Learning Bitcoin With Charts: How Are Hash Rate, Difficulty And Fees Related?
Date: May 15, 2021
Bitcoin’s difficulty adjustment mechanism is one of its most important aspects, but learning how it works can be a daunting task. This article leverages on-chain data to visualize how this mechanism works and how it relates to hash rate, block intervals, transaction fees, and the mempool. After reading this article, you will have a better understanding of why at certain times using Bitcoin may appear to be relatively slow and expensive, but also how Bitcoin fixes this and why this process is so essential to ensure Bitcoin’s monetary properties.
Bitcoin’s Supply Issuance Schedule
If you have heard of Bitcoin, you have probably heard that its supply is hard capped at 21 million units (BTC), making it a perfectly scarce asset and thus the ultimate “hard money.”
When Bitcoin was created, miners received 50 BTC for each new block as a reward for their work. The software has a built-in rule that after every 210,000 blocks that are mined (approximately every 4 years, if the block interval is 10 minutes), this “block subsidy” is cut in half during an event called “the halving.” During this first “reward era”’ which ended November 28, 2012, 10.5 million BTC were mined — half of its maximum supply. During the second reward era, half of that amount (10.5 million / 2 = 5.25 million) was issued, followed by half of that (5.25 million / 2 = 2.625 million) during the third reward era — and so forth. After 32 halvings, the block subsidy equals the smallest unit in Bitcoin (0.00000001 BTC = 1 sat) and cannot be split after, which means the block subsidy falls away completely after that (believed to be in the year 2140, if block intervals were 10 minutes during its entire existence). The first 14 reward eras of Bitcoin’s issuance schedule are visualized in figure one.