Bitcoin mining: difficulty still decreasing

Good news for Bitcoin miners: difficulty dropped again today. 

Bitcoin mining: current levels of difficulty

Difficulty is the level set automatically by Bitcoin’s protocol for those who mine blocks, and it updates every two weeks or so, or every 2,016 blocks. 

On 6 December there had already been a sharp decrease in difficulty, but on the 19th it had increased slightly again. 

The all-time high was reached between 21 November and 5 December, when it touched 37 T. 

The thing is, the previous week marked the all-time peak in hashrate, which is the computing power committed globally to Bitcoin mining. Because of that high level of hashrate, the average time taken to mine blocks had dropped below 9 minutes, whereas in the Bitcoin protocol, it is expected to be about 10 minutes. 

At that point, an increase in difficulty was inevitably triggered to lengthen the average time it takes to mine a block. In fact, after 21 November the block-time went up to as much as 13 minutes, partly because due to the increase in difficulty, many miners had to shut down their least profitable machines. 

In fact, increased difficulty necessarily implies more power consumption for miners for the same results, and since just before mid-November the value of BTC hit an annual low, after 21 November it had become uneconomic to mine with the least efficient machines. 

Bitcoin mining hashrate

In fact, as of 21 November, there was a sharp drop in hashrate, from about 270 Ehash/s to about 240, due to the increase in difficulty that caused costs to rise. Since the value of BTC at that juncture did not increase, the increase in costs led to a sharp decrease in mining profitability. 

In November, the profitability of Bitcoin mining fell so much that it hit its lowest in five years, very close to its all-time lows. 

The fact is that, faced with a market value at annual lows, the hashrate was instead at all-time highs, with also a difficulty inevitably at all-time highs.

So it is not surprising that in November the hashrate dropped significantly, so much so that block-time also rose to 13 minutes due to very high difficulty. 

Inevitably, at that point, there was a first sharp reduction in difficulty on 6 December, which suddenly made mining more profitable. In fact, almost immediately many miners turned some of the machines they had previously turned off back on, and the hashrate returned to 260 Ehash/s. 

The block-time

At that point, block-time dropped again, even below 9 minutes, causing the difficulty to rise again on 19 December. 

Specifically from the very moment of FTX’s collapse, which caused Bitcoin’s price to hit new 2022 market lows, a dynamic was set in motion that caused the block-time, or the average time between the mining of one block and the next, to fluctuate greatly over the weeks. 

Whereas in October it had fluctuated right around 10 minutes, with small and brief excursions to 9 or 11 minutes, in November it first went up, due to the reduction in hashrate caused by the reduction in profitability due to falling prices, then went down thanks to the sharp reduction in difficulty. 

In particular, in November there were real abnormal peaks in block-time, up to 13 minutes on 26 November, later surpassed by 16 minutes on 24 December. 

In fact, in December this was compounded by the big winter storm in the US that forced many miners to turn off their machines altogether to save energy. 

Projections for 2023

This dynamic seems to have abated somewhat with the start of the new year, and now that the difficulty has fallen again it is possible that it could almost be reduced to zero, especially by virtue of the fact that the price of BTC seems decidedly stable. 

It is worth remembering that hashrate increases very slowly, while market prices can vary very much and very quickly. In fact, the November 2022 hashrate spike is actually a consequence of the previous year’s price speculative bubble, because it took miners a year to adjust their computing power to the new BTC market values. 

Should Bitcoin’s price remain stable in the coming days and weeks, somewhat as it has been doing since mid-December, 2023 could begin with an abnormally quiet period, even for miners. 

Miners were heavily hurt by the 2022 price collapse, not least because they had invested heavily in 2021 to buy machines that take months to receive and put into operation. 

It is worth recalling that mining is a competition in which those with the most computing power win, and those with the least lose. In this way, miners are actually incentivized to increase their computing power as much as possible, which is precisely what happened from late 2020 to late 2022. 

Finally, it is necessary to remember that Bitcoin requires neither a lot of miners, a lot of computing power, nor high power consumption to function properly: it is the miners who, autonomously and independently, decide how much power to use and how much to consume. The Bitcoin protocol merely pits them against each other by favoring those with more computing power.