Bitcoin Mining Difficulty Drops as Miners Capitulate

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The Bitcoin mining difficulty dropped by almost 16% yesterday following a collapse in the hashrate as the impact of the recent price crash hit home. Miners who are no longer making a profit at these prices are turning off their hardware, leading to a decrease in competition from the remaining miners. This has also led to March seeing a huge drop in hashrate, which has the potential to see the Bitcoin price drop even further.

Bitcoin Rates Experience Record Drops

As we can see from the below chart, the Bitcoin difficulty has experienced severe drops in line with price crashes, but usually over a period of time:

Screenshot 2020-03-26 at 06.22.52

The difference here is that yesterday’s 15.95% drop occurred in 24 hours and is the result of a plummeting hashrate:

Screenshot 2020-03-26 at 06.25.57

Bitcoin’s difficulty adjusts every 2016 blocks, approximately every two weeks. This difficulty is adjusted to reflect changes in the hashrate to ensure that the network continues to solve new blocks every 10 minutes – if the mining difficulty remains high while the hashrate drops, the network will produce too few blocks, and vice versa.

Price Crash Incoming?

Some claim that reductions in hash rate and mining difficulty predicate a crash in the Bitcoin price, and there is some merit to this – Bitcoin endured its second most severe mining difficulty drop just last month in the lead up to its 51% crash in mid-March. Late 2019 also saw some significant downward activity in the hash and difficulty rates, followed by a 25% price drop in the following weeks.

Some put this down to miner capitulation, where miners are forced to sell more Bitcoin in order to keep the lights on, which puts more pressure on the Bitcoin price. However, others, such as CoinShares’ research director Christopher Bendiksen, claim that miner capitulation is just theoretical rather than practical:

‘Mining death spirals’ do not actually happen in real life. They are highly theoretical edge cases without any historical real-world precedent … Mining is here to stay.

Whether they have an immediate real world impact or not, the mining hashrate and, to a lesser extent the difficulty, are certainly factors to keep an eye on in order to monitor the health of the Bitcoin network, especially when such big reversals are taking place.