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How Is the Bear Market Affecting Bitcoin Mining Difficulty, and Why Does It Matter?

Bitcoin mining difficulty has declined sharply in recent weeks. So has the price of bitcoin itself. What do these two trends have to do with each other? Do they signal the “end times” for bitcoin or new opportunity for bitcoin miners?

What Is Bitcoin Mining Difficulty?

Put simply, mining difficulty refers to the complexity of the computing operations that a device has to perform in order to mine new bitcoin (or another type of cryptocurrency, if you’re using a different blockchain).

Why would mining difficulty vary over time? The reason is that changes in mining difficulty ensure that the blockchain grows at a relatively constant rate, even if the number of miners on the network or the computing power that they control fluctuates.

The growth rate of a blockchain is determined by how long it takes to record a new block (which is basically just a chunk of data that people want to store on the blockchain) to the blockchain network. The more people you have mining at a given time, the more resources you have available to generate new blocks. If the complexity of the computing operations required to create a new block did not change, then new blocks would be generated more quickly as the number of miners (and the power of the computing hardware they use to mine) increases.

Thus, by automatically increasing mining difficulty as the network increases, Bitcoin is able to achieve a relatively consistent “block time,” or the amount of time it takes to create a new block. Bitcoin is designed to achieve a block time of 10 minutes on average; the block times of other blockchains vary widely.

How Does the Market Affect Mining Difficulty?

As the chart below shows, bitcoin mining difficulty has decreased by more than 15 percent since early November 2018. That’s a notable decline, especially when you consider that the last time bitcoin mining difficulty saw a drop on this scale was way back in 2011. (There have been smaller drops in mining difficulty in more recent years, but none above 15 percent.)

Bitcoin Mining Difficulty Chart, October to December 2018

Bitcoin Mining Difficulty Chart, October 5 to December 3, 2018. Data from Blockchain.com.

You may also know, if you follow crypto news regularly, that the price of bitcoin on exchanges has declined by more than 30 percent between early November (when a bitcoin traded for around $6,200) and early December 2018 (when it was at about $4,000).

That’s not a coincidence. As the value of bitcoin relative to fiat currency (like the U.S. dollar) has declined in recent weeks, the profitability of bitcoin mining has also decreased. That means that there are fewer people incentivized to mine bitcoin. Therefore, mining difficulty has decreased in order to keep block times consistent as the network has grown smaller.

This trend has played out before. The 2011 drop in bitcoin mining difficulty was accompanied by a similar decrease in bitcoin’s price, for example.

A Death Spiral? Mining Difficulty and the Future of Bitcoin

Some folks contend, however, that this crypto winter is different. They claim that bitcoin is in a “death spiral” and that if its price goes below a certain threshold — $3,000, perhaps — the resulting decrease in the number of bitcoin miners and bitcoin mining difficulty will reach a point of no return and continue to decline until they reach zero and no one mines bitcoin anymore, at which point the Bitcoin blockchain would effectively cease to function.

There’s reason to question whether this will ever come to pass. A good counterpoint is that bitcoin miners are incentivized not just by the current price of bitcoin but also by its potential future price; therefore, people might choose to continue mining bitcoin even as the price drops because they believe it will recover, at which time they will profit.

Relatedly, as mining difficulty decreases along with the price of bitcoin, bitcoin mining becomes cheaper because it does not require as much computing power. If mining difficulty becomes insignificant enough, we could return to the days when you could feasibly mine bitcoin on your own, using an ordinary laptop. That change would significantly lower the barrier for entry to bitcoin mining and could reinvigorate the network — even if bitcoin prices are low.

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