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Difficulty drops as miners feel the pinch

Difficulty drops as miners feel the pinch

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Bitcoin miners are switching off their rigs as the cost of mining bitcoins outstrips their income. The falling price of BTC means that smaller miners have struggled, and now the results of the crypto recession are filtering through to the underlying infrastructure.

How does Difficulty work?

Bitcoin mining involves computers dedicating processing power or ‘hashrate’ to the network. Collectively, the computers on the Bitcoin network look for the solution to a very specific mathematical problem. The winner of the puzzle gets to add the next block of transactions to the blockchain, and receives a tranche of new coins and transaction fees as their reward.

As more processing power is added to the network, it takes less time to find the answer to the problem. Therefore, Satoshi’s design increases ‘Difficulty’: it makes the problem harder to solve. This means that, on average, it always takes 10 minutes for the entire Bitcoin network to create a new block. Difficulty is adjusted every 2,016 blocks, or around 2 weeks.

Over the long term, Difficulty and price move together: if it is worth mining bitcoin, more people will do it. That’s what we’ve seen over the course of Bitcoin’s history. It has resulted in the evolution of mining from CPUs to GPUs to extremely powerful ASICs. You can see the rising Difficulty since Bitcoin was first launched here: https://www.blockchain.com/en/charts/difficulty?timespan=all

Falling Difficulty shows miners in trouble

It’s rare for Difficulty to fall on each two-week update, and rarer still for it to fall significantly. Miners are forward-thinking and often well capitalised. Many will take the hit in the short term, on the expectation of higher prices to come.

That’s why it’s significant that Difficulty has been falling recently, and has just posted an unprecedented drop. Here and there Difficulty falls a little, but double digits is almost unheard of, especially in recent times.

Of course, this is how it’s supposed to work. Difficulty changes lag price movements as miners react to changing revenues. And through the bull run of 2017 hashrate and Difficulty increased steadily, as miners flocked to the network. The amazing thing is that Difficulty has continued to rise for the whole of this year, apparently topping out in October, even as the price of BTC has slid to just 20% of its peak. But the last couple of weeks, and this last adjustment, have been brutal ‘corrections’ in Difficulty, reflecting miners switching off and packing up en masse – just like traders bailing and getting out of the market.

It might be a coincidence, but the last time Difficulty dropped anything close to this much was just after the capitulation from the last bear market, in January 2015.

Red hot news, scorching wit and searing opinion pieces from Crypto Inferno.

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