Why Today’s 16% Fall in BTC Mining Difficulty May Cause the Price to Plunge
Bitcoin mining difficulty today dropped by 15.95 percent — the second largest decline in its history. The last time a downward adjustment took place, the Bitcoin price plummeted more than 50% percent.
Bitcoin difficulty
Bitcoin’s difficulty is designed to adjust every 2016 blocks — or approximately every two weeks. This adjustment is based on changes in the network’s hashrate, and occurs regularly in an attempt to ensure that the network continues to solve new blocks at a rate of one every 10 minutes.
If the hashrate during the past two weeks has gone up, the difficulty will go up as well, making mining more challenging. If the hashrate has dropped, the difficulty level will decrease, making blocks easier to solve. The latter event is somewhat uncommon, and is considered by some to be a historically ominous indicator for Bitcoin’s price. When the next adjustment takes place, mining difficulty is expected to ease by 13.67%.
Recent history
The last downward adjustment took place on February 25, 2020, when bitcoin price was $9,989.39. Three days later, it dropped to $8,785.52, and by March 14, had retreated to $4830.21. In a span of twenty days, bitcoin lost 52% percent of its value.
Source: Cointelegraph, Quandle
The previous significant downward adjustment happened on November 7 2019. Bitcoin’s price on that date closed at $9,310.19. Some twenty days later, November 26, the price dropped to $6,907.4, surrendering 25.81% in total.
Miners give up
While this relationship could be a fluke, there is a rationale behind the trend. Downward difficulty adjustment completes the so-called “miners’ capitulation cycle.”
In short, let’s say we are at a point where mining is highly profitable. This leads to more miners joining the network, increasing the hash rate. As a result, the difficulty adjusts upwards and the margins get a little thinner, but mining is still profitable, incentivizing more miners to join.
This cycle continues until a relatively large proportion of miners cannot keep up anymore. Some are forced to liquidate an ever-increasing percentage of their newly mined Bitcoins, eventually depleting their treasuries. This causes an increased supply of bitcoins for sale on the market. At some point, they capitulate and stop mining. The hashrate decreases and, finally, the difficulty receives a downward reset.
Philip Salter, head of operations at Genesis Mining, echoed this sentiment while speaking to Cointelegraph recently:
“It’s no different from traditional markets, you have to sell everything to keep the operations going, to pay off your debts. As a miner you have bills to pay, you have to pay for electricity, for operations; and your expenses are in dollars, so as the price of bitcoin is dropping, it means you have to sell more of your inventory just to keep going.”
Thanks to today’s massive decrease, this theory will soon be tested once more.