Over the weekend, Bitcoin miners saw a large windfall materialise as the cryptocurrency’s blockchain saw mining difficulty tumble by 28% on Saturday morning, the largest decline ever recorded in its history.
Predictions that mining difficulty would plunge had been flagged the previous week as the recent crackdown on digital currencies in China knocked out a large chunk of computing power usually used to mine Bitcoin, reducing competition and opening up the market to non-Chinese competitors.
However, the decline was steeper than some had predicted, with analysts at Glassnode having previously estimated that mining difficulty would fall by 25%.
How is mining difficulty calculated?
The difficulty of mining Bitcoin is programmed to rise or fall depending on the number of miners competing to mine the next ‘block’ of transactions on the crypto’s blockchain network. This reassessment of difficulty usually occurs every two weeks.
Crypto mining works by miners using their computing power to solve complicated maths problems to validate transactions which are then added to the blockchain as a permanent, unalterable record. In return for solving the block, miners are rewarded with Bitcoin.
When there are more miners competing to find the next block, the speed at which blocks are mined increases, which in turn triggers the blockchain to make them harder to solve and maintain a consistent block addition rate to the blockchain of about one every ten minutes.
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However, when fewer miners are contributing computing power to solving blocks on the network, as was the case when the Chinese crackdown caused a large number of them to go offline, mining difficulty is programmed to become simpler to maintain the rate of one block every 10 minutes.
What are the effects of the decline in mining difficulty?
Aside from making it easier for miners to acquire Bitcoin through the mining process, one of the biggest benefits from the drop in mining difficulty for users of Bitcoin as a payment method is a corresponding fall in transaction fees, meaning payments made using Bitcoin are currently cheaper than before.
On Saturday morning shortly after the difficulty drop came into effect, Charlie Morris, founder of asset manager ByteTree, highlighted that transaction fees using Bitcoin had dropped to US$6 from US$10 the day before.
Nice #bitcoin price move as the downward difficulty adjustment passes as expected this monrning. Fees already $6 over the past hour compared to $10 yesterday. Hopefully transactions can now start to pick up. They need to. pic.twitter.com/n1iuwP5FXM
— Charlie Morris (@AtlasPulse) July 3, 2021
Miners that have managed to avoid the Chinese crackdown, such as those based in North America, are also likely to see their profits increase as the decline in difficulty will allow them to expand their Bitcoin holdings at a faster rate, at least until the difficulty increases again.
Among these firms are the likes of London-listed Argo Blockchain, which owns Bitcoin mining facilities in both the US and Canada, as well as Texas-based outfit Blockcap Inc.
However, while miners and users may be hailing the decline in difficulty, the decline in mining power does leave the network more open to attacks by hackers, although only slightly.
Bitcoin prices also saw a surge over the weekend in the wake of the reduction in difficulty, however into mid-afternoon trading in London on Monday its value had fallen back and was down 4.5% in the last 24 hours at US$33,667.