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How to figure out bitcoin difficulty

#1 To maintain network integrity

The level of Bitcoin mining difficulty increases or decreases according to the ease of mining within the protocol. Remember, Bitcoin needs to have a consistent block time of 10 minutes. In other words, new BTC can be injected into the circulating supply every 10 minutes. To make sure that this timing doesn’t change the Bitcoin protocol:

  • Increases network difficulty when it becomes easier for miners to mine.
  • Decrease network difficulty when it becomes harder for miners to mine.

The Bitcoin network has a universal block difficulty. All valid blocks must have a hash below the target. Mining pools also have a pool-specific share difficulty setting a lower limit for shares.

#2 Relationship with hash rate

One of the critical metrics in judging the health of a proof-of-work network is hash rate. Simply put, hashrate shows you how powerful the miners are within the network. Higher the bitcoin network hashrate, higher it’s overall security and speed. However, these networks need to keep their hashrate under control for consistent block production. This is why, when hashrate becomes high, the bitcoin difficulty eventually gets higher as well, making it tougher for miners to mine easily within the network.

The inverse is also true.

If Bitcoin’s hashrate decreases, the network difficulty will reduce as well. Hashrate may decrease because of the following reasons:

  • Bitcoin currently has a high difficulty, which is why the miners are having a tough time mining in the system.
  • The price of BTC went down, which is why a lot of miners quit mining.

To understand the correlation between the two, let’s check out their graphs. Up first, we have the hash rate.

After that, we have the bitcoin difficulty chart:

As you can see, there is a very close correlation between the two. Around March 26, the network difficulty fell by 16% from 16.55 trillion to 13.9 trillion. This was the largest crash in network difficulty since early 2013. To understand why this happened this time around, look at how the hashrate dropped as well just before the bitcoin difficulty drop. This dip occurred because of Bitcoin’s price crash, which forced a lot of miners to quit operations.

Conclusion – Bitcoin Mining Difficulty

We hope that you found a lot of value in this article. If you have some doubts, then feel free to reach out to us at any time.

Conclusion: Bitcoin Mining Is Perfectly Competitive

The nature of competition in Bitcoin mining is near perfect which means miners will work extremely hard to have the most efficient operation, and indeed, the most efficient supply chain. It also means that they are ready and able to physically go wherever is required to achieve this. Mining is not easy, and for a home miner, is akin to panning for gold in 2022 — it sounds far more glamorous and rewarding than it actually is! There are better ways to pique your curiosity about mining than spending money trying it out yourself (read: going short spot-Bitcoin in hopes you’ll earn more by mining versus going long spot-BTC) — but you will never hear this from the people selling picks and shovels!

Bitcoin mining has been able to absorb most of my time and intellectual capacity for eight years, yet I have never even turned on a miner in my life. When it comes to mining, it’s best to leave the bread to the baker, as they are most capable of identifying, assuming and managing the risks. The history speaks for itself: When it comes to hash rate and difficulty, “number go up” harder, faster and more consistently than price, and while this is great for Bitcoin, it is terrible for those looking to compete in what is a perfectly competitive space.

This is a guest post by Hass McCook. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

How To Calculate Bitcoin Mining Profitability

Investors choose this investment strategy when long term growth of an asset is foreseen, but a removal of short term volatility is desired. Percentage increases of difficulty per year should be entered here. This price may seem much too high to even start; it’s not obvious just how much Bitcoin you would receive for a given amount of money. The BTC calculator can help anyone who is interested in crypto or is already trading crypto. Just type in how much BTC you would like to buy, and you immediately get a price estimate in your local currency. You can convert BTC to USD or XMR to EUR or RUB to EUR or XMR to ETH … Average cost calculator is a handy tool for traders and investors. The article can’t possibly be concluded without including a mobile solution.

  • On top of reporting differences, different exchanges may have different bitcoin prices for each date.
  • Like price and hashrate, transaction fees paid per block vary significantly over time as network use and spend sizes vary.
  • Percentage increases of difficulty per year should be entered here.
  • If the owner of that wallet wishes to send more than 1 BTC in a single transaction he must utilize more than one of his addresses, resulting in a transaction with more than one input.
  • Breaking down everything you need to know about Bitcoin mining, from blockchain and block rewards to proof of work and mining pools.

Blockstream Green is one of the friendliest yet feature-packed wallets on the market. The best part about Green is that it’s available in the iOS App Store, Android Google Play Store, and also the F-Droid repository. Furthermore, Blockstream’s wallet can route the connection through Tor for greater privacy, connect to a hardware wallet like a Ledger or Trezor, and even work on the Bitcoin Testnet and Liquid sidechain. Bitcoin fees are a fascinating component of the network’s game theory and an indispensable element without which the whole project’s economic sustainability becomes questionable.

There are only a few options when using the bitcoin return calculator, but any small adjustments can have major effects on your results. You can use the Bitcoin calculator to know the currency between Bitcoin, Ethereum, Ripple, and other 5000 cryptocurrencies and fiat currencies like USD, CNY and others. You can choose every combination of corventing fiat money or cryptocurrency in the list. To calculate the average price you need to know the total contracts / shares quantity and the purchase price of each contract / share. Unconfirmed Transaction Count on Johoe’s Bitcoin Mempool Statistics Another valuable and well-reputed resource is Johoe’s Bitcoin Mempool Statistics. The website features a collection of graphs that will help you better understand what’s going on with Bitcoin fees and unconfirmed transactions.

Why Our Calculator is the Most Accurate

There are many factors that affect your mining profitability. Two of the main factors that influence your profitability are:

The Bitcoin price and the total network hash rate.

The Bitcoin network hash rate is growing at a rate of 0.4527678% per day. This means if you buy 50 TH/s of mining hardware your total share of the network will go DOWN every day compared to the total network hash rate.

Our calculator assumes the 0.4527678% daily increase in network hash rate that has been the average daily increase over the past 6 months.

Without factoring in this growth, most Bitcoin mining calculators show results that appear MUCH, MUCH more profitable than reality.

How will miners react to this reduction?

While this adjustment will certainly have an impact on both block-time and mining profitability, it maynot have a significant effect on the price of BTC.

On the one hand, it is true that higher profitability means less need for miners to sell the BTC they mine, but it is unlikely that profitability will increase so much that it will convince many miners to significantly reduce themarket sale of the BTC they mine.

It is worth remembering that 6.25 BTC is created and given as a prize in every single mined block, and at the rate of one block every 10 minutes there are about 900 BTC being created every day. When miners have profitability problems they tend to sell all, or almost all, of the BTC they have mined. Since this is a total volume of about27 million per day, the selling activities may also have some effect on the market.

We will need to wait until spring 2024 for this rate to be halved, to3.125 BTC per block.

At the very least, however, tomorrow’s difficulty cut should help miners to be able to continue mining even in the face of Bitcoin’s value dropping so much in recent weeks.

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This feature of the bitcoin code is a critical part of its network architecture.

This spring, an entire country – which signified 54% of bitcoin’s total hashrate – went offline, and bitcoin didn’t miss a beat.

“There was no downtime whatsoever to the bitcoin network. That’s actually the smartest part of the bitcoin software: the difficulty adjustment,” said bitcoin mining engineer Brandon Arvanaghi.

The entire episode was considered a “black swan” event for the industry, and according to crypto miner Alejandro de la Torre, it also made a whole lot of people much richer.

Now, with the new adjustment, Deane tells CNBC it’s essentially 7.3% less profitable to mine bitcoin post upgrade.

“Assuming your energy cost and hashrate remain unchanged, the calculation really is as simple as it first appears,” said Deane.

The difficulty adjustment also reflects the fact that the mining world has already touched bottom in terms of global hashrate. Since the end of June, miners have been coming back online fast.

“We have seen the bottom of the hashrate decline, and it is nothing but up from here,” said Mike Colyer, CEO of digital currency company Foundry, which helped bring over $300 million of mining equipment into North America.

“This next adjustment reflects the fact that miners are building out capacity and plugging in new machines. There is an enormous amount of machines coming out of China that need to find new homes,” continued Colyer.

2014 To 2020: The ASIC Mining Era

2014

Despite the collapse of Mt. Gox starting the longest bear market in the history of Bitcoin, with the high watermark of $1,134.39 not to be passed again for the final time until April 2017 — a full 1,218 days later (trust me, as a November 2013 first-time buyer, I lived it and was counting the days!). 2014 was yet another seemingly “up only” year for difficulty, with 28 increases, and two small decreases of 0.73% and 1.39% to round out the year. The average difficulty change was plus 10.9% with a standard deviation of plus 6.57%. If you didn’t add any ASICs to your farm in 2014, your 1 BTC of earning power was slashed by 96.86% to 3.14 million sats.

2015

Even with Mt. Gox being dead for almost two years, the “Goxxings” just seemed to keep coming, with price bouncing between $300 and $150 for most of the year, with all five of the difficulty drops occuring in 2015 coinciding with sharp 30% to 50% drops in price over a short time period. ASIC manufacturers were still feeling out the space and perfecting their art, as shown in the graphic below from the Cambridge University SHA256 technology tracker. This meant that the average difficulty change for 2015 was only plus 3.31% with a standard deviation of plus 4.62%. Still, if you didn’t add any rigs to your farm, your 1 BTC of earnings on January 1 was cut by almost 60% to 0.403 BTC.

2016

2016 was one of the most special years in mining history, as it witnessed a halving as well as the release of the AK-47 of mining rigs, the Antminer S9, which would enjoy profitable service for six years up until the very recent major price drop witnessed in May 2022.

Price growth for the year was sluggish, save for the last few months which saw substantial growth, and the goxxings would still continue during 2016 despite the exchange collapsing more than two years prior. All of this would result in 22 difficulty increases, and five drops, three of which occurred prior to the halving.

The average change was plus 3.93% with standard deviation of plus 4.93%, resulting in a reduction of BTC income of 47.36% for the year.

2017

2017 saw two major events, a 20-times run up in price throughout the year, and the resolution of “the blocksize war” toward the very end of the year. I obviously cannot do justice to the blocksize war in one paragraph, so I will quote the blurb of Jonathan Bier’s seminal March 2021 book “The Blocksize War: The Battle Over Who Controls Bitcoin’s Protocol Rules”:

“[The Blocksize War] was about the amount of data allowed in each Bitcoin block, however it exposed much deeper issues, such as who controls Bitcoin’s protocol rules.”

The ultimate resolution was the creation of a new fork of Bitcoin, known as Bitcoin Cash (BCH), which could also be mined using the SHA-256 protocol. Huge increases in the price of BCH toward the end of the year were enough to coax miners away from mining the Bitcoin network and mine on the BCH network on three occasions after its launch in August, with a small drop in July taking the tally to four downward adjustments for the year.

There were still 23 increases for the year however, and with an average change of plus 6.16% with standard deviation of plus 6.15%, these changes resulted in a reduction of income of 82.06% for the year. More mining rig manufacturers would enter the game this year, but no dramatic improvements in rig efficiency were achieved.

2018

2018 saw much more competition in the ASIC hardware space, with rig efficiency almost doubling. Rigs were becoming so efficient, having an 80% drawdown in price over the year did little to stop hash rate growth.

There was an average change of plus 3.59% with standard deviation of plus 7.31%, across 23 difficulty increases, a drop in July when bitcoin’s price was at about $6,000, and four drops which occurred during the final price capitulation from about $6,000 to about $3,000 late in the year. The end result was a reduction of income of 64.09% for the year compared to your start-of-year earnings.

2019

After the brutal bear market of 2018, traders saw a relief rally that took the price from $4,000 at the start of the year to about $13,000 mid-year. Aside from five minor negative difficulty adjustments of less than 1% in the first half of the year, and two drops in the second half of the year when bitcoin would return to a price of $6,000, there were 19 increases. The average change of plus 3.06% with a standard deviation of plus 4.49% resulted in a reduction of income of 55.42% for the year.

This was mainly driven by even more competition and efficiency gains in the ASIC hardware market as opposed to chasing price-cost arbitrage, with the 2019 fleet of new rigs being more than twice as efficient as their 2017 peers. 2019 was also the first year we saw modular mining techniques at large scale, where miners would essentially turn shipping containers into portable ASIC farms, and simply ship them to the world’s cheapest power sources. The large drop in difficulty in late October was more likely from Chinese miners physically migrating to cheaper hydroelectric power sources due to the wet season, than a miner capitulation over a small drop in price. This would become far more apparent in the migrations of 2020.

2020

The most difficulty drops in Bitcoin history would happen in 2020, with 11 drops, some of previously-unseen magnitudes, occurring throughout the year, for different reasons. Despite the “COVID-19 everything crash of March 2020,” the substantial hash rate drops witnessed in April and late October would mostly be the result of Chinese miners physically migrating from Xinjiang province (which is coal heavy) to Sichuan province (which is hydro heavy) during the wet season, and then back at the conclusion of the wet season. The profit on offer was so great as a result of much cheaper power that it was worth it for miners to simply pack up, move and establish themselves elsewhere, despite the associated risk and downtime. Of course, the halving of May 2020 would result in two consecutive drops of 6.39% and 10.24%.

Mining techniques and rigs would continue to improve, with firmware service providers like Braiins.OS providing miners with software that dramatically increased the efficiency of their rigs and was easy enough to use by mining enthusiasts. Immersion-cooled mining would also start being used by various operations as a way to further increase efficiency and reduce downtime and maintenance costs.

The average change of plus 1.06% with standard deviation of plus 7.74% resulted in a reduction of bitcoin-denominated income by 24.91% for the year. Considering that the price of bitcoin would grow by four times in 2020 however, this would start a period of time where home and collocated mining started to look more appealing to a far wider user base due to the seemingly irresistible cost-price arbitrage on offer in a booming market, seemingly protected from competition, at least temporarily, due to the COVID-induced global supply chain issues afflicting the market.

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