Since the inception of Bitcoin, the difficulty of the network has grown from 1 to 48.71 trillion hashes that a miner must perform to find the winner. This means that it is 48.71 trillion times more difficult to mine a Bitcoin block today than it was when mining began in 2009 – a compound increase of 20.64% per month.
At the time of this writing, the difficulty of Bitcoin is at an all-time high, which means that miners – on a BTC basis – are getting less rewards per unit of hash rate than before. Next to the price of bitcoin, the difficulty of Bitcoin is a main factor that influences the price of hash (mining revenue per unit of hash rate), so miners are interested in projecting the growth of the hash rate of Bitcoin and difficulty trend for business planning.
To this end, miners and Bitcoiners often use the block-time method to estimate future adjustments, but this method often over- or under-estimates the difficulty changes at the beginning of each period. difficulty.
To improve this, the Luxor Technologies team has developed a new method called the “rolling-block method,” which we describe in more detail in a recent report on predicting the difficulty of Bitcoin mining.
We hope that the rolling-block method for predicting Bitcoin difficulty will provide miners, investors and hash rate traders with a better planning tool for changes in difficulty.
Luxor’s ‘Rolling Block Method’ For Predicting Adjustment Difficulty
For this report, we developed a new time series forecasting method for future difficulty changes, which improves the accuracy of the time onset compared to the constant block time method. We call it the short-named “rolling-2,015-block, square-root-weighted, epoch-adjusted block time method” (or “rolling-block method,” “adjusted-block-time method,” or “dual – epoch method”).
This new method improves on the constant block-time method in the early part of the season by including block times from the previous 2,015 blocks, instead of only blocks from the current season, which may change forecasts early in the season due to lack of data points. To account for the change in network difficulty between periods, the block times of the previous period were adjusted by the previous adjustment. And finally, we weight the average block times in the current period with the square of the proportion by epoch. This last step is to reduce the effect of block times from the previous period as the current period progresses because these values do not determine the future adjustment.
In the chart below, we can see through the confidence intervals that the new method performed better than the old model at the beginning of the period until block 650, but it became slightly worse after that:
This forecast is, of course, only for planning the next difficulty adjustment. What if we want to predict, say, one year into the future?
Long-Term Bitcoin Mining Difficulty Prediction
Luxor has developed models for long-term difficulty forecasting, as well, but these models are obviously more complex, as they span a longer time frame.
Our model takes the bitcoin price, transaction fees and block subsidy as input on the demand side, and internal data on ASIC production estimates and operating cost distributions across the industry on the supply side. Using these inputs, the model produces an equilibrium hash rate, difficulty and hash price for 18-month periods.
The model structure reflects reality; hash rate, difficulty and hash price are endogenous to the system, not exogenous determinants of each other. We are able to analyze the sensitivity of the model to all inputs as well. For example, we can predict an equilibrium hash rate, difficulty, and hash price at different bitcoin prices.
The charts below present projections from our updated hash rate supply and demand model. It provides estimates for flat, bull and bear bitcoin price scenarios.
Hash Rate, Difficulty And Hash Price Projection Updates
Hash rate is a trending asset class and digital commodity market. Hash rate market participants such as Bitcoin miners, hosters, lenders, investors and traders need access to rigorous economic analysis and data available in other commodity markets.
Luxor commits to providing this analysis and forecast every three months. If you want to know more, please visit this post.
This is a guest post by Colin Harper. The opinions expressed are their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.