Can Crypto Mining Difficulty Lower Profits?

Can crypto mining difficulty lower profits? Ideally, for any type of task, when the level of difficulty is higher, the outcome is naturally slower, if not lower. It is the same with crypto mining difficulty.

However, in order to understand the effects of crypto mining difficulty or Bitcoin difficulty, you should start from the basics.

This article will let you know all about it and therefore you should not skip any part of it if you really want to gain a comprehensive knowledge about crypto mining difficulty.

In simple words, crypto mining difficulty refers to a measure that determines how difficult it is to mine the subsequent new blocks of coins in a blockchain network.

In more complex and technical terms, crypto mining difficulty refers to the number of hashes, statistically, that is required to generate in order to find a legitimate solution for the next block of coin and earn the reward for mining.

Adjustments are made quite often on this difficulty level by adding more hashing power to the mining network.

This is done in order to ensure that the block generation is in accordance with the set block time or the period of time that should pass between two new blocks are generated, statistically.

This means that new blocks will not be generated too quickly.

Can Crypto Mining Difficulty Lower the Profits?

Can Crypto Mining Difficulty Lower Profits

With all that said above, your mining rewards will be significantly reduced if there is an overall increase in the hash rate of the mining network which will increase the mining difficulty as compared to the constant hash rate.

And, with frequent increase and decrease in the mining difficulty level, your earning will vary for which you will need to use a mining calculator to calculate your profits from mining.

An increase or decrease in the difficulty level of crypto mining, a process referred to as difficulty retargeting, also ensures that the blocks are generated consistently.

On each and every difficulty re-target block or every number of blocks, the difficulty level is increased when it is seen that the preceding blocks are generated faster than the set block time.

On the other hand, it is decreased if these blocks are generated slower than the set block time.

Therefore, as of now, the facts about crypto mining difficulty can be summarized as:

  • The mining difficulty indicates how time consuming and difficult it is to solve a math or complex cryptographic puzzle or to find the correct hash for a new block
  • The mining difficulty of new blocks is increased or decreased over time
  • The level of mining difficulty will depend on the number of miners at work in a specific network and
  • The whole intention of increasing the mining difficulty is to maintain the target block time and to ensure that generating new blocks is consistent.

The need to increase the difficulty in crypto mining is quite understandable.

Cryptocurrencies have grown in popularity exponentially and more and more people are participating in mining new coins.

As a result, the number of computers taking part in a P2P network also has increased over time gradually.

Therefore, it has increased the level of competition among the miners to be the first to solve a cryptographic puzzle and earn block rewards, which by itself is limited.

So, the hash power of the entire network needs to be increased.

If you look into the mechanism behind it, Bitcoin mining for example, all its transactions are stored in the blockchain as blocks and new blocks are added to the chain every ten minutes.

In order to maintain this time gap, the difficulty level in mining is needed to be increased.

The difficulty level is adjusted automatically every time after 2016 new blocks are generated in the network.

As said earlier, whether it will go up or down will depend on the number of participants in the network as well as their total hash power.

Due to this increase in mining difficulty, more computational power is needed to solve the mathematical puzzles for creating a valid new block which is why the miners join crypto mining pools to get the additional computing power.

The rewards earned, usually in the form of new coins, are split among the participants in the mining pool according to the proportion of their computing power.

So, the rewards may be low but are more consistent in comparison to individual mining.

As you may know crypto coins have a finite supply. For example, there can be only 21 million Bitcoin and as of now almost 85% of it has already been mined.

It is estimated that at this rate the limit will be reached and the last Bitcoin will be mined by 2140.

Now, you may wonder what will happen when the last Bitcoin is mined given the fact that the miners still need to contribute to the network to keep it running.

In that case, the rewards will change when new blocks are generated.

It may be that the successful miners will get a portion of the transaction fees paid by the users within the network instead of a new coin as a block reward.

Crypto Mining Difficulty Chart

Understanding the crypto mining difficulty chart is also very important in order to understand mining difficulty more comprehensively.

These charts plot the difficulty level graphically so that the users can visually determine the target increase or decrease of historical data of the mining difficulty over time as well as the current difficulty target.

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The time options for difficulty adjustments, both increase and decrease, can be varied. Usually, the timeline options defaulted to the current date can be for:

  • One day
  • One week
  • One month
  • Three months
  • Six months
  • One year
  • Three years and
  • All time.

Using the mining difficulty charts, you can see the average increase in mining difficulty for the specific time limit according to your requirement on the particular blockchain network.

This network difficulty is the comparative measure of the difficulty in finding a hash lower than the given target.

Technically, difficulty adjustment in crypto mining is related directly with the total projected mining power represented in the TH/s or Total Hash Rate chart.

Higher the difficulty is the more time and computing power will be needed to mine the same number of new blocks.

This will make the entire network more secure against malicious attacks.

And, this difficulty is determined from the data of the confirmed blocks in the network.

Effects of Algorithm Adjustments

When adjustments in the algorithms are made, it becomes much harder to mine new crypto coins and when it is done successfully, it turns out to be less profitable.

Though such adjustments are made when things are on the higher side such as the number of participants or the speed of generating new coins, historically speaking this is nothing alarming or surprising.

However, the most sizable increase in mining difficulty was noticed when China imposed a ban on crypto mining.

As a result, a lot of miners moved out of China to find new ‘homes.’

These miners are now making way more money than they used to do in China before the crackdown on crypto by the Chinese government in May 2021.

This is in spite of the self correction of the algorithm which has made crypto mining less lucrative than before.

This is due to the effect of both the algorithm adjustments as well as the ban on crypto by the Chinese government for which more than half of the computing power used in crypto mining went dark.

Miners residing in the other parts of the globe had to take on the brunt and deal with the slack.

As a result, there was less computing power and fewer people taking part in mining operations which inevitably increased the time to verify transactions and mine new crypto coins.

As a result, the algorithm self-corrected and there was a significant drop in the difficulty level noticed.

This made mining coins easier and crypto miners were back in form solving puzzles for new blocks of transactions in less than ten minutes on an average thereby resetting the clock.

Therefore, the crypto mining network did not miss a beat with no downtime which is critical for its architecture.

The number of miners increased the number of machines engaged in the process and the large number of machines that moved out of China found new homes in other places of the world.

Some of these machines are the same as those that were used in China before the ban.

Since most of the people living in China could not find a way to move into the United States due to capital restraints and the fact that they did not speak any English, they had to sell their machine off.

This resulted in an outbreak of activity all over the globe in the buying and selling of these machines.

However, the ASICs coming right off production lines and the newer rigs are much more efficient as these produce nearly double the hash power by using the same amount of electricity as these second-hand machines.

As a result, the newer generation machines are preferred by the miners which have sparked more competition among them.

All these mean that the level of difficulty in crypto mining will continue to rise steadily and quite significantly over time.

If the difficulty level increases by about 10% every month from this point onwards, it may take about another nine months to a year for it to double, as opined by several crypto experts and market insiders.

Mining Requirements and Crypto Difficulty

Typically, crypto difficulty maintains the average time taken to generate new blocks when the hash power changes.

A difficulty level makes the network more secure and less vulnerable to malicious attacks.

Since Bitcoin and other crypto coins use the PoW or Proof of Work consensus algorithm all through the mining process, it is the duty of the miners to verify transactions performed on the blockchain and ensure legitimacy of them to prevent fraud.

The miners who use their computer and resources to solve the cryptographic puzzle to validate a new block and add it to the blockchain with a hash get paid in new coins or transaction fees as reward.

However, there are other requirements in it before they can receive compensation, if any at all.

  • First, it is the extent of computing power required to validate a transaction. This is represented by crypto difficulty. The time taken to verify a new block depends on random chance and the level of mining difficulty.
  • Second, it is the random hashes or the alphanumeric codes that represent the data. This is generated by the miner by running a set of data of a particular transaction through a hash algorithm. This is specifically a one-way function that produces the same result always for a specific set of data and cannot be reversed. This means that the original data cannot be seen.
  • Third, the hash produced by the miners needs to be equal to or lower than the set numeric value which is called the target hash. This is accomplished by changing a single value called the nonce or the number used once.
  • Fourth, every time the nonce is altered to create a new hash it will have its unique set of numbers. This means that there will be no way in which one can predict what the new hash will be due to the fact that for any given hash function the output will be exclusive. Therefore, the miners need to repeat the process to add new nonce to the given data if it meets the hash requirement.
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The hash requirement should meet the corresponding crypto mining difficulty.

Typically, it should be below the specific target value that is set automatically and adjusted periodically by the protocol of the crypto.

If this target value is lower, the hash function must be repeated several times in order to get a suitable result.

This means that the difficulty in mining will be higher and therefore the miner will have to use a large number of nonce for each new block generated on an average until it meets the requirements of the target hash.

It is only then the new block will be added to the blockchain.

Sometimes, two new and valid blocks can be mined at the same time and broadcasted by the miners.

In such situations, the miners may begin to mine the next block depending on the particular block among the two competing valid blocks that they receive first.

This results in a split in the network, though temporarily, and it creates two separate versions of the blockchain.

There will be an antagonism between the two valid blocks and it will continue until a subsequent block is mined by any miner on top of one of these two rival blocks.

The winner will be decided based on which block among the two comes first.

When this happens, the other valid block is abandoned and is called a stale block or an orphan block.

All those miners who had selected this now orphaned block before will switch back to the winner block and continue trying to mine a new block for the chain and be the first.

Crypto Difficulty Benefits

Now, at this point you may wonder what the need for a higher crypto mining difficulty is, especially when the miners have to perform the same task over and over again.

Well, there are ideally two major benefits of crypto mining difficulty. These are:

  • Ensuring a steady rate of generating new blocks by varying the computing power required for it which is, for example, approximately 10 minutes for Bitcoin and 2.5 minutes for Litecoin and
  • Ensuring security of the blockchain network to prevent the bad actors and fraudsters from taking control of the devices’ hash power.

Therefore, higher the crypto mining difficulty, more guesses are required to meet the requirements of the target hash.

As a result, it prevents hackers from making a 51% attack.

Hitting Record High

The crypto mining difficulty level, especially for Bitcoin, is all set to reach an all-time high in 2022.

As of now, the rate at which the difficulty level of Bitcoin mining is increased is about 10%.

This is considering the situation now where the miners in North America are deploying more machines for crypto mining.

On the other hand, if you look back a bit, the level of difficulty in crypto mining dropped significantly till July last year as a result of the Chinese ban on crypto mining.

This resulted in new facilities in new homes to come online and the difficulty level and hash rate started to increase.

The miners started to make profits and therefore tried to increase their mining capacity.

This trend will continue all through 2022 as the industry insiders, crypto experts and analysts expect.

The miners in Europe, North America and Russia will therefore continue to deploy more machines for crypto mining and make use of the unused and additional electrical power.

According to the data collected by Blockchain.com, the Bitcoin mining difficulty is at 26.643 trillion and it will rise further with subsequent updates to create new all-time highs.

And, according to a report of CoinWarz, the hash rate of Bitcoin hit over 205 hashes per second called exahashes on January 15, 2022 in spite of the plunge in its price.

This indicates a 19.6% rise in the hash rate as compared to that in November 2021. The same trend is noticed in the case of Ethereum.

Rising Revenue and Price Slumps

The revenue of the crypto miners, especially the bitcoin miners, has risen by nearly 206% in 2021 and it is expected to be much more than that in 2022.

This is all due to the boom in the infrastructure experienced in other countries of the globe as far as crypto mining is concerned after the ban by the Chinese government on it.

According to a survey report of Block Research and GSR published in January 2022, the YTD or Year to Date revenue of Bitcoin miners in 2021 reached a staggering total of $15.3 billion, which is a record.

This was also the cause for the price of Bitcoin to go through the roof!

It was even more significant in the case of the Ethereum miners. According to the same report, their revenue reached a total of $16.5 billion indicating an increase of 678% in terms of YTD revenue, which is also a record.

However, in terms of price, there was a sudden plunge experienced in the later quarter of 2021, once again due to the ban on crypto mining by the Chinese government in May last year.

As a result of the price slumps coupled with Bitcoin mining difficulty on the rise to reach an all-time high, mining profit reduced in size day by day.

Add to that, the doldrums in the price of Bitcoin along with the FUD among the miners regarding crypto mining, the revenue of mining took a further hit.

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However, since prices and mining difficulty move in opposite ways, the situation cannot be considered to be a deterrent for the miners, and things have steadied somewhat now.

Higher Difficulty Equals Lower Profits

There is no doubt that mining Bitcoin, the oldest crypto of the world, is more difficult now than before as it is with other types of crypto coins as well. It now needs more energy and computing power to generate a new coin than it was needed before.

With such an increase in the mining difficulty, the miners now have to bear higher expenses in terms of computing power and electricity bills.

This has reduced their profits while they achieve the same end result, as it is explained earlier.

Moreover, the value of the new blocks generated now is significantly lower than what it was before as well.

This is due to the price slumps in Bitcoin and other cryptocurrencies.

According to some market reports published by bitcoin.com, miners are making less than $10 a day even after using some of the best mining rigs.

It is needless to say that the miners using the older machines are earning even less than that.

New Centers

The new centers that have come up after the ban on crypto mining by China have helped the crypto industry to turn around after going down.

These new centers have not only expanded the crypto market but have also reshuffled the mining pools.

Even lesser known countries such as Kazakhstan and several others in North America, Europe, and Central Asia became the new home and hot spots for crypto mining, in spite of the rising difficulty level in crypto mining.

According to a report, as of now, it is the United States that has jumped to the top spot replacing China to become the biggest hub officially for Bitcoin mining and business operations.

Coins to Look for

Finally, you should know the coins that you should typically mine in order to make significant profit from mining in spite of the price slumps and rise in mining difficulty.

Though Bitcoin, which is based on the Proof of Work consensus algorithm, is the most favored and well established coin to mine, there are also others that are as good as it.

However, not all coins out of those thousands available in the market are good to mine.

Here are the top five chosen coins that promise higher profitability or rewards per block mined in comparison to other types of crypto coins.

These are selected on the basis of different factors such as income volatility, affordability, high energy consumption, and market capitalizations.

  • Bitcoin – Highly favored, this is the biggest and oldest crypto coin of the world in terms of market capitalization. It is highly profitable but Bitcoin or BTC mining now is more difficult because it is more energy intensive and is also considered to be impacting the environment severely.
  • Ethereum – It is also quite profitable to mine Ethereum or ETH in 2022 being the second-most popular crypto coin after Bitcoin. It is simpler to mine ETH than BTC but you should keep in mind that it is equally energy sensitive and needs high computational power to mine.
  • Monero – Another high value crypto coin, Monero or XMR focuses more on anonymity and privacy. Launched in 2014, this crypto offers powerful financial performance and therefore is quite favored by the crypto miners. You will not need high-end technology or equipment such as an ASIC to mine this coin which makes it more profitable since you can use a simple CPU or GPU mining rig for it.
  • Litecoin – Founded in 2011, this is the first Altcoin that comes with a much faster block generation rate as compared to that of Bitcoin making it a worthy alternative to it. It is also quite profitable to mine Litecoin or LTC because you can use a personal computer to mine it instead of a costly mining rig. The reward will be more lucrative if you use a specialized mining rig, operating systems and software however.
  • Ravencoin – Founded in 2018, Ravencoin or RVN also holds quite a high value in spite of its low price as compared to other crypto coins. It is the other features of the RVN that makes it quite profitable to mine it. For example, you can mine this crypto coin using any standard computer. It is due to the special algorithm of this coin. Also, the energy consumption is much lower than the revenue offered by this coin making it quite profitable to mine.

Therefore, considering all the facts and information above, it can be said that mining crypto coins is a profitable venture but it is only for those who can afford to spend a lot of money, time, and energy for it and are okay with the increased difficulty in crypto mining.

Conclusion

The difficulty in crypto mining rises every time a new miner joins the network. It is adjusted by the network protocol which ensures constant creation of new coins with the desired time gap. Reading this article you now know why and how it is done.