Mining difficulty measures the computational power required to validate Bitcoin transactions and consequently how hard it is to earn new Bitcoin. The network adjusts the difficulty each fortnight to reflect the level of competition among miners. Lower mining difficulty indicates less competition.
Today’s difficulty mining drop follows China’s crackdown on Bitcoin miners, which were responsible for an estimated 65% of the network’s hash rate. Well before the government started to shut down miners last month, Bitcoin’s hash rate peaked at 198 EH/s (i.e. a lot) on April 15. After the crackdown, the hash rate sunk to 89 EH/s.
Chinese miners are now emigrating en masse or selling mining machines to foreign mining farms. But until China’s Bitcoin miners find new homes, non-Chinese miners stand to benefit from the reduced difficulty, which makes it cheaper and easier to mine Bitcoin.
“All other miners who continue to operate gain a commensurate amount of market share and therefore daily block rewards,” Ben Gagnon, chief mining officer at Toronto-based Bitfarms, told Decrypt.
Peter Wall, CEO of London-based Argo Mining, told Decrypt that while miners in the West are trying to capitalize on the gap left by the Chinese crackdown, the market for mining sites is booming.
“Displaced Chinese miners are searching the globe for appropriate hosting sites for their machines, and that means, in places like North America, power and space are at a premium like never before,” he said.
The Chinese government crackdown and subsequent exodus of miners have contributed to a halving of Bitcoin’s price (from about $64k to $33k). The reduced hashrate also means that there aren’t as many computers backing the network, making it less secure.
But the crackdown is good for Bitcoin in the long run, said Josh Goodbody, who used to lead Huobi’s mining sales in the West before he became COO of crypto custodian Qredo. He said the network is now less reliant on the Chinese government.
More difficulty ahead
The woes may not be over anytime soon. Bitcoin will, once again, adjust for difficulty in two weeks. But the change is unlikely to be this dramatic, miners told Decrypt.
“While we may see some more hashrate in China come offline over the next few weeks, it will be small compared to what we have already seen and likely offset by the first miners relocating to new facilities,” said Gagnon. In any case, “Nearly all the Chinese hashrate has come offline already,” he said.
Wall said that Chinese miners want to get back to normal as soon as possible. “For miners looking to relocate, time is of the essence,” he said. “The reduction in hash rate and subsequent dip in mining difficulty isn’t going to last forever.”
But it’s difficult to determine when and where Chinese mining operators will reinstall their machines, said Gagnon, since the scale of Chinese infrastructure simply doesn’t exist anywhere else in the world. “The world doesn’t operate at Chinese speed,” he said.
The digital currency, then, is clearly still subject to real-world constraints.