The Bitcoin mining difficulty is crucial to both miner profitability and ensuring that BTC is not mined faster than the protocol allows.
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The Bitcoin () mining difficulty hit an all-time high of 127.6 trillion this week, but is projected to drop during the next difficulty adjustment on August 9.
Mining difficulty is expected to fall by about 3% to 123.7 trillion in the next adjustment period, and the current average block time is about 10 minutes and 20 seconds, according to .
Data from CryptoQuant shows that the , with a sharp drop-off at the end of month and the first two weeks of July, when difficulty fell to 116.9 trillion. However, the difficulty level resumed its long-term uptrend in the latter half of July.
Bitcoin mining difficulty, and — the total computing power committed to securing the network — is central to miner profitability and maintaining Bitcoin’s high , which protects BTC’s price from overproduction.
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Stock-to-flow ratio measures the total available supply of a financial asset or commodity against the newly created supply added by miners or commodity producers.
The higher the ratio, the more resilient the asset or commodity is to price changes caused by overproduction; the lower the ratio, the more the asset or commodity will be impacted by new supply.
This ratio is partially why silver was demonetized by gold. Silver has a lower stock-to-flow ratio than gold. Rising silver prices attract miners and producers to create more supply, which floods the market with new silver and depresses prices.
Bitcoin has a higher stock-to-flow ratio than gold, with about 94% of BTC’s 21 million supply . Gold, in comparison, has no hard supply cap and an inflation rate of about 2% per year.
“Gold scarcity, the stock-to-flow ratio, is about 60. Bitcoin’s scarcity is about 120. So, bitcoin is 2x scarcer than gold,” according to , the creator of the Bitcoin stock-to-flow price analysis model.
The difficulty adjustment makes Bitcoin’s price inelastic to production, which is kept proportional to the total computing power deployed by miners.
Adjusting difficulty prevents overproduction and subsequent price collapses due to new supply being dumped on the market in large quantities over a short period of time.
As more computing power is deployed to secure the Bitcoin network, the difficulty rises to match the new computing resources, keeping block production as close to the protocol’s 10-minute target as possible.
Conversely, if computing power drops, the network difficulty adjusts down to ensure new blocks are mined at a steady pace of about 10 minutes.
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