Bitcoin

As Bitcoin Price Starts 2022 With A Crash, Mining Difficulties Rise

As Bitcoin Price Starts 2022 With A Crash, Mining Difficulties Rise

Since the start of 2022, Bitcoin (BTC) has seen its price fall by more than 40% from its all-time high (ATH) of $69,044.77 on November 10, 2021.

This price volatility has not affected the network’s ability to increase the difficulty for miners to obtain Bitcoin. As competition between miners continues to grow, Bitcoin’s difficulty has hit a new ATH for the second time in two months. The hash rate has also seen a steady rise of 45% in 6 months from the lows of last July.

The difficulty of the Bitcoin network is determined by the overall computing power, which is correlated to the difficulty of confirming transactions and mining BTC.

To confirm a block and obtain its reward, miners encounter more opposition as the difficulty increases. Minors unable to catch up were excluded from the race. This dilemma between miners securing the network and earning enough profit from it is likely to continue to play out as they determine the feasibility of their current operations.

The network’s hash rate metrics also signaled hitting new ATHs following a similar trend to Bitcoin’s difficulty metrics. The Bitcoin network seems to be at its peak in terms of security, as the more hashing power the network uses, the more work is distributed for each transaction that takes place on-chain.

Since there is no standard agreement for calculating these metrics, various hash rate highs have been recorded over the past few weeks. Despite the different approaches used, a common consensus is that the hash rate and mining difficulty have increased since the last drop in July 2021.

The Difference Between Hash Rate and Bitcoin Difficulty

Bitcoin mining is the process of adding new transactions to the Bitcoin blockchain. Using proof of work (PoW), miners compete to solve mathematical problems that validate transactions.

Bitcoin hash rate indicates the estimated number of hashes created by miners attempting to solve the current Bitcoin block or any given block. This is how new blockchain transactions are added to the system.

Bitcoin’s hash rate is measured in hashes per second (H/s). Miners need a high hash rate to mine successfully.

Difficulty and hash are both very large numbers expressed in bits, so for the operation to be profitable for miners, the computation simply requires the hash to be less than the difficulty.

Bitcoin difficulty is calculated based on how difficult it is for miners to produce a hash that is lower than the target hash. It grows or shrinks exponentially, depending on the number of competing miners on the network.

The difficulty readjusts every 2,016 bitcoin blocks — or roughly two weeks — to maintain a constant block time, which refers to the time it takes to find each new block while mining.

Blocks are targeted to be found by miners every 10 minutes. So if miners solve blocks and find Bitcoin more often than every 10 minutes, on average, the difficulty increases. If miners find Bitcoin less often than every 10 minutes on average, the difficulty decreases.

The more miners online, the higher the hash rate, which means it is more likely that the right hash will be discovered quickly. But, because blockchains are generally designed to add blocks (and release new coins) at a steady, predictable rate, the difficulty is programmed to automatically adjust after a set number of blocks to keep that rate constant.

The difficulty of Bitcoin in numbers

Bitcoin’s difficulty has steadily increased for each network difficulty readjustment since hitting ATH, regardless of the measurement tools used.

Miners have to work a lot harder to solve the equations that process transactions on the blockchain. It is the most important of the fundamental components of the Bitcoin network, as it keeps mining stable regardless of factors such as sentiment, price, or black swan events.

The hash rate and mining difficulty continue to experience a persistent increase since its lowest point last July, when the hash rate dropped to 69.11 exahashes per second (EH/s) (1 exahash = 1 quintillion of hashes), according to to CoinWarz, while undermining the difficulty hit a minimum of 13.6 trillion hashes.

On-chain analysis tools indicated that the mining difficulty on February 18 reached an ATH of 27.97 trillion hashes while the hash rate was then 186.77 (EH/s).

Previously, the new ATH for the network was reached on January 21 at 26.64 trillion hashes with a hash rate of 173.57 (EH/s).

Although hash rate and difficulty are two different factors, they show some correlation.

The network hash rate has also recently reached new ATHs. On February 14, Bitcoin’s hash rate reached 224.17 (EH/s).

Bitcoin difficulty adjustment

The last Bitcoin difficulty adjustment took place on March 3 and saw a negative correction of 1.49%, bringing the difficulty down to 197.19 exahashes. This is the first decrease this year after six consecutive increases. The metric automatically adjusts mining effort to miner participation and does not significantly affect the general upward trend in mining difficulty.

According to data from Blockchain.com, the top six known global mining pools minted 315 blocks (over 56% of the total amount). AntPool and F2Pool contributed the most hash power.

Bitcoin fundamentals can diverge from BTC price volatility. The increasing trend in the hash rate therefore implies that over longer periods of time, miners’ optimism about the profitability of their operations remains.

Historically, the price follows the hash rate. However, this trend is taking a back seat against the backdrop of current macro events, as the fundamentals are steadily rising while the spot price is experiencing uncertain volatility.

The Next Bitcoin Halving and Beyond

The amount of BTC miners received for adding new transactions to the blockchain will be reduced as the halving reduces the rewards. The next Bitcoin halving, which is expected to take place in early 2024, will double the cost of producing Bitcoin, with block rewards being cut in half.

Pseudonymous bitcoin creator Satoshi Nakomoto discussed the beginnings of cryptocurrency on the Bitcointalk forum:

“The price of any commodity tends to gravitate toward the cost of production. If the price is lower than the cost, production slows down. If the price is higher than the cost, a profit can be made by generating and selling more. At the same time, the increase in production would increase the difficulty, pushing the cost of production towards the price. In the following years, when the new generation of coins will represent only a small percentage of the existing supply, the market price will dictate the cost of production more than the reverse.

Historical data around pivotal dates like previous Bitcoin halvings tells us that unless an unexpected black swan event occurs like the one experienced last year when China banned Bitcoin mining , Bitcoin’s difficulty and hash rate will continue to rise.

Being an energy-intensive PoW network, Bitcoin’s core infrastructure was designed to balance dips in supply and fluctuations in demand. Changing the price accordingly makes Bitcoin a deflationary asset. Bitcoin will continue to increase in difficulty and hash rate as long as miners receive economic incentives that keep their operations profitable.

Miners will find it difficult to stay competitive if the price does not increase over time in proportion to the declining rewards. Miners will need to be as efficient as possible to stay in business, developing new technologies that can generate more hashes per second while consuming less power, contributing to Bitcoin’s increased difficulty.