What does Bitcoin’s historic difficulty adjustment mean for the network?
The Bitcoin mining difficulty has undergone its most significant drop in history — roughly 28%. This is logical, as it follows a decline in hashrate as memorable as this adjustment. But what does it mean for the network and miners?
Understanding mining difficulty
If we want to analyze the implications this unique difficulty adjustment has, we must first fully understand what this concept is all about.
Mining difficulty is a feature of all proof-of-work networks that define how hard it is for a miner to mine a block. In other words, how much computing power they need to solve the mathematical calculations required to verify the transactions. In Bitcoin’s case, the higher the difficulty, the more complex the equation will be, and thus, the more time and power it takes to solve it. That said, a couple of questions arise.
Firstly, who defines difficulty? The parameters that calculate mining difficulty lie in Bitcoin’s immutable code. It is directly proportional to the blockchain’s total hashrate. If new mining devices — and more hashpower — plug into the network, it goes up. Inversely, if hashrate drops, so does the difficulty, making solving blocks easier.
Why would we want to make mining more difficult? Difficulty adjustments help keep block solving time on a ten-minute average, contributing to the network’s stability. It also improves security: If the new computing power connecting to the network had malicious intentions, difficulty increases would render their efforts helpless. This makes 51% attacks virtually impossible.
Are you new to crypto? Don’t worry, mining is a complex subject. We recommend you to check out our article about basic mining knowledge to get started!
The last Bitcoin mining difficulty adjustment
In the particular case of Bitcoin, mining difficulty updates happen every 2,016 blocks — approximately two weeks in non-block time for you non-geeks out there. The network picks up the previous period’s hashrate and calculates the difference, defining the new difficulty according to fluctuations.
It’s no surprise that last was the largest Bitcoin difficulty adjustment in history, following up China’s miner exodus. After all significant Chinese mining farms and pools ceased operations, around half of Bitcoin’s global hashrate went offline.
Some miners have relocated. Others are still evaluating their possibilities and deciding their destinations. In the meantime, and until they get back online, their absence has led to this historic difficulty drop.
There’s no doubt that Chinese miners have a lot to consider. But what about the rest of the community? This event, as unique as it is, opens up a range of unique opportunities as well. Let’s break them down.
Difficulty goes down, miners (and profits) come up
We’ve said reducing difficulty means mining — solving each transaction’s mathematical problem — is easier. In other words, it requires less computing power.
That, in turn, means that mining becomes three things:
- More profitable, as miners that remain active can mine more with the same hashpower.
- More accessible, as small operations and investors that couldn’t compete with large-scale mining farms now have a shot at finding hashes first and thus turn sustainable.
- More democratic, as hashrate spreads among these new, small miners connecting to the network rather than stay concentrated on a few massive mining pools.
Indeed, the big winners on this difficulty reduction are miners that can continue working. Let’s explain that with a practical example: Imagine crypto mining was like gold mining, with all the drilling and digging. Now, what would happen if miners were all working in the same physical place? Miners would be swinging pickaxes and shovels all over the place, bumping into each other, fighting over the same little gold nugget no matter how small it was.
What would happen if, suddenly, half of the miners went away in the blink of an eye? The mine would remain the same. Their amount of gold and their equipment too. However, without the fierce competition, they would have it much easier to obtain gold and, consequently, to earn better profits.
Although this is a rather simplistic analogy, it helps better understand the situation non-Chinese miners find themselves in. With half of the global hashrate shutting down, all those blocks are now up for grabs, and if you managed to keep your operation running, you are among the lucky winners. Similarly, if you were considering setting up your own mining rigs but were doubtful about it, this might be the little push you were expecting. You won’t get an opportunity any better than this one.
Drawbacks to consider
However positive, it’s not all rosy regarding this change in difficulty.
First of all, as we mentioned before, this is a temporary situation. All that dormant hashrate will eventually go back online, spiking hashrate again and, consequently, mining difficulty. In turn, planning becomes highly complicated.
In mining, assessing an estimate of future hashrate — and mining difficulty — is critical for planning your business and calculating your ROI. With all the dormant hashrate that could reconnect at any moment, it becomes virtually impossible to plan precisely, which translates into higher risk in the long term.
Another disadvantage of this situation is slow network transactions. With difficulty updating every 2,016 blocks, there may be a period of slower speed between the hashrate drop and the adjustment date. This delay often leads to unbearable waiting times and high fee costs to interact with the Bitcoin blockchain, which discourages use. According to Compass Mining, this was clear in this period’s revenue for miners, in which transaction fees were only 5% of total profits.
Although we can expect this to recover gradually after the drop in difficulty, it’s impossible to determine precisely when the network will return to typical performance.
Why is the miners’ relocation taking so long then? The lag is mainly due to the inflexible nature of the electrical generation marketplace. It was relatively simple to set up a crypto mining operation in China due to easy access to electrical generators. What miners are finding when trying to transfer to the EU, US, and Canada is that those markets are more mature and regulated. The power generators, along with other associated equipment, have long supply chains and times, making the settling down process much more arduous.
Next steps for Bitcoin mining
The United States — Texas is ahead because of its unregulated energy market, although other states are making consistent efforts to attract investors — and Canada are taking the lead as the primary destination for migrating Chinese hashrate. Nonetheless, there are still more doubts than certainties about when and how the situation will develop, and there’s nothing we can do besides waiting it out.
Opportunities present themselves for those who are willing to take the risk, though, as Bitcoin difficulty has never seen such a drop ever in history. Furthermore, last time difficulty was this low, Bitcoin was trading around $9,000. You could mine it for almost 3.5x the revenue that you would have done back then.
One thing is sure: We see exciting days as global hashrate reorganizes, and we don’t doubt that it’ll turn out for the better. Bitcoin always does.
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