Who let the miners out?

Many folks have estimates of Chinese miner attrition but reality is that the true figure is always a vague range of sorts (some say 50%; some more; others less). Irrespective, the bitcoin network has continued to work as expected. However, if you were a HFT, or a market-maker, or a large directional trader, you might have had a few sweaty moments over past few days when trying to move BTC collateral around (especially when Bitfinex and Deribit went down).

Margin call - anyone?

This BTC collateral movement can occur one of two ways depending on the counterparty involved. If one of the counterparty is traditional in their setup they might only accept movements on-chain (i.e. on the bitcoin network). This means your transfer is as fast as the new block creation (i.e. mining). On the other hand, if both counterparties are sophisticated; their setup might also involve the lightening network - so can conduct transaction in a peer-to-peer fashion.

Where the blocks at?

This brings me back to my original thought about Chinese miner attrition. So, block creation (aka block time) is dependent on mining, and speed of mining is dependent on the concept of difficulty* (all else being equal). Difficulty is a mathematical construct that controls how complex the job of mining must be to ensure expected block time on average is 10 minutes (in ETH world its 10 to 19 seconds). The difficulty is computed every 2016 blocks (so ~14 days). Given, the abrupt miners shutdown, and the fact that difficulty level was computed prior to the Chinese miner exit; therefore, block time must increase since its much more difficult to mine (with less computational power). Voila, we saw block times breach levels not seen since 2009 (up to 24 minutes).

Are we done now?

We haven't yet decreased the difficulty level since we haven't yet minded 2016 blocks. At the time of this writing; we are ~61 blocks away (so approx. 14 more hours at current speeds) from that new difficulty adjustment. The statistics seem to suggest the next difficulty adjustment will be a 27% drop.

What could it mean?

If I was to presume the highest difficulty in May was prior to Chinese miner exit, so that would be 25 T (trillion). If I now presume future suggested difficulty is 27% from current level (20 T), so that's 14.6 T. That tells me a realistic range of miner exit is 27% to 42% of global mining capacity.

musings:

The new projected difficulty level is around same level of difficulty we were last at in early 2020, so can I put on my bullish sunglasses and think baseline cost of mining has now maybe doubled if all these miners are migrating to more expensive regions? Or, are we soon to feel the fire of ESG vs Bitcoin Mining Council - and wish we were not building up an OPEC equivalent thereby throwing away the goodwill crypto has generated amongst the younger generation?

Gut says to keep an eye out for a surprise crypto vol event between this long weekend and around 9th of July...... happy independence day America!