It’s never a dull day with Bitcoin!
So, mining difficulty on the Bitcoin network increased by 9.32% and hit an all-time high of 26.64 trillion on Jan. 21, at 3:07 UTC, beating the previous record set on May 13, 2021.
And this difficulty is automatically adjusted based on the amount of computational power on the network, or hash rate, to keep the time it takes to mine a block roughly stable at 10 minutes. The higher the hash rate, the higher the difficulty, and vice versa.
A little backstory
On May 13, last year, bitcoin’s mining difficulty hit a record 25.04 trillion, primarily because Chinese and North American miners deployed their machines. But it started dropping later in May when miners in China, at the time the biggest bitcoin mining country, went dark to comply with the regulatory crackdown.
hash rate and difficulty kept falling until late July. Most miners from China estimated they would come back online in Q1 2022.
However, Chinese miners found new homes for their operations in Kazakhstan, new facilities came online, and the hash rate and difficulty started to increase. By December, the hash rate had almost recovered from its July lows.
So what happened?
Bitcoin’s hash rate is falling
Kazakhstan’s government has cut off internet access amid escalating protests, and the country’s bitcoin mining operations appear to be caught up in the fray.
A comparison of mining pool hash rates — preceding the broader internet crackdown, as reported by multiple news outlets — now indicates a decline in rates for numerous mining pools. The most significantly impacted are 1THash (82% decline), OKExPool (46.3% decline), and KuCoinPool (22.7% decline).
The situation is notable given that Kazakhstan is home to as much as 18% of the world’s bitcoin hash rate. Major pools including F2Pool, AntPool, and ViaBTC also saw declines of 12.8%, 11.6%, and 19.2%, respectively.
A three-day chart of mining pool activity also illustrates the decline:
Even so, the hash rate impact is far from the dramatic drop seen last year. Still, the ongoing crisis in Kazakhstan, which appears far from resolved, is the latest headache for miners who hoped for proverbially greener pastures away from China.
Okay, but what does mining have to do with the hash rate?
How does BTC adapt to its mining difficulty with the increasing hash rate?
Mining for Bitcoin, as we know, is how new coins are brought into circulation. And, it’s necessary to maintain the ledger on which the entire system is based. It’s a process that involves solving math problems.
The more people there are mining for Bitcoin, the more difficult the puzzle. And, fewer people would result in the puzzles being easier. It is denoted by the time taken to mine each block, and it dynamically varies depending on the network’s total hash rate.
What’s the BTC hash rate you ask, here’s the answer.
Each miner, depending on the hardware used, will have a particular calculation speed, which is commonly referred to as the hashrate, with the miner’s profit correlated to the miner’s hashrate. More specifically, the hashrate is a measure of the power of the miner’s hardware and reflects the frequency of hash function computation per second.
So, when China started closing down mining farms, fewer people were fighting to verify transactions. As a result, Bitcoin’s mining difficulty dropped significantly as the hash rate plunged. China contributed 65% of all Bitcoin hash rates in May, hence a crackdown had affected the global hash rate by a whopping 40%.
As an example, if an investor has a hashrate of 10 Ethers per day and puzzle complexity rises by 30%, the investor’s daily mining income at the same hashrate, but with increased complexity, would fall and the more miners that enter the greater the fall in income, the calculation above, assuming that no new miners enter, the investor’s money would fall by 23%, 7.69 Ethers.
Hash rates are of particular importance in both the trading and the pricing of cryptocurrencies, with an increase in a cryptocurrency’s exchange rate also driving up the mining’s hash rate, which tends to lag whilst proportionate to the size of the exchange rate moves, the two being correlated.
Simply put, a drop in the hash rate means the chances of landing on the correct hash to earn Bitcoin are very low.
Where is it all expected to head?
The relation between the hash rate and bitcoin’s price is directly proportional. As more people buy and sell bitcoins in the network, there needs to be more asset liquidity. Mining introduces more coins, and the activity increases when more people buy and sell bitcoin.
People usually tend to buy/sell assets when the price of an asset increases, so a high bitcoin price tends to result in higher hash rates. For miners, a high bitcoin price means higher rewards from transaction fees on the network. So, when the bitcoin prices increase, it usually invites more miners to the network.
Bitcoin mining can be an activity with diminishing returns.
As the hashrate increases in the bitcoin network, the computational power necessary to mine new blocks increases for miners, resulting in shrinking profit margins. This could be especially crushing to new entrants in the mining sector, as they will require extensive mining hardware to compete with established mining companies.
The sentiment toward bitcoin mining is changing. Initially seen as an isolated hobby, it is now becoming a professionalized and institutional industry. It’ll be interesting to see how this unfolds further into the year.
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