Bitcoin’s (BTC) mining difficulty dropped by 15 percent on December 3rd, the biggest retreat since 2011. It’s a result of the diminishing amount of hash power of the network. With the price of BTC having crashed in the last two weeks, some are questioning whether the original cryptocurrency can survive.
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Price Down, Hash Power Down, Mining Difficulty Down
According to Bitcoinity, BTC difficulty fell by 15.13 percent on December 3rd. The prior adjustment was -7.39 percent on November 17th. This is the second-largest difficulty drop ever on a percentage basis, coming in only after the November 1st, 2011 drop, which was -18.03 percent. The third largest was on October 15th, 2011, when the mining difficulty decline was 13.09 percent.
The difficulty level peaked in early October and has fallen by 25 percent since then. The price of BTC, likewise, has dropped by about 38 percent since November 14th.
Difficulty determines the computational effort necessary to mine a block and receive the 12.5 block reward, which occurs roughly every ten minutes. The BTC protocol automatically adjusts the difficulty every 2,016 blocks.
Adjustment Occurs Automatically
The difficulty adjustment occurs about every two weeks and is updated automatically by the protocol based on the network’s hash power. Hash power on BTC peaked on August 26th, 2018 at 61,866,256 TerraHash per second, and has been declining since then, per Blockchain.com.
The last month has seen a particularly sharp decline in hash power, with it dropping by more than 25 percent over the last 30 days.
Can Miners Stay Profitable?
The dropping price led to the decline in hash power, which means a sizeable number of mining firms and mining pools have turned off their machines. This is because they are unable to stay profitable at current difficulty and price levels. A recent report out of China said as much last week.
But, since mining difficulty is dropping alongside the price, the miners who are remaining just got a boost to their bottom line. This is because the remaining awards are spread among a smaller pool of miners. While the lower price still means lower overall profits for everyone, the difficulty decline is good news for those who are still operating.
“Bitcoin Death Spiral”
However, some see the price decline as evidence of an irreversible trend that will only end when BTC hits zero. Atuyla Sarin, a professor of finance at Santa Clara University, wrote an article on December 3rd on MarketWatch entitled, “Bitcoin is close to becoming worthless,” saying he believes that bitcoin will fall straight to zero.
Professor Sarin writes that:
“So, it appears bitcoin is now entering a death spiral: If the price continues to drop and the cost of mining does not fall correspondingly (the cost of mining will algorithmically decrease, but not necessarily to same extent as the decline in prices), bitcoin will quickly go to zero.”
Professor Sarin adds that “the magnitude of the recent decline dwarfs the magnitudes of past declines.” That’s not quite right, however, as the price of BTC fell by more than 80 percent from December of 2013 to January 2015, from around $1,150 USD to about $200. BTC has fallen by roughly the same amount in percentage terms between December 2017 and now.
While Professor Sarin may be pessimistic about bitcoin’s survival, he does write that it’s likely that in the future, “many of our transactions will be processed on the blockchain,” and that people will “use cryptocurrency for daily transactions.”
What’s your take? Does the continued easing of mining difficulty suggest miners see bitcoin continuing to fall in the months ahead?
Images via Pixabay, Coinmarketcap