For the past few days, the hashrate of Bitcoin mining has been reported to be falling.
The seven-day moving average hit a monthly low on Nov. 28, below 240 Eh/s, before recovering slightly in early November and rising again to 254 Eh/s.
However, at the beginning of November it was above 270 Eh/s, so the current level is still well below that of a month ago.
It is no coincidence that as of November 21, block-time rose above 10 minutes, necessitating a reduction in difficulty.
Bitcoin mining: difficulty adjustment after hashrate drop
In fact, a new difficulty adjustment has just occurred with a drop of as much as 7.3 percent.
Until yesterday it was almost 37T, while today it has dropped to 34.2T.
Bitcoin’s difficulty adjustments happen automatically, and are handled by the same decentralized protocol that underlies Bitcoin.
They occur exactly every 2,016 blocks, or about every two weeks. The previous adjustment took place on Nov. 21, and the next one is scheduled to take place on Dec. 20.
The difficulty makes it more or less difficult to extract the hashes that confirm individual blocks. The fact is that the SHA-256 algorithm by which blocks are mined has fairly well predictable runtimes, so depending on how much hashrate is used globally to mine Bitcoin, it is possible to calculate what level of difficulty is needed to keep the average block-time around 10 minutes.
Block-time is the time between one block and the next that is concatenated to the blockchain.
Since Bitcoin’s block-time had remained above 10 minutes for too many days, it became necessary to reduce the difficulty when it was updated at block 766,080. This was Bitcoin’s 379th difficulty adjustment that kicked off epoch 380, which is precisely the current one with a difficulty of about 34.2T.
The difficulties for miners
The fact that the block-time in recent days was over 10 minutes means that the hashrate in the past two weeks has decreased.
The fact is that mining BTC has very high costs, especially electricity, and since the takings are in BTC should the price of Bitcoin be low the earnings are lower than usual.
In early November the price of Bitcoin was about $20,000, which dropped to $15,500 on the 10th of the month.
Miners tried to hold on, despite the drop in the price of BTC, but starting on November 14 they had to start shutting down the least efficient machines, i.e., those that consume the most.
On Nov. 21 there was an adjustment in difficulty, but a slight increase, as block-time had remained below 10 minutes on average in the previous two weeks.
This increase in difficulty made it even less convenient to mine BTC with the less efficient machines, so much so that at that point many miners had to make the decision to shut down some of them, causing the hashrate to drop to monthly lows in late November.
At that point block-time rose above 10 minutes, necessitating today’s sharp reduction in difficulty.
It was the largest single difficulty reduction of 2022, due primarily to Bitcoin’s low market value, and the fact that miners until Nov. 21 had tried to hold on and continue mining as much as possible.
Fear over the end of mining
Those unfamiliar with these dynamics could easily fall into the misconception that Bitcoin mining is a business at risk of closure.
After all, if costs were to remain higher than earnings, no miner would find it worthwhile to continue mining BTC.
But in reality adjusting the difficulty once every two weeks can reduce mining costs so that they are still sustainable. It all depends on the size of the reduction, and since this is calculated on block-time, that is, on the result of the actual mining activity, it is always adequate in the end to bring the mining activity as a whole back to profitability.
What does change is the level of profitability, for now still at its lowest in years, and the amount of machines that miners keep running. However, Bitcoin does not actually need much hashrate to function, so much so that even when China banned mining causing the hashrate to suddenly collapse by 30 percent Bitcoin continued to function without problems, thanks to the automatic reduction in difficulty.
Therefore there is no point in being afraid that mining will end, because even if the market value of BTC collapses there will always be someone who will find it worthwhile to continue mining it.
Note that the current level of difficulty, after today’s sharp decline, is still very close to the all-time highs, which were touched precisely on November 21. This gives a good idea of how overall Bitcoin mining is by no means in crisis, although there are many miners who are.
Moreover, the reduction in difficulty along with a reduction in electricity consumption, and thus in the cost of mining, also increases its profitability, making it almost impossible that there are no longer any miners who find it worthwhile to mine BTC.
It is no coincidence that even the current hashrate level remains near all-time highs, because it is actually still full of miners who find it worthwhile to mine Bitcoin.