Bitcoin Difficulty Dropping as Bitcoin Price Forces Miners Offline

Colin Muller

In line with the trend that started in October, Bitcoin’s mining difficulty is projected to drop lower for the third adjustment in a row, showing the sharply dropping hashrate as miners go offline. As of press time, a -13% adjustment is expected to occur within 2.9 days for the first time since 2011, according to data gathered by bitcoinwisdom.com.

Bitcoin’s hashing difficulty algorithm, which adjusts on average every two weeks (2016 blocks) is designed to maintain ten-minute block times. The difficulty dropping is a reflection of hashing power on the network also dropping.

bitcoinDiffAlltime.png(source: bitinfocharts.com)

It is historically very rare that the Bitcoin difficulty drops, because it’s rare that the hashrate drops for a sustained period, however, falling prices have forced many miners offline lowering the hashrate. For example, over the past year difficulty has fallen during only about 17% of the adjustment events, while overall hashrate increased nearly fourfold during the period from January to October.

bitcoinDiffYear.png(source: bitinfocharts.com)

CryptoGlobe recently reported on the relationship between bitcoin’s price on one hand, and the Bitcoin network’s hashing difficulty on the other. Some experts have observed that six to twelve months of falling and flat changes in hashrate and difficulty has historically presaged an end to negative price action - in this case, we would be anticipating an end to the 2018 bear market.

Why Is hashrate and Difficulty Falling?

The fairly straightforward answer to this question is that: bitcoin’s price is falling. A falling price in bitcoin means a falling reward for miners when they mine a block. Mining could eventually become unprofitable for miners, especially less efficient ones. In that case, firms could either continue mining at a loss - if they are able - anticipating higher prices in future, or close down, an example of which CryptoGlobe recently reported on.

hashratebtc3m.png(source: bitinfocharts.com)

With bitcoin’s price recently breaking the key $6,000 support level to as low as $3,500, augmenting the pain of an already brutal ten-month decline in cryptoasset prices, it is not surprising to see hashrate on the network falling, especially after such a sustained uptrend.

Enter Bitcoin Cash

With respect to hashrate, difficulty, and the price of bitcoin, the recently introduced elephant in the room is the Bitcoin Cash forking conflict.

One of the main characters behind the hardfork, Craig Wright (with whom CryptoGlobe recently conducted an exclusive interview), vowed to his erstwhile partner Roger Ver to mobilize all the resources necessary to emerge as the dominant side of the split - although the conflict now seems to have ended in an unceremonious fizzle.

Both sides have historically mined bitcoin as well as Bitcoin Cash, and it is likely that both sides re-deployed some of their hashrate to mine their side of the Bitcoin Cash fork. In addition, they could have sold bitcoin in order to fund their operations, as this is precisely what Wright threatened to do in a tweet.

What Does this Mean?

Whatever the causes, the upshot of falling hashing difficulty is that pain on the bitcoin mining network will eventually, inevitably be eased.

Element Group have speculated that in situations of continuously falling difficulty, sell pressure will eventually be eased, as more efficient miners (or at any rate, miners willing and able to outlast the hard times) “are compelled to sell less bitcoin to cover their fiat-denominated expenses thereby reducing the natural selling pressure by miners. This reduction in natural mining pressure may cause the price to rise, which could lead to miners needing to sell even less bitcoin – this creates a virtuous cycle and is the seed from which a new bubble forms.”