Growing competition in the crypto mining sector: BTC mining difficulty marks record high – the consequences

• The difficulty rate in bitcoin mining has recently increased rapidly
• The reason: Increased competition in the crypto mining sector
• Cryptomining: are the boom years over?

Bitcoin miners profits mainly depend on three factors. While it is well known that the current Bitcoin price level and the energy costs at the respective mining location are important influencing factors, the third aspect is less well known, which is probably related to a somewhat more complicated calculation. Because in addition to the Bitcoin price and the energy costs, the so-called mining difficulty is also decisive for the miners’ profits – and there have been interesting developments in this area in the past few weeks.

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What does the difficulty rate express?

The mining difficulty describes the complexity of the cryptographic arithmetic task to be solved when mining a new block in the Bitcoin network and varies depending on the number of miners. In general, a higher difficulty rate means it is more difficult to mine bitcoin, reducing profits. The difficulty of bitcoin mining tends to increase when more miners are active, increasing competition for rewards in bitcoin in exchange for validating transactions on the network. The higher the difficulty, the lower the chance that a miner can secure an entire block on the chain, which in turn can reduce the miner’s profitability.

The hash rate is closely linked to the difficulty: In order to find the new block you are looking for, the mining devices have to calculate as many hashes (random numbers) as possible per second. The most modern mining devices create 100 terahashes per second, i.e. 100,000,000,000,000 hashes. The miner’s share of the total hash rate (network of all miners involved in the search) then determines the probability of finding the block. Since the Bitcoin code stipulates that a new block should be mined every 10 minutes, the so-called Bitcoin difficulty, i.e. the difficulty of finding the block, is adjusted depending on how large the hash rate is.

Bitcoin mining is getting “more difficult”

The development of the mining difficulty and the hash rate suggests that the crypto miners’ business has become significantly less profitable in recent months. According to data from BTC.com, the difficulty rate reached 52 trillion at block height 794,304 in mid-June. For comparison: During the crypto bull market at the end of 2017, the difficulty was still around 1.5 trillion; before the Corona crisis, the value hovered around the 15 trillion mark. Since the summer of 2021, however, the difficulty rate, which is reassessed every two weeks, has risen rapidly and has been rushing from record high to record high ever since. This also increases the hash rate, which was last at 374.40 exahashes per second. The two values ​​of difficulty and hash rate move in unison. “In short, difficulty follows hashrate up or down, and hashrate is determined by the overall profitability of building and operating bitcoin data centers,” quoted Andrew Webber, head of Digital Power Optimization, yahoo finance.

The reasons and consequences of the increased difficulty rate

How can the enormous increase in difficulty be explained? Interestingly, there is not a particularly large correlation with the BTC price: Although the value rose sharply during the 2021 bull market, it has not weakened since the beginning of the crypto winter, but rather has continued to rise constantly – the price development of the crypto market is so less important.

Instead, the increasing difficulty indicates that the competition in crypto mining is increasing. An increasing number of participants are joining the peer-to-peer network, which means that the competition for the block rewards is becoming increasingly fierce, and the hash power collected is increasing. The extremely successful years between 2017 and 2021, in which crypto miners with locations in regions with cheap energy such as China, Kuwait, Kazakhstan or Texas were able to make billions in profits, have obviously brought an increasing number of imitators onto the scene. However, increasing competition means that more and more crypto miners have to share the cake. One consequence is the increased difficulty rate. If the development of the past few months continues, the profits of the crypto miners are likely to continue to decrease – but it should not be forgotten that the pure price of a bitcoin will probably continue to be the most important factor influencing the profits of the crypto mining industry.

Editorial office finanzen.net