Courtesy of China’s intense crackdown on Bitcoin mining, approximately 70% of the country’s Bitcoin mining capacity has already halted its operations. Moreover, this figure is estimated to reach 90% by the end of June. Bearing in mind that China hosts nearly 75% of the world’s Bitcoin mining hashrate, the global Bitcoin community is expecting a record drop in terms of hashrate.
However, a drop in hashrate is not much of a concern since Bitcoin was inherently designed to tackle a drop or rise in its hashrate. The leading digital asset does this in a process called “the mining difficulty.” As a result of the recent drop in Bitcoin hashrate, mining difficulty is also poised to drop.
While there may not be a direct relationship between mining difficulty and BTC’s price, there are certain traders who believe otherwise.
What is Bitcoin Mining Difficulty?
In its essence, Bitcoin was designed to add a new block to its blockchain every 10 minutes. However, when new miners join the network, the amount of computing power increases and this might result in blocks being produced faster. In order to make sure that the average time between each block remains at the 10 minute mark, Bitcoin’s software is set to automatically adjust the target hashrate up or down, which results in lower or higher difficulty.
Here is how Satoshi Nakamoto explains this in the original Bitcoin whitepaper:
“To compensate for increasing hardware speed and varying interest in running nodes over time, the proof-of-work difficulty is determined by a moving average targeting an average number of blocks per hour. If they’re generated too fast, the difficulty increases.”
In simple terms, Bitcoin mining difficulty is a measure of how difficult it is to mine a Bitcoin block. A high difficulty is an indication that additional computing power will be required to verify transactions while also implying that the network is more secure against attacks.
Naturally, Bitcoin mining difficulty is proportional to the mining hashrate (the total computing power that the Bitcoin blockchain network uses to send and confirm transactions). If the hashrate increases, so does the mining difficulty. Since the hashrate is constantly changing as miners join and leave the network, the difficulty needs to adjust itself frequently.
That is why the difficulty is adjusted every 2,016 blocks, which is equivalent to approximately 2 weeks. And the next time this difficulty adjustment happens is July 1.
Bitcoin Mining Difficulty to See a Historic Drop
What makes the upcoming mining difficulty adjustment special is that a massive crowd of Chinese miners has left the network. Bitcoin’s hashrate has dropped by around 50%, and this shall accompany a significant drop in Bitcoin mining difficulty.
According to one estimation, this round of adjustment will see Bitcoin’s mining difficulty drop by around 21% — the largest difficulty drop ever in Bitcoin’s history. Moreover, the mining difficulty has been dropping for two months now. The difficulty dropped approximately 16% and 5% on the previous two adjustment rounds, on May 30 and June 14.
Nevertheless, a decline in Bitcoin mining difficulty is usually associated with an increase in mining profitability. Predominantly, a decline in difficulty is an implication of a decline in competition to solve blocks. Thus, miners will save time, processing power, and electricity, making their mining operations more profitable.
As miners are packing up and leaving China, mining operations elsewhere will be securing the network:
How Will a Drop in Mining Difficulty Affect BTC’s Price?
While at least theoretically, there is no direct relationship between mining difficulty and Bitcoin price, yet many investors predict how the mainstream will react and forecast a price movement on that basis. For one, Max Keiser has such trading logic.
Wall Street veteran Max Keiser believes that price follows hashrate, stating that these words have been his mantra ever since the days of a single Bitcoin selling for a mere $3. Logically, this makes sense because the hashrate increases only when more and more people invest in Bitcoin through the dedication of expensive resources such as electricity and mining equipment.
A prediction following this perspective would suggest a decline in Bitcoin price since its hashrate has dropped significantly. However, it is good to keep in mind that the current drop in mining hashrate is actually transitory. So, this theory might not be applicable.
But aside from this, all sentiments across Bitcoin are positive. The displaced Chinese mining farms are searching for a suitable alternative and will soon come back online. Plus, a drop in mining difficulty, which is fundamentally an increase in mining profitability, will incentivize hordes of new investors to enter the mining industry.
Historically, China bans have not been very impactful to the global price action of technology-related entities. For instance, leading tech companies including Google, Facebook, and Twitter are banned in China, yet they continue to prosper. Not to mention that China has been banning cryptocurrencies since 2013, and yet, here we are.
In addition, thanks to El Salvador’s act of gifting $30 worth of BTC to every citizen that registers for the country’s official wallet, Bitcoin adoption is soaring. Further, other countries like Paraguay also want to follow suit and vote Bitcoin as legal tender, which will further spread Bitcoin’s adoption.
All in all, one could argue that the imminent drop in mining difficulty will not broadly affect BTC’s price. However, Bitcoin price has been showing considerable weakness recently, so still, there are chances that BTC plunge to levels below $30,000.
How long do you think it will take for the Bitcoin mining difficulty to rise to ATH levels again? Let us know in the comments below.
About the author
Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird’s US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firms specializing in sensing, protection and control solutions.