adjusting for how much computing power (hashrate) is actively mining on the network.

So, as a "miner", you rent your computing power to the network (joining a pool) so your hardware is used in the mining process. As a miner, you are paid based on your hashrate times the payout which is determined by the fixed number of bitcoins added to the network (new bitcoins for mining) divided by the total hashrate operating on the network.

What this does is create an equilibrium or basically a "profitability" point for each miner. This profitability point changes over time with the cost of equipment, operations, and electricity.

As the number of bitcoins paid out (referred to as reward) to mining operations, gets cut in half (approximately every 4 years), this indirectly creates a need for the price of bitcoin to rise. However, it is a self correcting network. Basically, if the price of bitcoin doesn't rise enough for the mining payout received to cover your costs of operating and a recovery of your investment, the miner turns off their equipment. This reduces the total hashrate on the network which increases the bitcoin reward for the remaining machines mining on the network. The reverse is also true. Currently, bitcoin has gone on quite the rise in price from one year ago (last fall it was around $10k). This is making a large profitable margin on current operations which drives up the purchasing of newer and more powerful equipment which then gets added to the network which then drives the difficulty factor up to reduce the payout.

I have been mining or part of mining operations for 7 years now and have gone through 3 cycles of price spikes and halvings. I have watched and been a part of decisions to turn equipment off and to bring on new equipment.

Good luck