Difficulty for beginners

Jun

#Bitcoin, #Blockchain, #Crypto, #Cryptocurrency

For beginners

Hashrate just hit an all-time high. So did Difficulty. But what even are those, anyway?

You might have heard of Bitcoin’s hashrate or Difficulty mentioned as a metric of the health of the network, and not had a clue what it means. The crypto press tends to celebrate these two numbers rising, and wring their hands when they fall. But why?

Hashrate, and Difficulty (which is derived from hashrate), are measures of the interest in Bitcoin from miners – the ones who secure the network and process transactions. You can find both figures at https://bitcoinwisdom.com/bitcoin/difficulty. Bitcoin is known as digital gold, so we’ll use an analogy from gold mining.

Hashrate is the number of men with shovels digging for gold. Or women. Bitcoin mining is an equal opportunities endeavour, so long as you’re a machine.

Difficulty is the number of workers with shovels you need to find a nugget of gold every 10 minutes.

As more and more people find out about Bitcoin, more miners buy rigs and start mining – just like in a gold rush, more people buy shovels and start digging. But here’s where Bitcoin is different to gold. There’s a limited amount of gold and bitcoin in the world, but the rate at which they are mined is different. The faster you dig, the more gold you find. But when miners put more hashrate into finding bitcoin, that doesn’t mean more BTC are mined. Instead, Difficulty adjusts upwards. Difficulty is retargeted every 2 weeks, and its job is to make sure that the same amount of bitcoin are mined every day – in other words, that blocks are 10 minutes apart on average. More miners doesn’t mean more bitcoins, it means each miner receives less BTC.

When hashrate is high, and rising, it means that the network is highly secure and that interest is growing. Hashrate tends to follow price, because when BTC is more valuable, you tend to get more miners chasing it. When the price drops, fewer miners are able to cover their costs, and some switch off their rigs. That tends to lag a price drop, though, because miners have large sunk costs (their rigs) as well as ongoing costs (electricity).