There are a lot of chats out there on the subject of cryptocurrency mining and trading. A typical question for any newbie would be something like, “which ASIC to buy or which mining rig to build,” and the response is: “Take a look at the growing difficulty of the network and don’t even think about getting into this business!”
What is Network Hashrate?
Let’s have a look at the hashrate and difficulty of a Musicoin blockchain (similar to Ethereum, same as a Dagger Hashimoto algorithm). The values are smaller than you think, so I hope it will be easier for you to understand the idea this way.
Each cryptocurrency network has a “block time” parameter. In Musicoin the block time is 15 seconds. Let’s assume that all miners around the world are solving a big puzzle. Each piece is called a block.
A musicoin block is found every 15 seconds in an ideal world. But this is not the case, so sometimes it could be 1 second or even 1 minute. However, the average block time is 15 seconds.
How is this parameter being held regardless of the number of miners that connect to the network? It is evident that if there are lots of miners, they should find blocks frequently (here is an example of an empty block at UBIQ), and if there are only a few miners, the blocks will be rare, and the network transactions will take a very long time.
Currently, a miner or Mining Pool (many miners working together) receive 309 Musicoin coins ($13) for one solved Musicoin block.
In the Ethereum network, 5 ETH = $1,900 for one block, in the Ethereum Classic network 5 ETC = $75. Unfortunately, the complexity and hashrate of these cryptocurrencies are higher than for Musicoin.
If the miners are to produce empty blocks and receive the money, the coin will depreciate, and with slowly found blocks; the transactions will become stagnant, devaluing the currency once again. Right here, the difficulty starts to take place.
What is Mining Difficulty?
Simply explained, it’s just the complexity of the task that miners need to solve to create the block (the problematic piece of the puzzle to find). This difficulty could change. It depends on the hashrate of the network (the number of miners who mine off this coin).
If there are not many miners, difficulty falls, if there are a lot of miners, the difficulty starts growing, and it becomes harder for a particular miner to find this block.
Miners mine for coins. All of them would like to buy nice cars, good food, and fashionable clothing. That’s why it’s important to know how much the reward is in US dollars.
If the coin price has grown on the cryptocurrency exchange, the value of the block reward increases in US dollars.
Let’s have a look at the graph above. On the 27th of August, the price of the Musicoin coin rose. Miners that were mining coins such as Zcash, Ethereum, Monero wanted more profit and switched their mining rigs to Musicoin. So naturally, the Musicoin network itself reacted by increasing its difficulty.
The difficulty is measured in hashes (usually terahashes – TH), concerning mining, it signifies the unit of work performed. The network hashrate or nethash (number of miners) are measured by hashes per second (TH/s).
The network itself adjusts difficulty in such a way that the difficulty/nethash = block time (in case of Musicoin it is 15 seconds).
What Happens When Mining Difficulty Rises?
On August 27, before the price took off, the difficulty of the network was: 7.5 TH, and it’s hashrate: 500 GH/s (approximately 16000 video cards). This price increase caused the hashrate to increase to 1.12 TH/s (1120 GH/s) (about 35000 video cards), and the difficulty flew up to 16,728 TH.
As a result, the rig’s profit, which was mining the coin BEFORE the price took off and AFTER the price took off, has not changed. The rig began to mine fewer coins, but at a higher rate (it doesn’t matter if it is a mining rig or an entire pool of rigs).
Many people don’t understand this critical point. Yes, you can make a couple of bucks in these jumps, but it’s usually settled in a couple of hours, and it doesn’t matter what currency you’re going to mine on the same algorithm. The reward of the miner will be the same. Of course, if you’re waiting for a currency to take off, you’d better mine it in advance.
There is another retreat where people who closely follow the difficulty and hashrate, all networks, 24 hours a day. And when the hashrate falls, or the difficulty sags, they buy power on Nicehash which directs them to the network of the sagged coin and if the miners are smart enough they can find a lot of blocks.
Let’s pretend there’s only one currency – Ethereum. The hashrate of Ethereum networks are continually growing as new miners are coming in. If the Ethereum rate falls and the number of miners doesn’t change (or even worse, increase), mining could become unprofitable.
This scenario will happen if a mining rig gets the same profit as it spends on electricity. If that happens, the rigs will start to turn off, and the difficulty will begin to fall. In this case, the profit will grow again.
If that happens only the miners with cheap electricity will survive.
We have not yet considered the possible coming of the POS era, a hardware breakdown, a possible Ethereum ASIC (highly efficient mining device) invention, etc. and of course the mining of other currencies, not just Ethereum.