26 March 2020

A Historic Difficulty Adjustment

At around 11pm tonight Bitcoin could undergo its 2nd largest negative difficulty adjustment in history. After a brutal past 2 weeks that saw the price of Bitcoin drop nearly 50% in one day, and estimated hash rate drop as much as 40% from its March 1st peak, Bitcoin’s difficulty level is expected to adjust downwards by about 15% - 16%.

At the upper end of the range that would place tonight’s negative difficulty adjustment at the 2nd largest ever. At the bottom end of the range it would be the 3rd largest.

The adjustment will provide much needed relief to remaining miners, who have taken much longer to mine blocks following the hash rate drop off.

A self-readjusting system While severe hash rate drops appear catastrophic on the surface, having provoked calls for “mining death spirals” for 9 years now, the game theory underpinning why this is not the case is simple. If the price of Bitcoin falls, marginal miners will go offline, and Bitcoin will readjust mining difficulty within the next 2016 blocks to ensure stable block times.

Source: Nic Carter

The key nuance skeptics fail to grasp when thinking about Bitcoin mining, is that the set of Bitcoin miners consists of numerous independent entities with their own cost structures and balance sheets. Miners don’t rise and fall as one, they rise and fall as individuals. Mining is a competition, and the miners that are least competitive simply just lose.

With the halving coming up within the next two months, expect mining death spiral fears to re-emerge. As I’ve discussed previously, we could see another dramatic decrease in hashrate due to the upcoming block reward halving and continued uncertainty about the coronavirus. Such a scenario may damage the halving narrative (which is nonsense anyways), but is far from damaging Bitcoin.

The Bitcoin blockchain will keep trucking along producing blocks every 10 minutes - a beacon of stability in unstable times.

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