Consequences of Bitcoin Hash Rate Drop

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The Consequences of Bitcoin Hash Rate Drop

Bitcoin hash rate has dropped more than 30% in the last quarter of 2018. Miners have increasingly been shutting down their rigs due to the sharp fall in BTC’s price.

What are the consequences?

The drop in Bitcoin hash rate is causing a reduction in mining difficulty. In this respect, BTC’s algorithm follows simple logic: the fewer machines mining, the easier it becomes to mine. This adjustment in difficulty occurs approximately every two weeks, or more precisely after 2016 blocks have been generated.

Difficulty adjustment of BTC mining: It’s easier to mine now than it was in July. Source

Bitcoin adjusts its mining difficulty in order to keep the block generation time at 10 minutes. The last adjustment took place on December 18, when the difficulty dropped by 9.56 percent. The previous drop was even larger: over 15 percent.

Things are starting to improve

Considering that this is the fourth decrease in difficulty in Q4, it has become much easier to mine a block of BTC. In fact, it is now 30 percent easier to mine than it was on October 5, 2018. However, the price of BTC is now also 36 percent lower than it was then.

Nevertheless, the price started recovering around the time of the last difficulty drop, so miners are switching their rigs on again.

miner inside Bitcoin Cash logo

Their revenue per transaction, at the time of writing, is 80 percent higher than it was on December 7, 2018. The combined value of transaction fees and block rewards is growing as well.

The reduced hash rate has not negatively influenced the number of confirmed BTC transactions. In fact, the number of confirmed Bitcoin transactions has grown steadily since the end of February, when there were 180,000. There are now between 250,000 and 300,000 confirmed daily transactions.

The number of daily confirmed BTC transactions in 2018. Source: Blockchain.com

The only unusual spike in the number of unconfirmed transactions happened on November 20, 2018. That’s because on that date, Bitcoin lost around $1,000 in value. This massive sell-off of BTC caused the highest number of unconfirmed transactions of any day in the past nine months.

BTC transaction fees paid to miners in the last quarter. Source: Blockchain.com

So, nothing drastic at the moment … but what if?

The last quarter of 2018 has shown us that a 30 to 50 percent decrease in hash power, over a period of two to three months, is still not drastic.

It would be a different story if the hash rate dropped abruptly. By that, we mean above the maximum possible change in difficulty per 2016 blocks due to “Factor of 4” in retargeting adjustments. For example, 85 percent in three days would be a radical drop, and would have certain consequences described here.

Lessons from the past

Mining difficulty, the available equipment, electricity price, competition, and the price of Bitcoin directly influence the profitability of mining. For miners, the drop in hash rate means less competition. For the network and users it means less security, possible congestion, and delays in confirmation of transactions.

Halving could cause the loss of hash rate. Every four years, block rewards are halved, meaning miners are rewarded 50 percent less BTC per mined block. If Bitcoin’s price doesn’t rise after the halving, the total effort spent on mining could decrease, making the chain less secure and more susceptible to a 51 percent attack.

Mining profitability vs price in USD, before and after the previous BTC halving in July 2016. Source: Bitinfocharts

However, about a year after the two previous Bitcoin halvings, in 2012 and 2016, BTC’s price rose high enough to offset the reward loss that halving caused. There is also an economic explanation for the price rise after the halvings, and it’s about the reduced supply of new Bitcoins. Reduced supply should cause the price to rise, if the demand for BTC stays the same or grows after the halving. So, in the case of a substantial price rise, hash rate does not need to change; in fact, it may even grow. It depends heavily on the price of BTC.

Many miners have so far shown a willingness to maintain computing power through less profitable periods. This is because they expect future BTC price increases to offset current price drops or reduced block rewards.

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