Earlier this month, Bitcoin network difficulty reached a new all-time high of 92.6 trillion. You may be saying to yourself, “OK that seems like a really big number, but what does it mean?” Let’s dive in!

Chart via @BitcoinNewsCom on X

What is Bitcoin Network Difficulty?

Bitcoin’s network difficulty is a goal that dictates how much work its blockchain network needs to do to add blocks. Since Bitcoin is a proof of work blockchain, its difficulty level is adjusted automatically to compensate for changes in the network’s hashrate, or participation level.

Proof of work is a consensus mechanism used by many cryptocurrencies to verify the accuracy of new transactions that are added to a blockchain. Since the decentralized networks used by many digital assets don’t have a central governing authority, they utilize proof of work to ensure the integrity of new data.

Bitcoin difficulty is a parameter used to keep the average time to produce one block steady as the network’s hash power changes. The higher the difficulty, the more additional computing power needed to verify transactions entered on the chain, a process known as “mining.”

Understanding Hashing and Mining

To really understand how network difficulty is measured and adjusted, it’s helpful to first know the roles that “hashing” and “mining” play.

Hashing is the term used for sending transaction data through an algorithm, where it’s transformed into a long string of numbers and letters. Any adjustment made to the input data will change the hashing algorithm’s output.

Miners must compete to produce a hash that’s less than or equal to a numeric value called the target hash, which is set and maintained by the network’s programming. Each miner sends specific fields through the algorithm, including the “nonce,” a number used once. The nonce is increased by a value of one on each hash attempt, up to a maximum value of ~4.5 billion.

A new hash is created on every attempt, and there is no way of predicting what the hash will be. Since each set of data has only one output, miners must repeat the process over and over until they meet the hash requirement.

Miners are basically a blockchain’s auditors, verifying the new transactions and preventing fraud to ensure legitimacy. They run software on their computers and compete to have their proposed block of data added to the chain. This means that those who have faster systems with more computing power have a better chance of generating a hash that meets the target.

Why Were Difficulty Adjustments Introduced?

In an effort to try to keep mining fair and maintain a steady pace of block production, difficulty adjustments were created. Due to technological advancements and a shift from individuals mining to businesses with massive computational ability, mining is no longer really “fair.” However, difficulty levels still ensure that there’s a steady block production rate.

How is Bitcoin Difficulty Calculated?

Put simply, Bitcoin’s difficulty is a measure of how far the target has moved from its starting value, where the target is the number that block hashes must fall below for a new block to be added to the chain.

On the Bitcoin blockchain, difficulty is automatically adjusted to maintain a constant rate of one block every 10 minutes.

The maximum difficulty the Bitcoin blockchain can set in a decimal format is 2224 (a 68-digit number), while the minimum value is 1.

After every 2,016 blocks – 10 minutes per block -> 144 blocks per day -> for 14 days – the network recalculates the next difficulty using the time it took to mine the previous 2,016 blocks, which produces a ratio (T):

T = Time Previous / (2016 x 10 min)

Since it should take 20,160 minutes to create 2,016 blocks, anything greater or less than that will cause the difficulty to be adjusted either up or down.

Why is Bitcoin Network Difficulty Adjusted?

The difficulty is adjusted to maintain the target block time of one block every 10 minutes. The higher the difficulty, the harder it is to mine a single block, and the more intense the competition is on the network.

So, What Does This All Mean?

Network difficulty adjustments ensure that higher hash rates don’t cause block time to drop too far from the 10 minute target. Hypothetically, if an increase in bitcoin miners were to drop the block time from 10 minutes to 20 seconds, the market would be flooded with new bitcoin supply, and bitcoin would no longer be a scarce asset.. The new ATH signifies that right now, mining competition is higher than it’s ever been.

If gold prices quickly shot up, gold miners would likely mine a ton more. A rapid increase in supply should likely then cause gold prices to drop. That same scenario can’t occur with Bitcoin because the difficulty adjusts every 2 weeks or so. We believe this makes gold prices far more elastic than Bitcoin.

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