Mining difficulties bog down Bitcoin for the third time this year


  • Bitcoin is struggling for momentum as mining difficulties continue to increase third time in a row to 13%.
  • Mining difficulty is a measure of the amount of computing resources that are needed for bitcoin mining.
  • Chinese bitcoin miners relocate to North America, Russia and Kazakhstan after crackdown on bitcoin.

Cryptocurrency prices were mostly higher as of Friday, but bitcoin (BTC) still continued to be below the US $50,000 (£36,462) mark, in the midst of mining difficulties. According to several mining sites, the blockchain's mining difficulty has increased by 13.2% at block 697,536. Last week, bitcoin had reached a three-month high above US $50,000. A week later on 30 August, bitcoin was trading at US $48,469.95. This follows after China’s crackdown on bitcoin mining earlier this year, which led to relocation of miners outside China to places like North America, Russia, and Kazakhstan. But what exactly is bitcoin mining? Let’s briefly take a look.

Bitcoin mining

The process through which new bitcoins enter into circulation is called bitcoin mining. There are 18,798,906 BTC in circulation, as of 27 August 2021. The crypto mining is performed using highly difficult algorithms on very sophisticated computers, which makes it a very costly and time-consuming process. But the miners get rewarded for their work with bitcoins, which provides them with an incentive as they can get bitcoins without putting down money to buy them. The miners complete the blocks of verified transactions, which are then added to the blockchain. This helps in maintaining transparency in the decentralised network.

Apart from introducing new bitcoins into the circulation, mining also plays a key role in maintaining and developing the blockchain ledger. Mining supports the bitcoin ecosystem in many ways, and although it may seem to be profitable, it is actually very difficult and expensive. Also, there is risk related to uncertainty which arises due to extreme price volatility in the crypto market.

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Why Bitcoin is struggling for momentum?


Mining difficulty

The 13% increase in the mining difficulty is the second largest of the year, and it is the third time in a row that it has increased. The higher the number of miners on the operating network, the more quickly blocks can be discovered and mined. But the process slows down if miners drop off the network. The blockchain's programming spontaneously compensates for the same, so that new data blocks continue to be mined around every 10 minutes. Bitcoin network also uses this process since its launch.

Around every two weeks, the bitcoin mining difficulty is reset, and it plays a key role in determining the health of the network as well as the profit margins of the miner. The largest drop of bitcoin’s difficulty level in history was recorded recently on 3 July as bitcoin’s hashrate hit a low point a few months ago. After hitting a low due to the Chinese crackdown on bitcoin, its hashrate has now recovered by around 85%, which represents the extreme volatility created by the crackdown. Hashrate is basically a measure of the total computational power that is being utilised to secure the blockchain network, and it shows the number of times hash values are calculated for Proof of Work per second. On Tuesday, the bitcoin hashrate was recorded as 123 exahashes per second, as per Glassnode data. Quadrillion computations are represented by one exahash.

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Hashrate did witness an increase due to relocation of Chinese miners, but also due to the plugging in of machines by many North American miners, which have been delivered to them recently. Given the Chinese crackdown and reduced competition, mining is still highly profitable for active miners especially in the US, despite the reduction in bitcoin prices. Huge profits were reaped by plugged-in miners despite bitcoin’s price being 50% off its all-time high for most of the Summer.

Summing up

Cryptocurrencies are being increasingly adopted by leading institutions and organisations across the globe. Trading crypto futures on the Chicago Mercantile Exchange, Citigroup, the leading global bank, is the latest to enter the blockchain sphere. Goldman Sachs and Morgan Stanley have also expressed interest in the sector. Among other cryptocurrencies, bitcoin, the most popular cryptocurrency, is also struggling for momentum, but bitcoin mining is still quite profitable despite increasing difficulty.