China cracked down on all crypto mining in the country earlier this year, effectively forcing all Bitcoin (CCC:BTC-USD) miners out of the country. Whereas China used to be the top country in the world mining Bitcoin, it now has virtually no income there. As a result, Bitcoin took a pretty solid body blow in September.
But since then, both Bitcoin mining and the BTC-USD price have recovered as if nothing had occurred in China. For example, Cryptoslate recently reported that the hash rate and the total amount of money earned from Bitcoin mining are now at levels before the China crackdown.
In addition, BIT-USD’s price has also recovered. For example, earlier in April, and then again in September, Chinese authorities made all Bitcoin mining illegal in the country. BIT-USD’s price faltered and fell to a low of $29,807 on July 20. But today, Dec. 3, it has recovered to $56,984.34, after having reached an all-time high of $68,789.63 as of Nov. 10.
Where Things Stand With BTC-USD
Now numerous reports are emerging that Bitcoin miners are thriving. This is true especially since many of the Chinese operators moved to Russia, the U.S., and Kazakhstan.
According to Cryptoslate magazine and Coin Metrics, mining difficulty during the lows after the Chinese ban fell to as low as 84.79 exahashes per second (EH/s). This means that many Bitcoin miners in the U.S. and elsewhere were able to produce much larger amounts of Bitcoin in their mining operations.
But now the hashrate has moved back up to now currently at 156.6 EH/s. It even moved as high as 167.18 EH/s on Nov. 17, according to Cryptoslate. In fact, Cryptoslate quotes a November report from Kraken indicating that the hashrate could rise significantly higher.
As the hashrate and difficulty of mining increases, it takes longer and more electricity to mine the same amount of Bitcoin tokens as before. This could reduce profitability unless they increase their scale appropriately.
But something strange is happening.
Cryptoslate reports that miners are “raking in almost the same amount of money they were making before the ban.” However, Cryptoslate does not indicate where they got this data or if they have some study reinforcing that conclusion.
Yet, Bitcoin Magazine reports that mining revenue “has been rising for the past five months, is already back to pre-ban levels, and is close to its previous all-time high.”
It is unclear from this preliminary reporting how exactly miners managed to increase their revenue so dramatically in such a short amount of time. Bitcoin Magazine points to increased investment by U.S. miners and an uptick in interest in Bitcoin mining by state governments.
What This Means For Bitcoin Going Forward
Now that the mining difficulty is higher than before, Bitcoin miners could be making windfall profits. But this may not continue for long as the competition begins to heat up. That could be one reason why BTC-USD has peaked recently and has drifted lower.
For example, Bitcoin Magazine reports that there has been a 65.8% increase in mining difficulty since July, based on the Kraken Intelligence report.
More likely the recent drop in BTC-USD’s price is likely due to tax-loss selling before the end of the year. Often this trend happens with stocks and the same activity likely happens with cryptos now.
After all, Bitcoin ended last year at $29,374. This means that as of today, BTC-USD’s price is up 94% year-to-date as of Dec. 3. This is an extraordinary gain. Some people may be tempted to take profits, including some Bitcoin miners.
Therefore, many patient investors may want to take their time before re-initiating a new position in Bitcoin. The likelihood of a further drop is fairly high both because of the higher Bitcoin difficulty rate and tax-related selling. This means that most cautious investors will wait until closer to the end of the year before plunging back in with Bitcoin.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.