What is happening to the Bitcoin Mining Difficulty?

A short introduction to Bitcoin mining difficulty

The mining difficulty is basically a measure of how difficult it is to find a new block in the Bitcoin Blockchain or in other words, how big the nonce is that miners need to brute force to find a hash smaller than the target hash (using Proof of Work).

Just a small observation: I always thought that is quite funny when people say that what miners are doing is to “solve complex mathematical problem” when what they are really doing is trying to guess a “lottery” number.

The mining difficulty is adjusted every 2016 blocks which are approximately 2 weeks considering an average of 10 minutes per block. Bitcoin algorithm provides this adjustment very easily. If the previous 2016 blocks took more or less than 2 weeks to find, the difficulty is increased or decreased in the proportion of the amount of time difference to the 2 weeks.

This difficulty needs to be adjusted because there are variations on how much computing power, i.e. the total hash rate exists in the Bitcoin network. More miners contributing, bigger the total hash rate and the need to increase the difficulty.

Why is mining Bitcoin less profitable now?

Since the beginning of BTC time, Bitcoin mining difficulty was completely correlated with the price. The number of miners (or hash rate) in the network was, until the end of 2017, totally correlated: if the bitcoin price was increasing the hash rate would also increase in a result of some people starting to mine Bitcoin. If the price was not increasing, the mining difficulty would most of the times stabilize.

However, in 2018 we are seeing a rather strange behaviour. Although Bitcoin price has dropped quite a lot, more than 80% from the all-time high, the mining difficulty has been keeping to rise like crazy! The hash rate (and total mining power) grows 3.5x in 2018 and at the same time, the price has dropped 80%.

Source: https://bitcoinwisdom.com/bitcoin/difficulty

This fact leads to the worst moment in the history of Bitcoin mining. Even the recent drop of the mining difficulty is not enough to keep up with the price drop and keep decent profitability level to miners.

The recent mining difficulty adjustments (Nov. and Dec. 2018) improve the mining profitability slightly. However, the Bitcoin price drop is once again penalizing miners.

To better illustrate the impact of the mining difficulty and the price on miners profitability, I have created the “Difficulty Strength” which is basically DS=difficulty/BTCprice .

This chart shows the BTC Difficulty Strength , i.e. the relation between price and difficulty. Until the beginning of 2018 (and pretty much the whole Bitcoin history) the “Difficulty Strength” was always under 0.5.

As you can see in the chart, the best value for miners profitability was in December 2017 and January 2018 when the Bitcoin price was around all-time high, and the difficulty was increasing slower than the price variation. This means that considering these values and ceteris paribus; this was the best time for miners profitability in the history of Bitcoin.

In December 2018 the Difficulty Strength reaches new all-time high values represent the worst time ever for Bitcoin Miners.

What happened in 2018?

Many people simply say that the reason why the hash rate has raised so much in 2018 (and consequently the mining difficulty too) is that many people and corporates believe in the future of Bitcoin. However, even believing in the ideals and future of Bitcoin, the fact is that economically stopped making sense for many people to mine Bitcoin (as well as other PoW cryptocurrencies).

China was and continues to be one of the biggest contributors with thousands of miners that can’t be seen, here https://bitnodes.earn.com/ because the “Great Wall of China” forces every Bitcoin miner to use a VPN.

In December 2018, it only makes sense to continue to run Bitcoin miners if the price of the electricity is less than $0.045 kWh (for example for an Antminer S9). One year before, miners paying $0.045kWh would be having a good margin and interesting profits. Probably only in certain regions of China and countries where the electricity is subsidized or renewable energy based continues to make sense to run Bitcoin miners.

How is the mining difficulty going to evolve in 2019? Is bitcoin mining ever going to be profitable as before? Is now mining a game only for big corporates?

The Bitcoin Difficulty Strength may threaten the Bitcoin network?

The Bitcoin network is a self-sustained and self-balanced market. One of the most significant roles of the Bitcoin mining difficulty is precisely to provide the network of miners an algorithm that is going to make sure that the network has the ideal number of miners in order to have one block produced every 10 minutes in average.

In an extreme scenario where the Bitcoin price drops to extremely low values, many miners are going to leave the network but the difficulty would automatically adjust and open doors to smaller miners allowing people to mine Bitcoin with their laptop, just like during the early days of the Bitcoin network.

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