Bitcoin Mining Difficulty: Everything You Need to Know
One of the most lucrative income earning methods in crypto is Bitcoin mining. While the costs can be very high, the return on investment (ROI) is even higher. Therefore, a crypto investor must understand the workings of mining. This guide will explore one of the most prevalent terminologies in the mining industry, Bitcoin mining difficulty. What is it, and what are its benefits?
What Is Bitcoin Mining Difficulty?
Bitcoin mining difficulty is a measure of the complexity of mining BTC. It indicates how hard it is for an average miner to verify blockchain transactions and earn a new BTC.
As mentioned above, BTC mining is a long process involving solving highly complex cryptographic equations. When the mining difficulty is great, miners use very high computing power to solve the cryptographic equations and complete transaction verification successfully; vice versa is also true.
Many experts believe the mining difficulty should be reasonably high to secure the network. Crypto blockchains with super high mining difficulty akin to Bitcoin are highly secure.
Bitcoin uses the mining difficulty to stabilize the average time between blocks as the network’s hash power changes.
One thing to note is that mining difficulty is a protective parameter only in Proof of Work blockchains. This is because it’s only in PoW blockchains where miners perform auditory functions preventing fraud and validating available transactions. Mining difficulty in PoW essentially controls the time taken to complete new blocks.
What Is the Relevance of Bitcoin Mining Difficulty?
So, why does the mining difficulty of a crypto matter? There are essentially two benefits of Bitcoin mining difficulty, including;
- Network stability
- Network security
- Deflationary BTC value
One of the main pros associated with the mining difficulty is network stability. The Bitcoin blockchain completes a new block every 10 minutes. Without the concept of mining difficulty, it would be hard to maintain stability in block release durations. Hence, mining difficulty ensures the 10-minute block creation cycle is stable.
But, why would the network autonomously increase or decrease a mining difficulty? The number of miners within the network at a particular time drives the changes in mining difficulty.
Take, for instance, a situation where many miners are concurrently fighting to mine Bitcoin. In that case, the Bitcoin network will increase the mining difficulty. The idea is to make it hard to mine the coins, so they maintain the stability of the 10-minute duration for releasing blocks.
When the number of miners is low, the network autonomously reduces the difficulty. This reduction will help the few miners complete blocks within ten minutes. Bitcoin mining difficulty ensures no unpredictable overflow of new BTC in circulation.
Deflationary BTC Value in Long Term
Bitcoin mining difficulty also helps in ensuring that the value of Bitcoin is deflationary in the long term. As mentioned above, the difficulty removes the unpredictability of the low of new BTC in circulation. The BTC released is expected, hence does not affect the prices of the coin in exchanges.
Network security is another benefit of the bitcoin mining difficulty and any adjustments involved. Blockchain networks are susceptible to attacks from bad actors, including miners. Problems like 51%-attacks are primarily a result of network miners taking advantage of the system.
Bitcoin mining difficulty essentially increases the resources required to mine the asset. Increasing resources means increasing the costs of mining. By increasing resources, the network makes it hard for miners to attack the system since they may incur massive losses in case of failure.
How Is Mining Difficulty Changed?
As mentioned, adjustments to mining difficulty are necessary to ensure the network maintains stability. So, how does the network adjust the mining difficulty?
When mining, miners have a target hash which they all try to beat. A target hash in BTC is a specific fixed length code with several zeros before the code itself. To be considered the winning miner;
- Before the hash, you must generate a code with either an equal or more zeros.
- You must be the first to generate this code.
Hence, to ensure the blocks are not discovered superfast, Bitcoin has algorithms that add or reduce the number of zeros preceding the target hash. Adding the zeros hardens the block discovery process while doing the opposite simplifies the block mining process. By making the mining process hard, the Bitcoin network helps maintains the coin’s steadily growing value.
How Can you Calculate Mining Difficulty?
The calculation of Bitcoin mining difficulty is also another vital factor to consider. How can a miner know their mining difficulty? There are many different formulas used today, but the most popular are;
Difficulty Level = Difficulty Target/Current Target.
- The difficulty target is simply the hexadecimal notation of the target hash with a mining difficulty of 1
- Current target. Target hash of a most immediate block of transactions
Whenever you divide the difficulty target by the current target, you get a whole number: the difficulty level. If you get your answer as 25 trillion, that is the mining difficulty, meaning you must generate over 25 trillion hashes to get the winning hash. In some cases, miners could get the correct hash with fewer guesses.
Adjustments to Mining Difficulty
As mentioned earlier, the average time for releasing a single Bitcoin block is 10 minutes. The difficulty adjustments compare the average time required to find 2016 blocks on the network versus the time it took to get the immediate 2016 blocks. The 2016-block interval is an epoch. After every epoch, the Bitcoin network calculates and re-adjusts the mining difficulty.
The standard time needed in mining the 2016 blocks is 20160 minutes (2016 X 10 minutes). 20160 minutes is the equivalent of a fortnight of block production. Now, the calculation for adjusting mining difficulty is as follows;
20160 minutes/actual time used in last 2016(epoch) X most recent difficulty level= Percentage upward or downward change in mining difficulty
If the percentage change is over 300%(4X) to the positive, the network will only adjust to 300%. This +300% change was done on July 16th, 2010, after the hashrate grew from 300 to 1300 MH/s in the preceding epoch.
The change can only be as low as -75%(¼) on the negative side of every epoch. The most minimal adjustment was -27.9% on July 3rd, 2021, after the Sicuan shutdowns. The limits to percentage upwards or downward changes in mining difficulty ensure there are no massive abrupt changes.
While the epoch consists of 2016 blocks, only 2015 blocks are relevant in difficulty-level computations.
What if All Bitcoin is Mined?
So, what happens with Bitcoin mining difficulty once the bitcoin mining process ends? Basically, after mining all 21 million coins, the idea of mining bitcoin could lose meaning.
However, transaction verification and network security will remain highly relevant in the ecosystem. Hence, miners will still have to participate to ensure the Bitcoin network continues to run. The reward, in this case, will not be new coins but transaction fees.
This guide looked deeply into the concept of bitcoin mining difficulty and how you can calculate it and adjust your predictions accordingly. As severely reiterated, Bitcoin mining’s difficulty is the complexity involved in releasing new bitcoins into circulation. This process in the blockchain helps maintain the bitcoin network’s security and stability while also ensuring a deflationary value of Bitcoin in the long term.
What is Bitcoin Mining?
Bitcoin mining is a process in which computers do complex mathematical calculations to solve cryptographic puzzles and create new bitcoins. This process can be used to confirm transactions between two parties, verify bitcoin payments or create secure records.
How much time do I need to mine Bitcoin?
Mining bitcoins is similar to mining other cryptocurrencies like Litecoin or Dogecoins. Each computer has a set amount of processing power which they use to solve mathematical equations for new blocks of currency to be added to the blockchain. The first person who solves the equation gets rewarded with new coins, while all participants are given some.
Mining difficulty increases every 2016 block, making it increasingly difficult to find blocks. As such, miners must upgrade their hardware regularly. If done correctly, the process should provide a reward proportional to how much effort was put into solving the problem. One bitcoin equals 10^9 bytes of information, and it takes about 1 min to confirm a block. This means that the average confirmation time is 10 minutes.
Is mining Bitcoin difficult?
Mining bitcoins is relatively easy when compared to other currencies like gold. All one needs is electricity and computing power. However, the difficulty level keeps increasing each year, thus making it harder and harder to mine bitcoins. The current network difficulty level is 15 quadrillion hashes per second! This number represents how much processing power is needed to complete a given block and is adjusted every 2016 block. There are currently around 16 million coins mined daily, with 2 million coins reaching miners who solve the next block first.
Is mining Bitcoin easier than mining Ethereum?
Mining bitcoin is much easier than mining ethereum. This is because Bitcoin has a block reward of 12 million compared to 20 million for ethereum. Additionally, ethereum miners must compete against other miners to solve blocks, which makes them less efficient per unit cost than bitcoin miners.