Quick take:

  • Difficulty is estimated to rise by 12% after Bitcoin price continues to rise and new mining machines get delivered
  • The past two difficulty adjustments have been declines despite Bitcoin price trading significantly higher
  • Electricity shortages in Sichuan and Yunnan forcing mining facilities to turn machines off is the likely cause behind the previous two difficulty declines

Bitcoin has been breaking record highs almost every day. The relentless rise in the price of Bitcoin will only come as a surprise to some. Diehard Bitcoin advocates never questioned that such bullish market conditions would return. However, one thing that has been surprising was how the network difficulty played out after such significant price rises.

Typically, difficulty will rise after Bitcoin price increases. The higher price allows more miners to operate profitably. Those that were previously below breakeven levels can turn their mining machines back online which results in a greater level of hashrate being deployed network-wide.

More hashrate means faster blocks. Faster blocks means higher difficulty. However, the past two difficulty adjustments have been declines. Bitcoin price has roughly doubled compared to one month ago. Nonetheless, difficulty dropped by 2.54% and 0.38% on the 14th and 28th of December respectively.

One factor that played into the declines has been a tight supply in the mining machine market. MicroBT and Bitmain are reportedly sold out of rigs until May 2021 and prices in the secondary market have increased to over $47 per TH to account for the lack of machines in the primary market.

While this puts a limit on the amount of new hashrate which can come online, it doesn’t explain why hashrate and difficulty dropped over the past two adjustments. Electricity shortages in Sichuan and Yunnan are the likely explanation for the recent drop in difficulty. Chinese government authorities have reportedly cut off the electricity supply to some mining facilities in these regions amid an underproduction of energy.

These regions account for a significant portion of the Bitcoin network hashrate. During the past dry season, estimates from Cambridge Center for Alternative Finance put their combined hashrate share at roughly 15% of Bitcoin network hashrate. During the previous two difficulty declines, it is likely that the hashrate coming offline in these regions outsized the hashrate that was coming online elsewhere.

However, Bitcoin price has continued its rise after recently surpassing $40k. As a result, revenue for miners has almost tripled compared to three months ago. More lucrative conditions for Bitcoin miners has spurred more miners to turn their machines online and this is being reflected in the estimated change for the upcoming difficulty adjustment.

Difficulty is currently estimated to increase by 12% tomorrow. While higher prices are one factor fueling the rise in hashrate, rig deliveries are another factor behind the upcoming rise. According to Compass COO Thomas Heller, mining machines that were ordered several months ago are finally finding a home in facilities.

With more deliveries anticipated over the coming months, steady increases in hashrate is likely. However, the hashrate deployed in the initial months of 2021 will also depend on Bitcoin price movements. But as it stands, BTC price has only been moving in one direction.