Today the Bitcoin (BTC) difficulty has been adjusted once again. The difficulty adjustment yesterday is somewhat historical as it saw a big jump. The difficulty rose by almost 15%, which is rare in Bitcoin’s history. In this article, we will explain what the difficulty is and what an increase of 15% might mean for the network and bitcoin price.
Keeping the Bitcoin network safe but fast
As you might have read in our previous blog article, ‘Bitcoin (BTC) Hash Rate: What Is It And Why Is It Important?’, the task of a miner is to encrypt transaction data and add it to the blockchain. This means that when a transaction is made, it will be processed once a miner picks it up and puts it into a block.
The encryption of transaction data is an intensive task for bitcoin miners. Their goal is to guess the right hash key that meets the requirements set by the Bitcoin protocol. To increase their chances, miners try to spit out as many hash keys as fast as possible in the hope of guessing the right key.
For the average Bitcoin user, however, time is important. When you send a bitcoin transaction, you really want that transaction to arrive within a reasonable time, which is just as important to the receiver. This is where Bitcoin’s 10-minute block processing time comes in. The network has to process one block with transactions every 10 minutes, give or take.
Now let’s say the miners on the Bitcoin network consist of only slow miners that are not very good at encrypting data. They will take a long time to find the right hash key. A result is that blocks will not be added to the blockchain once every 10 minutes, but maybe once every 20 minutes or longer. In this case, the difficulty, a parameter within the Bitcoin protocol, will be automatically lowered as it is just too difficult to mine bitcoin.
Bitcoin miners get faster and faster as development proceeds and new technologies are implemented, which means that mining bitcoin becomes easier. The result of this is the opposite of the previous example; mining bitcoin becomes easier. This time a block might be added every 5 minutes instead of 10. In this scenario the difficulty will increase, to make it harder to mine bitcoin. Also when more and more miners enter the network, the difficulty will increase as the overall hash rate of the network rises.
The Bitcoin halving caused an imbalance
As you might know, the Bitcoin halving took place in May 2020. After this halving event, the bitcoin miners only received half of the mining rewards as part of a mechanism to slow down the inflation of bitcoin. But what this meant for miners was that mining bitcoin became twice as expensive.
The immediate effect was seen in the form of the difficulty that became lower. Slower miners weren’t able to generate any profit anymore and turned off their rigs. The hash rate dropped and blocks weren’t processed every 10 minutes anymore. After the difficulty adjustment, however, the hash rate started to rise again as the miners that dropped out earlier, were able to generate some profits again.
This turnaround in the number of miners that joined the network again caused a new difficulty adjustment, but this time upwards. Again this might cause older miners to drop out, which in turn could lower the difficulty once again, offering new chances for smaller and older bitcoin miners. As you can see, the difficulty is a factor that moves in cycles which decides a lot for miners. Therefore, the difficulty of the Bitcoin network is an important statistic to keep an eye on when you are planning to mine bitcoin as you will be able to estimate the best moment to step into the Bitcoin mining world.