While Bitcoin price starts 2022 with a slump, mining difficulty is on the rise

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While Bitcoin price starts 2022 with a slump, mining difficulty is on the rise

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

This price volatility hasn’t affected the network’s ability to increase miners’ difficulty to obtain Bitcoin. As competition among miners continues to grow, Bitcoin’s difficulty reached a new ATH for the second time in two months. The hash rate has also experienced a steady climb of 45% in 6 months after last July’s lows.

The Bitcoin network difficulty is determined by the overall computational power, which co-relates to the difficulty in confirming transactions and mining BTC.

To confirm a block and obtain its reward, miners encounter more opposition as the difficulty goes up. Those miners not able to catch up have been pushed out of the race. This dilemma between miners securing the network and deriving enough profits is likely to continue to play out as they determine the feasibility of their current operations.

Measurements of the hash rate for the network also reported 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 distributed the work is for each transaction that takes place on-chain. 

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

The difference between Bitcoin’s hash rate and 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.

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

Both the difficulty and the hash are very large numbers expressed in bits, so for the operation to be profitable for miners, the calculation simply requires the hash to be lower than the difficulty.

Bitcoin’s difficulty is calculated by how demanding it is for miners to produce a hash below the target hash. It grows or shrinks exponentially, depending on how many miners are competing on the network.

Difficulty readjusts every 2,016 Bitcoin blocks — or approximately two weeks — to maintain a constant block time, which refers to how long it takes to find each new block while mining.

Blocks are targeted to be found by miners every 10 minutes. So, if miners are solving blocks and finding 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 that are online, the more hash rate is produced, meaning the more likely it is that the correct hash is going to be discovered quickly. But, since blockchains are generally designed to add blocks (and release new coins) at a steady and predictable rate, the difficulty is programmed to adjust automatically after a set number of blocks to keep that rate consistent.

Bitcoin difficulty by the numbers

Bitcoin’s difficulty has consistently been increasing for every difficulty readjustment of the network since hitting ATH, regardless of the measuring tools used. 

Miners need to work much more to solve the equations that process transactions on the blockchain. This is the most important of the fundamental Bitcoin network components, as it keeps mining stable regardless of factors such as sentiment, price or black swan events.

Both the hash rate and mining difficulty continue to experience a persistent increment since its lowest point last July, when the hash rate sank to 69.11 exahashes per second (EH/s) (1 exahash = 1 quintillion hashes), according to CoinWarz, while mining difficulty reached a low of 13.6 trillion hashes.

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

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

Although the hash rate and the difficulty are two different factors, they show correlation to a certain extent.

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

Bitcoin difficulty adjustment

The latest Bitcoin difficulty adjustment took place on March 3 and experienced a negative correction of 1.49%, bringing the difficulty down to 197.19 exahashes. It is the first drop this year after six consecutive increases. The metric automatically adjusts mining effort to miner participation and doesn’t significantly affect the overall upward trend mining difficulty is undergoing.

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

Bitcoin fundamentals can diverge from BTC price volatility. The growing hash rate trend thus implies that on longer timeframes, miner optimism over the profitability of their operations remains.

Historically, price follows the hash rate. However, this trend is taking a back seat under current macroeconomic events as fundamentals move up consistently while the spot price experiences uncertain volatility.

The next Bitcoin halving and beyond

The amount of BTC miners receive for adding new transactions to the blockchain will be reduced as the halving lowers rewards. The next Bitcoin halving, expected to occur sometime in early 2024, will double Bitcoin production cost as block rewards are cut in half. 

Pseudonymous creator of Bitcoin Satoshi Nakomoto discussed the early days of the cryptocurrency on the Bitcointalk forum:

“The price of any commodity tends to gravitate toward the production cost. If the price is below cost, then production slows down. If the price is above cost, profit can be made by generating and selling more. At the same time, the increased production would increase the difficulty, pushing the cost of generating towards the price. In later years, when new coin generation is a small percentage of the existing supply, market price will dictate the cost of production more than the other way around.”

Historic 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 difficulty and hash rate will continue to increase. 

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

Miners will struggle to stay competitive if the price does not rise over time proportionally to the decline in 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 energy contributing to the rise in Bitcoin difficulty.