Bitcoin Mining: More Serious Than China's Ban? The Cause of the Longest-Ever Slump

▲ China, Bitcoin (BTC), Mining/AI Generated Image ©

As Bitcoin (BTC) mining difficulty has failed to recover its all-time high for over a year, setting a record for a longer slump than during China's mining ban, an analysis has emerged that the shift of capital and power to the artificial intelligence (AI) industry is triggering structural changes in the mining market.

According to cryptocurrency media outlet CryptoPotato on November 8 (local time), Bitcoin mining difficulty has not surpassed its all-time high of approximately 156 trillion since it was recorded on October 29 last year. Currently, the mining difficulty is slightly over 148 trillion, about 5% lower than the peak. This surpasses the previous longest record, which lasted approximately 364 days from August 2011 to July 2012, marking the longest period in Bitcoin's history that mining difficulty has not set a new high.

In past long-term slumps, there were clear shocks such as a plunge in Bitcoin prices or government regulations. From 2011-2012, Bitcoin prices plummeted by approximately 94-95%, and in 2021, a significant portion of the global hashrate shifted to other countries due to China's comprehensive ban on cryptocurrency mining. However, Saifedean Ammous, author of 'The Bitcoin Standard,' noted that the current slump in the mining market occurred without large-scale shocks like those in the past, emphasizing structural changes rather than a temporary downturn.

Ammous pointed to Bitcoin halving, where block rewards are halved approximately every four years, as a major cause. For miners to offset the reduced rewards, Bitcoin prices need to rise sufficiently. He estimated that even excluding the depreciation of the dollar and the opportunity cost from the expansion of AI infrastructure, an average annual price increase of approximately 19% over four years is necessary to maintain mining profitability. He explained that if expected returns do not meet this level, the incentive to invest additional capital in mining equipment and power gradually weakens.

Competition for resources with the AI industry is also accelerating the business transformation of mining companies. Unlike in the past when miners could utilize relatively cheap power and data center infrastructure, recently AI companies are actively competing to secure the same resources. For example, Core Scientific plans to completely exit the Bitcoin mining business and transition to an AI and High-Performance Computing (HPC) infrastructure provider starting in 2027. The company has already reduced its mining equipment by nearly half, and its Q3 data center colocation revenue increased by 58% quarter-over-quarter to $215.4 million. This is a significant increase from $15 million in the same period last year.

However, Ammous assessed that the deteriorating profitability of the mining industry does not necessarily have a negative impact on Bitcoin prices. If holding Bitcoin directly becomes more advantageous than investing in mining equipment and power, related capital could shift to buying Bitcoin. He also predicted that a reduction in power consumption used for mining could alleviate controversies surrounding energy waste in the Bitcoin network.

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