Erik Weijers, a year ago

What is the Bitcoin difficulty?

Bitcoin's difficulty or network difficulty reflects the average processing power it takes to produce a block of transactions. The higher this number, the harder miners worldwide have to work. Since their totalcomputing power is a kind of wall that protects the Bitcoin network from attack, a high difficulty means that the network is secure.

What do the miners use their computing power for? In a nutshell, to guess a number. The greater the pool of possible numbers the miners have to guess from, the harder they have to work to guess this number in about ten minutes. This guessing is called hashing. The mining difficulty follows this so-called hashrate and is proportional to it - see explanation below.

See the graph for the current difficulty.

Bi-weekly difficulty adjustment

Bitcoin is designed so that a block is added to the blockchain roughly every ten minutes. Sometimes a miner gets lucky and guesses the number within a minute. Sometimes it takes twenty minutes or longer. As long as the average is ten minutes. This is because the issuance/distribution of new Bitcoins to a lucky miner is done on a block-by-block basis and that rate must be more or less constant.

Because the amount of miners varies and their computing power is generally increasing, the difficulty needs to be adjusted all the time. Think of it as a calibration of the system: a way to keep the Bitcoin blockchain running'stationary'. This difficulty adjustment happens every 2016 blocks, which amounts to about two weeks. That period is called an epoch.

Were this difficulty adjustment not built into the protocol, the time between blocks would become shorter and shorter. After all, the huge server farms that now mine worldwide would only need a fraction of a second to mine a block with a difficulty from the time when Satoshi was still active. He/she and the few enthusiasts of the time simply mined on their PCs or laptops.

Relationship between difficulty and price

A high mining difficulty also implies that the price of Bitcoin is high - or at least that miners expect it to stay high and/or go up. This is because when the difficulty is high, they incur high costs, which they must recoup through the block reward - at this writing 6.25 Bitcoin.

So there is a correlation between difficulty and price, although it is not perfect. For example, the price can rise quickly: faster than miners can add equipment. On top of that, more and more miners are using the strategy of hodling. They simply try to hash as much Bitcoin as possible over the course of months and years, regardless of the exact price at the time. Instead of selling it, they hold onto the Bitcoin for as long as possible. This strategy could only become problematic if the Bitcoin price stays too low for a long time in the face of relatively high difficulty.

Block time longer after Chinese mining ban in 2021

When the Chinese government banned Bitcoin mining in May 2021, miners switched off their equipment and packed their bags to other countries. This led to a rather sudden drop in global computing power of almost 50% (see graph above). Due to the lack of computing power, producing a block took about twenty minutes for a while. It was not until the next difficulty adjustment that the average block time dropped back to ten minutes.

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