Bitcoin experiences the second largest difficulty adjustment in history, potentially causing market impact due to delayed supply.

In the past few weeks, Bitcoin has experienced a significant drop, leading miners to eventually shut down mining equipment to reduce operational costs. The halt in a large number of mining machines means a substantial decrease in the overall network hash rate of the Bitcoin network, prompting the second-largest mining difficulty adjustment in history on March 26. Furthermore, some analysts believe that this may drive further downward pressure on the price of Bitcoin.

Miner Shutdown Leads to Sharp Decrease in Hashrate

Recently, analysts across the industry have noticed that the speed of Bitcoin block production has become unusually slow, far below the 10-minute average block time set by Bitcoin's creator, Satoshi Nakamoto. According to Bitcoin's blockchain data, on the evening of March 25th, between 8 pm and 11 pm, only 6 blocks were produced in the Bitcoin blockchain in 3 hours, which is 66.6% lower than the expected 18 blocks.

The significant drop in mining difficulty is closely related to the sharp decline in Bitcoin's price, which fell from $7,000 to a low of $3,800 last week. Although BTC has since recovered to around $6,000, some Bitcoin miners can no longer break even due to the electricity costs and diminishing returns, forcing them to shut down their mining rigs to avoid further losses. As a result, the overall network hashrate of Bitcoin has dropped sharply, reducing the probability of remaining miners finding a block within ten minutes.

As the block production rate decreases, the confirmation speed of transactions will also decrease. However, the demand for Bitcoin transactions remains high. According to data from BitInfoCharts.com, Bitcoin's transaction fees on March 25th increased threefold compared to the beginning of the month, reaching $1.76 on March 20th.

Second Largest Difficulty Adjustment in History

To adjust to the fluctuations in Bitcoin network hashrate, the Bitcoin network automatically adjusts mining difficulty approximately every 14 days (2016 blocks), lowering the mining difficulty means miners will find it easier to produce blocks, reducing transaction confirmation times and fees. According to data from BTC.com, this adjustment lowered by 15.95%, making it the second largest downward adjustment in history, only surpassed by the 18.03% adjustment on October 31, 2011. When calculated from the beginning of Bitcoin ASIC mining history, this adjustment marks a new record for the largest decrease in mining difficulty.

Delayed Supply Could Trigger Bitcoin Price Drop

The last difficulty adjustment occurred on February 25, 2020 (with a 0.38% decrease), when the Bitcoin price was $9,989.39. Three days later, the price dropped to $8,785.52. Additionally, after recent difficulty adjustments, Bitcoin's price has experienced a certain degree of decline.

The cause of the decline may come from "delayed supply." When mining is profitable, miners sell some Bitcoin to fund operations, while the rest is hoarded as long-term assets or reserves. However, when increasing competition makes mining less profitable, some miners are forced to liquidate their hoarded Bitcoin, increasing the supply of Bitcoin in the market. At some point, miners who can't break even will choose to shut down, reducing the hashrate, and subsequently lowering the mining difficulty. After the difficulty decreases, it will attract miners back in, initiating the next cycle of the "miner shutdown period." Philip Salter, head of operations at Genesis Mining, stated in an interview:

“This is no different from traditional markets, you have to sell all your products to pay off debts and continue operating. As a miner, you have to pay high electricity and operating costs; and all expenses are in USD, so as the price of Bitcoin falls, it means miners have to sell more inventory to continue operating.”

Further Reading

• Bitmain’s Latest Mining Machine Sells Out on the First Day, Criticized for Shipping Before Halving
• Falling Below Shutdown Price = Mining Difficulty? These Commonly Misunderstood Mining Knowledge Points You Need to Understand

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