What is Bitcoin Difficulty and How Does it Affect Me?

Updated 1/28/14 by Brian Webster (brianwebster@gmail.com)

Bitcoin Difficulty - establishes how much work, on average, must be done to solve a block on the bitcoin network.

So, what does it mean to solve a block?
When a block is solved, the solver gets just a bit over 25 Bitcoins (as of 2014. This will go down in the future). It is extremely difficult to solve a block. That is why most of us mine together in pools, such as btcguild or ghash.io. We work together to solve blocks, and the rewards are split amongst the pool members based upon each member's contributing hash rate for each block.

What does it mean when the difficulty goes up?
If the difficulty goes up 20%, your average earnings from mining will be 20% less.

How often does the difficulty change?
The difficulty changes every time 2016 blocks are solved. This is usually just under 2 weeks, sometimes every 10-11 days. The bitcoin network target is a block being solved every 10 minutes. If, during that 2016 blocks, the average solve time was only 8 minutes, that means the difficulty needs to go up in order to get everybody closer to a 10-minute average. When new bitcoin miners hit the market, that causes blocks to be solved faster, which causes the difficulty to go up!

Can the difficulty go down? Certainly. In fact, it has gone down three times in the past 14 months (as of the time of this writing). In December 2012 and January 2013, it went down 2%, 11.59%, and 8.64%. This means that it became easier and easier to solve blocks and miners were able to earn more Bitcoin per day!.

Why would the difficulty go down if new miners are hitting the market?
First and foremost, if the price of Bitcoin goes down, mining with many devices may become unprofitable as the devices may not make more Bitcoin than they are costing in electricity. Basically, if you add up everybody's hashrate on the entire bitcoin network, if that hash rate goes down, the difficulty is likely to go down.

How much should I expect the difficulty to change in the future?
This is a really good question. This will help us determine whether or not to buy a bitcoin miner. As of early 2014, I recommend expecting a 22% increase per 11 to 12 day period. Here is the recent difficulty increase history (as of the time of this writing)

How does this affect me?

• If you are considering purchasing a miner, you need to take two basic things into account.
  First, how much Bitcoin is the miner expected to gain before it becomes too costly to mine with and secondly, will I be able to resell the miner at some point?
  
  
• How do I figure out how many Bitcoins a miner is expected to earn before it becomes too costly to mine with?
  I recommend using the Bitcoin Wisdom Calculator for that. Enter your details into the "Hardware Info" area and check the results. Ignore their Overview window. It is chronically outdated and includes mostly pre-order devices, many of which are vaporware.
  
  
• How do I know how the resale value of a miner will hold up?
  There is no magic trick to this. Just read about miners, absorb information, and try to figure out which miners are considered reliable in the market. One nice trick is that USB devices tend to have excellent resale values, because people love the ease of plugging a miner into a USB port. You may be able to purchase a USB miner, mine for a couple of months, and then sell it for what you paid for it! Block Eruptors held their value for a very long time and continue to sell. If you are having trouble with this and would like some advice, feel free to email me. I, or what of my partners, will be happy to help you out. We keep up to date on all mining technology.
  
  
• Ok, I've looked at how long my device can mine without costing too much in electricity and I have a pretty good for the resale potential of the miner. What now?
  Just establish a plan and follow it. If you decide that you want to mine for 3 months and then sell the device, that is fine. Some people prefer to turn a device around faster, and some prefer to mine with the device until it costs more in electricity than it is worth (and then sell). All are viable strategies. All have some risk associated with them. All are quite fun. This is the game that we are playing. Enjoy!
  
  

Good luck! Any questions, email me at brianwebster@gmail.com or oxygen728 on Ebay.