Bitcoin Difficulty Retargeting And Transaction Fees

Bitcoin transaction fee prices are going up due to a sudden dearth of mining power. Seeing this, some people in the space are becoming jittery.

But are these people justified? Are these high transaction fees and the sudden dearth of BTC mining power – in China – becoming a warning sign of trouble ahead?

High Transaction Fees? BTC Does Not Care!

Before we analyze the sudden dearth of Bitcoin mining power, how that affects transaction fees, and if this should be worrying, we must establish the following:

  • Bitcoin is designed to adjust, so fees are not likely to remain high
  • Sudden mining power dearth can create deeper problems, but not if BTC prices are relatively high
  • When people freak out, BTC does not care; it continues working as advertised
5-day transaction fee chart. Take a look at how much the cost of using the Bitcoin network has gone up over the last 2 days! Courtesy: Ycharts

Know how the Bitcoin Difficulty Retargeting Mechanism Works!

There is one mechanism in particular that you should be aware about when mining power declines and fees go up. That mechanism is Bitcoin difficulty retargeting:

  • There should be a new block every 10 minutes on the Bitcoin blockchain
  • Sudden changes in mining power can upset this target
  • Nevertheless, due to the block subsidy/reward, it is important to give the network a degree of stability
  • That is why the Bitcoin difficulty retargeting mechanism exists, to keep difficulty constant for 2016 blocks
Bitcoin Difficulty Retargeting
Bitcoin difficulty retargeting is only 4 days away! Courtesy: Clark Moody Bitcoin

The difficulty retargeting mechanism works well to prevent a sudden surge in mining power. This mechanism does not work as well when the opposite happens.

Why are Transaction Fees Going Up?

If there is a sudden dearth of mining power, the network will keep difficulty constant, sacrificing the block intervals. That is due to the fact that the retargeting kicks in relatively fast.

Nevertheless, until that mechanism kicks in, new blocks come out at a slower rate. The implications of this are obvious:

  • Blocks have limited capacity to record transactions
  • If there are less blocks per hour coming out, there will be less transactions being recorded per hour
  • Unless the amount of transactions drops, miners will charge more because there is less space for transactions
So far, Bitcoin difficulty retargeting has not affected price. Chart courtesy of Coinmarketcap

Once Bitcoin difficulty retargeting takes place, transaction fees should gradually come down. That process may also take some time due to the backlog of transactions within the mempool.

High Fees + Decreased Mining Power = Disaster?

Now, how does this affect you? Will this have an effect on BTC prices – like certain people are saying – or will this just pass?

Bitcoin, like chess, is a game of patience and rational moves. Think before you react to the market!

We believe that this will just pass. It is not the start of an unmitigated disaster that will single-handedly bring the price of Bitcoin down. That assessment makes no sense if you look at it rationally:

  • BTC is in a bull market
  • Miners are getting more fiat for the block subsidies/rewards they get
  • People who have older mining equipment might see this as an incentive to join the network, pushing mining power back up
  • Miners in China will inevitably recover and begin mining again
  • After the Bitcoin difficulty retargeting in 3 or 4 days, the network will move closer to a block every 10 minutes again, regardless

What Should you do While Transaction Fees Remain High?

The main take away here is that you should not react emotionally to a temporary change in the network. Weigh your options. Take a look at everything you can do to either prioritize your Bitcoin transactions or lower your transaction costs through the mechanisms the network offers.

Be as mindful as you can about every variable that affects Bitcoin! Not everything hinges on fees!

Most importantly, understand what your financial situation is. If you must get fiat now – high time preference – then you will act in a certain way. If you can afford to wait – low time preference – then you will probably sit it out.

In the long-term, this might not affect Bitcoin prices at all, because there are many other variables affecting those. Take a closer look at the market and keep on doing your research to come up with the right strategy for you. Whatever you chose to do, remember, Bitcoin will keep on working as advertised!