Bitcoin difficulty is a measure of how easy it is to mine a block on the Bitcoin blockchain. This is a custom scoring system with scores ranging from 1 to (theoretically) infinity (e.g. Bitcoin starts with a difficulty value of 1, but at the time of writing, Bitcoin has a difficulty value of 27.55 trillion).
More specifically, Bitcoin’s difficulty is a measure of how hard it is for miners to calculate a valid hash below the 256-bit target number set by the Bitcoin network. When the hash value is at or below this target number, miners can successfully find and unlock new blocks. Therefore, the lower this target value, the higher the mining difficulty.
Bitcoin’s difficulty adjustment ensures that the Bitcoin network develops steadily according to a pre-set coin issuance plan. The Bitcoin network automatically adjusts its difficulty level after every 2016 blocks, on a time frame of approximately 2 weeks, which miners call the difficulty period. As one difficulty period ends, another new difficulty period starts over after the difficulty adjustment, which is to ensure that miners mine new blocks as closely as possible to the 10-minute average.
When miners find that the block mining time is lower than the target average of 10 minutes within a difficulty period, the Bitcoin network will increase the difficulty (the algorithm target value decreases); if the mining time exceeds 10 minutes, the network difficulty will decrease accordingly (The algorithm target value becomes larger).
As shown below, Bitcoin’s difficulty is an important component of Bitcoin, which confirms the consistency between Bitcoin’s supply issuance and block confirmation interval.
Figure 1: The relationship between the total circulation of Bitcoin and the inflation rate under the halving mechanism
Bitcoin Difficulty Calculation
Bitcoin miners can easily and independently determine the current mining difficulty using Bitcoin nodes. The difficulty formula is as follows:
Difficulty Level = Difficulty Target Value / Current Difficulty Value
Difficulty target value: Bitcoin’s maximum difficulty target value (that is, the difficulty target when Bitcoin was first launched, when the difficulty value was 1)
Current target value: A 256-bit base value determined by the Bitcoin network.
At the beginning of each difficulty period, the Bitcoin network recalculates the current target hash. It works by summing the total number of minutes miners spent mining the last 2,016 blocks, dividing this number by the protocol’s expected goal of 20,160 minutes (2,016 blocks x 10 minutes), and multiplying this ratio by the current difficulty level This results in a new difficulty level.
It is also worth mentioning that in order to prevent drastic changes in network difficulty, the Bitcoin network can only adjust the difficulty to a multiple of 4. That is, whenever a difficulty adjustment occurs, the Bitcoin network difficulty value increases by up to 300% or decreases by up to 75%.
How Bitcoin Mining Difficulty Affects Hash Rate and Mining Profits
The price of Bitcoin and the difficulty of mining will affect the price of computing power (Bitcoin mining profitability) in the short term, while the impact of the block subsidy halving on the price of computing power will be long-term. In most cases, the price of Bitcoin and the difficulty of mining are the main factors that affect the price of computing power.
The price of computing power is negatively correlated with mining difficulty. An increase in Bitcoin difficulty decreases the price of computing power, and a decrease in Bitcoin difficulty increases the price of computing power because miners need less work to find blocks during a difficult period with a low difficulty value.
This correlation is always true for Bitcoin-denominated hashrate prices (as shown below), but has a relatively subtle impact on USD-denominated hashrate prices, as USD-denominated hashrate prices are directly affected by Bitcoin difficulty and Influence of Bitcoin price.
Figure 2: A list of the correlation between Bitcoin network difficulty and computing power price (bitcoin-denominated)
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