Whenever there is a deficit in hash rate or reduction in mining difficulty, it means Bitcoin mining will become much more profitable. Both hash rate and mining difficulty have a prominent impact on how much profit miners can potentially extract from mining Bitcoin. Mining difficulty is reset after every 2016 blocks or around every two weeks, while the hash rate depends on the number of miners currently attached to the network. To know how hash rate and mining difficulty play a key role in Bitcoin mining profitability, this blog presents an in-depth analysis.
What’s the Link Between Hash Rate and Mining Difficulty?
Before we dig deeper into how Bitcoin mining profitability is impacted by hash rate and mining difficulty, we should first clear our concept about the relationship between hash rate and mining difficulty. To understand this concept, we will take China’s crackdown on Bitcoin miners as an example.
Recently, the Chinese government held a crackdown on Bitcoin miners in its country, which let China-based Bitcoin miners left out of the Bitcoin mining network. For a long time, China had been the center point of Bitcoin miners, as around 75% of the world’s Bitcoin mining was being conducted from there. Crackdown on such a large scale caused a severe impact on the Bitcoin network. It is narrated that over 50% of the hash rate (the collective computing power of miners across the world) dropped off the network after this crackdown.
A deficit in hash rate means that there are fewer miners linked with the network, so fewer blocks are solved per day. Roughly it takes around 10 minutes for block completion, but the deficit in hash rate slows the block completion to 14-19 minutes.
Since the network cannot withstand such a prominent decline in hash rate, that’s where “Mining Difficulty” comes into action. Mining difficulty is basically the level of difficulty to solve a complex mathematical equation for verifying transactions and creating blocks. To keep the network running flawlessly, the mining difficulty is re-calibrated after every 2016 blocks or after around every two weeks.
So, once there was a significant deficit in hash rate, the Bitcoin mining difficulty was reduced automatically by 28%, which was a historic decline in the difficulty level. It served the purpose effectively, as the block completion time was restored back to 10 minutes frame.
This is how hash rate and mining difficulty are linked. So, whenever there is an increase or decrease in hash rate, the mining difficulty is increased or decreased accordingly to keep the network operations running smoothly.
Impact of Hash Rate and Mining Difficulty on Bitcoin Mining Profitability
Now that we know how hash rate and mining difficulty are interlinked, let’s turn our focus on how Bitcoin mining becomes profitable with fluctuation.
To explain the impact of hash rate and mining difficulty, we will continue with the Chinese crackdown example. The decrease of 28% complexity in Bitcoin code and fewer active miners means that the ones that are currently mining can complete more blocks in a faster time, thereby increasing their overall profit.
For example, your ASIC miners were previously solving more complex equations and were competing with other big miner farms. But now you are solving much easier equations and competing with fewer competitors. This means your mining resources are the same, but it has become a lot easier to mine more Bitcoins and increase profit. As per Zhang, the revenue of active miners due to a 28% complexity reduction was projected to grow from $22 per day to $29 per day for those who were using the latest-generation Bitmain miners. In short, a decrease in hash rate and then a decrease in mining difficulty made Bitcoin mining extremely profitable.
But what about the impact of Bitcoin fluctuating pricing on mining profitability?
Bitcoin Price and Bitcoin Mining Profitability
Other than hash rate and mining difficulty, another factor that plays a key role in the profitability of Bitcoin mining is the price variation of Bitcoin. To your surprise, even with the historic decrease in mining difficulty and hash rate, the profit ratio from Bitcoin mining for negligible due to the continuous drop in Bitcoin price over the past couple of weeks. But since the last week of July, the price started increasing, which let miners make big bucks under decreased mining difficulty.
Long Term Impact on Bitcoin Mining Profitability
Just like Bitcoin price, the hash rate and mining difficulty keep changing. For example, after the China mining ban, many miners looked for new homes or new miners came to the network. Therefore, the deficit in hash rate gradually improved. In addition, as mining difficulty is re-calibrated after every 2016 blocks or after nearly every two weeks, it has also gradually become more complex. On Friday 13, 2021, the mining difficulty rose to 7.3% more complexity because the computing power in the Bitcoin network started returning back to normal. In short, the changes in hash rate and mining difficulty will have varying impacts on Bitcoin mining profitability.
Usually, miners get only short-term benefits from the drop in mining difficulty because the gap gets filled quickly. But the profit they can catch in that short duration can be massive considering that the Bitcoin price does not fluctuate much.
With the growing price of Bitcoin, the mining sector has also seen tremendous growth. But just like fluctuations in Bitcoin price, the profit ratio in Bitcoin mining also changes continuously. For miners, hash rate, mining difficulty, and Bitcoin price are the 3 key profitability factors they have to monitor continuously. Miners will be making big bucks when the hash rate is low, algorithms are less complex, and Bitcoin price is on a growing scale.