The Bitcoin mining difficulty rate adjustment is one of the key innovations behind the success of the Nakamoto consensus. As the number of miners increases or decreases, the difficulty of Bitcoin PoW increases or decreases, every 2016 blocks. Today we saw an increase of almost 7%.
What does this mean for Bitcoin?
Bitcoin's mining difficulty rate is recalibrated approximately every two weeks, or every 2016 blocks. This means that as more miners increase the hash rate of the network, the difficulty of the PoW increases, which makes it more difficult to find new block rewards. If the miners stopped mining in bulk, the difficulty would decrease to maintain balance.
Tomorrow’s #bitcoin difficulty adjustment (which keeps time between blocks at 10 minutes, regardless of hashrate) will be a massive + 7%! No sign of weakness 2 months before the halving. 🔥 https://t.co/zMdxlteR6Z pic.twitter.com/xtRYcQJgoD
– PlanB (@ 100trillionUSD) March 8, 2020
The Bitcoin PoW hash rate is the amount of computing power that would be needed to perform a reorganization attack or change the blockchain. The Bitcoin hash rate is currently at 121,637,666 tera hashes. As the hash rate increases and more miners secure the network, the price of Bitcoin sometimes follows.
difficulty adjustment appr. + 6.8% today.
I marked the adj. of 5% + (relevant adj.) from 2015.
green = price higher / equal until next relevant Adj.
red = price lower until next relevant adj.
a relevant adj. doesn´t lead to higher prices in general but often. pic.twitter.com/wSJXOKfKRz
– ฿ itcoin-Printer (@BitcoinPrinter) March 9, 2020
To attack the Bitcoin network, an attacker would have to provide more computing power than all the other thousands of computers that currently undermine Bitcoin combined. This type of attack becomes economically unfeasible as the hash rate increases. Smaller PoW chains with a lower hash rate are more vulnerable to attacks by malicious actors.
Hash rate has increased and Halving is still missing
An example of the FUD surrounding Bitcoin around halvings is the fear that the reduced block reward for miners will make mining unprofitable and cause a death spiral to decrease the hash rate, since miners capitulate
It's not really how it works. Mining is very competitive and successful mining teams generally operate with very low profit margins. Instead of causing a death spiral, in general, larger and more efficient companies absorb smaller and less profitable miners.
Seeing that the difficulty increases so close to half is generally perceived as very optimistic. The increase in the cost of producing new BTCs, and the reduction in the supply of freshly minted coins, adds upward pressure on prices that causes prices to rise.
Much of the media advertising around Bitcoin halving generally causes an avalanche of new users who also join, which initiates the demand for BTC, and also causes prices to rise.
Although mining as an industry tends to centralize as larger miners survive and smaller miners die, they still end up being more profitable by incentivizing more miners, although rewards are less frequent, they are more valuable.2