China’s Bitcoin Crackdown Sets Up Record Tweak to Mining Puzzle

(Bloomberg) -- Bitcoin is poised to break a record Friday, but it has nothing to do with its price.

What will happen on that day is the roughly biweekly adjustment to the protocol's difficulty level for processing blocks of transactions. The setting dictates how much computing power is needed to mine the digital currency at the target rate of one block every 10 minutes. And it's expected to be unlike any change that's been seen before.

Current estimates peg the adjustment to be around -27%, which would be 9 percentage points lower than the previous steepest decline on record of -18% in 2011. It will also be the third straight decline in the difficulty level, the first time that's happened since December 2018.

The drastic change was brought on as a result of China's crackdown on mining. With Chinese miners pulling the plugs on their machines and on the hunt for more welcoming jurisdictions, the network's overall computing power has plummeted. The time to produce a block leaped to a more than 20-minute pace in the wake of the country's decision.

Bitcoin's protocol is designed so that the average time for a block to be mined should be about 10 minutes. To keep it on track, every 2,016 blocks -- or about every two weeks -- a tweak is made to make the puzzle miners solve harder or easier, based on the current levels of computing power, or hash rate, flowing through the network. The current difficulty level was set before the computing power in China was shut off, which has led to longer processing times with fewer miners on the system than anticipated.

The University of Cambridge estimated that about 65% of the Bitcoin network's hash rate came from China as of April 2020. Now for the miners still up and running, there's an opportunity to reap a higher percentage of transaction fees and less competition for the lucrative block reward of 6.25 Bitcoin.

“Those miners that are positioned right now with hash rate online and hosting capacity hold all the cards,” said Mason Jappa, the chief executive officer of crypto mining hardware broker Blockware Solutions.