The difficulty level for bitcoin’s mining algorithm, which climbed over the last year, fell by 15% yesterday, recording its second-steepest drop ever. Difficulty level refers to the difficulty of the cryptographic problems required to be solved by systems within bitcoin’s network to earn the cryptocurrency. It is adjusted every 2016 blocks or approximately after every two weeks, depending on the rate of production.
The difficulty level of its algorithm determines bitcoin profitability for miners and associated hash rate (or system power dedicated to bitcoin mining). The more difficult it is to mine bitcoin, the greater the electricity costs, which some estimates claim comprise 90 percent of overall costs, associated with its production. Conversely, a relatively easy difficulty levels means less costs for bitcoin mining.
Estimates for bitcoin mining breakeven costs vary because they depend on multiple factors, including available hash rate and electricity costs. That said, difficulty levels play an “extremely important” role in every mining operation, says Taylor Monnig, chief operations officer at TMGCore, a Texas-based bitcoin mining operation. “At the end of the day, bitcoin mining is math, when the algorithm gets more difficult, it affects everyone,” he explains.
But the effect on some is more severe as compared to others. Increased difficulty levels can translate to higher electricity costs for miners without economies of scale. In response, they either switch off their machines or drop out of crypto mining altogether.
According to reports, increased difficulty levels coupled with an exodus of traders from the crypto ecosystem has crashed prices and made bitcoin mining unsustainable for miners. Reports estimate that between 600,000 to 800,000 miners have dropped out of mining. The miner shutdown has sparked fears of centralization in mining within bitcoin’s ecosystem.
Monnig from TMGCore does not disagree with this assessment. According to him, the drawdown in prices provides two opportunities to large organizations with cash reserves. The first one is an inevitable decrease in the algorithm’s difficulty levels to make bitcoin mining sustainable again. “That will increase the amount of bitcoin one can mine with the same hardware,” he explains.
The second opportunity is that of boosting mining capabilities through acquisitions of small miners at “ridiculously low costs”. Monnig estimates that price dips eliminate bitcoin miners with power costs higher than $.09 cents/KwH. “These people shouldn’t be mining anyways,” he says.