Bitcoin Mining (BTC) has just experienced the second biggest drop in its history, -16.05%. The last time such a large drop occurred was in October 2011. How can such a correction be explained?
An historic fall for Bitcoin mining
As BTC.com data shows, Bitcoin’s (BTC) mining difficulty has just dropped to 16,787,779,609,932 (16.79 T). This corresponds to a decrease of -16.05% compared to the previous mining difficulty.
This fall in difficulty is historic, as it corresponds to the second largest correction in Bitcoin’s history. Estimates predicted a drop of around -13%, which is already colossal, but far from the current fall.
The only other time the difficulty has seen such a larger downward adjustment (-18%) was more than 9 years ago, in October 2011. Last March, when Bitcoin was hit hard by an unprecedented crash, the difficulty had readjusted by -15.95%.
More impressively, only 17% of the adjustments are negative, and 2% of them are double-digit decreases, making this adjustment particularly noteworthy for its rarity.
This graph provided by The Block showing the 10 largest decreases in Bitcoin’s difficulty speaks for itself:
Self-adjusting every 2016 blocks, i.e. every 2 weeks, Bitcoin’s mining Golden Profit difficulty ensures that the average interval between block creation is maintained at around 10 minutes.
One could assume that a negative adjustment of this magnitude would indicate a drop in the price of Bitcoin, or a growing lack of confidence in the network. But this is not the case.
For the time being and as is often the case, the price of Bitcoin remains impassive to this drop in difficulty. Indeed, the mining difficulty adjustments are regular, and known in advance. Although this happens in the middle of a bull market, nothing allows us to be alarmist about the future of Bitcoin in the short term.
How do you explain such a fall?
This decrease in difficulty is the consequence of a decrease in the Bitcoin network hashrate for several weeks.
As the rainy season has come to an end in China – where the vast majority of the hashrate comes from – many miners have ceased their activities, no longer being able to take advantage of cheap electricity.
For Mathieu Vincent, founder of Summit Mining, the end of the rainy season has two effects: „The risk, as last year, is not having enough electricity to power all the machines. »
He points out that this will lead to a migration of mining machines to places where production is stable and guaranteed, even though electricity is much more expensive there, i.e. mainly in Xinjiang.
„We ourselves have 3,360 TH/s of power with a small part of our own machines located in China, in Sichuan, which were disconnected last Monday and which will be connected again this evening, in Xinjiang precisely. »
Second effect, many Chinese only speculate during the rainy season: „They buy miners in April and sell them in October and November to foreigners. These machines will be reconnected when they have found a buyer,“ Mathieu Vincent reveals.
Following this adjustment, the machines recently disconnected from the network should come back online in the coming days, causing an increase in the hashrate.
Mathieu Vincent believes that a new higher value could be expected from April or May next year, when the new rainy season starts.
The next adjustment should take place on November 15th. Estimates at the time of writing indicate a potential drop of -15.92%, again a particularly large adjustment. But this is only an estimate, based on current data.
Indeed, the fall in difficulty should attract new miners, in order to take advantage of a period of increased profitability. The next adjustments should thus start to turn positive again.