Bitcoin Difficulty Reversing

Has this happened before?

Yes, many times (I have include a table below highlighting decreases for reference). Rest assured that this is not the end of bitcoin and is, at least technically, a normal function of the network. In fact it uses the exact same tried and proven mechanism that has seen the difficulty increase for the past 20 months or so.

The first difficulty decreases happened in 2011 when CPU mining was still practical and massive botnets were using unsuspecting people computers to mine bitcoins. As these botnets were discovered and taken down by security experts the difficulty took minor hits. As the total network hashrate back then was measured in KiloHashs per seconds (1000's of hashes per second) compared to todays TerraHashs Per Second (1,000,000,000,000's of hashes per second) even a tiny change was felt quite dramatically.

The second set of decreases was due to economics and the imminent arrival of ASIC's. At the time the bitcoin price was measured in dollars (single dollars, not hundreds as they are now) and mining was done with video cards and specialised mining software allowing miners clock their cards up to a typical speeds of about 100 MegaHash per second (A MegaHash is 1,000,000 hashes per second). At the time of the last difficulty decrease on January 23rd 2013 when the difficulty drop to 2,968,775 (a -8.64% decrease) the total bitcoin network was only 21,251 GH/s (or 21,251,000 hashes per second).

Back then, the price of bitcoins no longer justified the electricity it took to run your GPU mining rigs.

Why is the difficulty decreasing now?

Their are many reasons for the difficulty to decrease apart from the obvious statement that there is less hashpower being pointed at the bitcoin network. It is unlikely that the ASIC bitcoin miner manufacturers are voluntarily scaling back production, it is also unlikely that miners are voluntarily turning off their rigs for no reason.

There is a few possible reasons that the difficulty may decrease, but in the end there only one rational reason, economics.

Evidence seems to suggest that even the biggest hashing farms, with the cheapest electricity have reached the point where at the current price of bitcoin cannot justify adding new hashrate to the network.

Where do we go from here?

There are a few possible 'next steps' from here;-

• The bitcoin price will increase allowing the current generation of mining equipment to generate more bitcoins for their electricity consumption.
• The "Next Generation" of bitcoin miners using more electrically efficient ASIC's will boost us into another period of expansion.

Where it goes exactly is hard to tell, but it will be an interesting phase in the continued development of the bitcoin network.

Are we still safe?

With the network entering a possible stage of stagnation as far as mining hashrate is concerned you may ask yourself if the network can maintain it's safety, after all, securing the network is the main function of all this hashpower.

Rest assured though, even at the current status quo it would take hundreds of millions of dollars and many months of time to threaten the network. I plan to do a series of articles over the next few weeks to explore the possibilities and potential ramifications of the difficulty change that will be happening in less than an hour.