Mining Difficulty Explained
What is the mining difficulty and Hash rate and how does it affect my returns when mining crypto currency?
Let’s try to understand what network Difficulty and Hash rate are. I’ve been in the Crypto World, literally, for just over 18 months. I’m still not going to claim that I’m an expert on the subject. It was challenging for me to understand the principles of the crypto-currency networks, but I took a lot of time and effort, reading and research to understand it, so I decided to share my perspective on the mining difficulty debate.
What is mining difficulty?
Simply explained, it’s just the complexity of the task [Math calculation] that miners need, to discover a block [If you really want to understand the math behind Bitcoin look here- The Math behind Bitcoin]. The difficulty can change. It depends on the Hash Rate of the network (the number of miners who are mining the network).
If there are not many miners, difficulty falls, if there are a lot of miners, the difficulty starts growing, and it becomes harder and harder for a miner to find a block.
It is therefore with this understanding that the rewards in mining are dependent on 3 key factors, the Difficulty, Hash rate and the Price of Bitcoin. The price is also a key ingredient to the whole mining game to make it rewarding to mine.
The difficulty – The faster coins are being mined on the blockchain the more the difficulty rate increases, making the Hash calculation more difficult, so fewer miners are finding the key to mine a block of transactions on the Blockchain. The Bitcoin network varies its difficulty levels after the discovery of every 2016 blocks to ensure a constant output. If the network hash rate is high and the time the network takes to discover a new block is less than 10 minutes, then the network will increase the difficulty level proportionately to increase the block discovery time. If the block discovery time is more than 10 minutes, then the same protocol will reduce the difficulty level.
The Hash rate – Simply put the Hash rate is the total number of mining computers mining on the network, the more miners that join the network the higher the hash rate becomes. Imagine it this way, if there where 1000 mining machines on the network mining, and a block is found every ten minutes that means 144 of the 1000 computers would find a block each day [24 hrs x 60 min = 1440 minutes in a day ÷ 10 min =144 x blocks per day] This would be great if you owned one of these 1000 machines because, if all things where equal, your computer would be rewarded almost every 7 days with 1 block on the blockchain. [Current reward for mining 1 Block = 12.5BTC]
However, if the number of computers increased to 2000 that means you would be rewarded only every 14 days, the more computers that join the network the less your reward gets. Get the picture.
The Price – The price of Bitcoin [Or any crypto-Currency] fluctuates on a daily bases, the higher the price of the coin [usually given in USD] the higher your mining rewards daily, simple enough.
How does this affect me when I am mining Bitcoin?
This is a question I often get asked, how does all of this jargon effect me when I am mining Bitcoin.
To explain how it affects your rewards I would like to show you a couple of graphs from the blockchain website [And if you have not been on this website I would encourage you to go here often https://blockchain.info/charts]
Below is a screen grab of the difficulty rate over 6 months, this graph represents a 103.7% increase over the past 6 months in the difficulty for mining Bitcoin or 17.3% per month increase in difficulty.
In the past 6 months the difficulty has doubled from around 3 500 000 000 000 to 7 152 000 000 000 [103.7% increase]
Below is a screen grab of the Hash Rate over 6 Months which shows a 105% increase in the Hash Rate for the past 6 months or 17.47% per month on average increase in the Hash Rate.
Currently, the Hash Rate is 56 178 375 TH/s. (01/10/2018)
So what does this Hash rate represent?
Simply put if each S9 Antminer [S9 is the preferred Bitcoin mining machine] if each S9 Antminer has 13.5TH/s of computing power, 56 178 375 TH/s represents 4.16 Million S9 Antmining machines on the blockchain.
In January 2018 the Hashrate was 14 975 581 TH/s or 1 109 302 S9 Antminers. This simple explanation just helps you to see how many miners have joined the Bitcoin mining network in 2018 alone, and this number is still growing.
Below is the Hash Rate for the past month which increased from 50 496 241 TH/s to 57 956 171 TH/s or 14.7% increase in hashrate in September 2018.
So let’s start putting the pieces of this puzzle together to determine how does this affect your rewards when mining Bitcoin.
As you can see the Difficulty and the Hash Rate are closely related and over the past year they have increased at the same rate. As a Bitcoin miner, we understand TH [Terahash] therefore 1x TH is equivalent to 1000 GH [Gigahash]
We purchase mining contracts either in GH or TH.
So how does the Hash Rate affect my mining?
From the above 1 month Hash Rate graph it showed a 14.7% increase in the Hash Rate. If therefore you have a Bitcoin mine that is producing 0.1 BTC per month as an example, next month your mine would produce 14.7% less due to the increase in the DIfficulty / Hash Rate or 0.0147BTC less. Does this make sense?
NB! This may not bee 100% true and correct, it must also be noted that your monthly rewards are also dependent on the company that you mine with and the mining pool you mine in. Simply put a mining pool is the pooling of resources by miners, who share their processing power over a network, to split the reward equally, according to the amount of work they contributed to the probability of finding a block.
Mining in pools began when the difficulty for mining increased to the point where it could take years for slower miners to generate a block. The solution to this problem was for miners to pool their resources so they could generate blocks more quickly with greater Hashpower and therefore miners would receive a portion of the block reward on a consistent basis, rather than randomly once every few years.
So how does the Price affect my rewards?
So as we mentioned at the outset, your rewards when mining are affected by the Difficulty, Hash Rate, and Price.
The price of Bitcoin does not effect how many Bitcoins your mine will make each month.
The price of Bitcoin effects how much you are going to put in your pocket each month if you are going to convert the Bitcoins your mine is making each month back into FIAT currency. So as the price of Bitcoin goes from $10 000 to $8 000 your 0.1 BTC per month is worth less and as Bitcoin goes from $10 000 to $20 000 your 0.1 BTC per month is worth more. Makes sense hey?
A lot of Bitcoin miners get really excited when Bitcoin keeps going up, but suffer discouragement FUD [Fear Uncertainty & Doubt] when the price starts to drop. Perhaps you then need to develop a strategy.
What is your strategy?
Do you really believe that Bitcoin will reach $50 000 or more per BTC in the next 2 to 3 years? If you firmly believe in Bitcoin, then it does not matter what the price of Bitcoin is currently and if it drops or goes up. Naturally, we all want it to go up because that is when everyone is making real money.
A good strategy would then be to increase the Hash power of your mine. As I explained above if the hash rate increased 14.7% last month if you could increase your mining power to stay ahead of the difficulty rate you could mine indefinitely?
One strategy could be to reinvest all the Bitcoin your mine is making each day and repurchase more Hash power each day, I would need to repurchase at least 14.7% more hash power last month to stay ahead of the Hash Rate. If I could do this every month for the next 2 to 3 years when Bitcoin is $50 000 my mine could be making you a lot of money.
Let’s examine one of my accounts and see if this strategy works?
The account shown below is a $2500 Bitcoin mining contract, the mining contract provided 16 500 GH/s of processing power in September 2017, the account is just over a year old. The picture below is taken from my account on the 12/10/2018. What does it show?
GH/s Purchased incl. bonus 16 500 GH/s [15 000 + 1 500]
Total GH/s in the account 41 447 GH/s [Almost 3X the account purchased]
Total GH/s repurchased 24 947 GH/s [Repurchasing is taking all the BTC made each day and buying more GH/s equipment]
Ok, so what is significant about this?
Total GH/s repurchased per month – 24 947 GH ÷ 12 Mths = 2 079 GH/s per month [Average]
Percentage growth of account per month – 2 079 ÷ 16 500 = 12.6% growth per month
[It must however be noted that almost 8 of the 12 months the market has been down with Bitcoin drop significantly from December 2017 levels to $6 300 at the time of writing this article
Over and above the almost 3X increase in the size of this mining account, a total of 0.1049 BTC has also been withdrawn from the account in BTC or $630.
So what is your strategy, are you in it for the long term or are you in for the short term?
If mining Bitcoin interests you drop me an email, I would like to introduce you to the safest and most rewarding mining company in the world.