Bitcoin difficulty is pretty much what is says on the tin. The higher the difficulty the harder it is to find a hash.
It is a common myth that Bitcoin difficulty rises as more blocks are found. This isn’t true. The difficulty increases if the rate that new blocks are found exceeds certain limits. If new blocks are found at a rate slower than these limits then the difficulty will go down.
Here’s a great video with a really simple explanation:
OK so we know that bitcoin difficulty will change every 2016 blocks. So how is that actual figure calculated? If you want to see the actual maths then the bitcoin wiki has a pretty good explanation.
The desired rate to find 1 block is 10 minutes. This is how the optimum time of 2 weeks to find 2016 blocks is reached. So if this were the case then the difficulty would be set at 1. The current difficulty is something like 4,250 million. Here’s a chart showing how the difficulty has progressed over time.
So what does it all mean? Well we know that if you were mining at the start of the bitcoin process then you would have collected a large amount of coins and it is possibly a weakness of the system that hashing power pretty much rules in the profitability stakes. There are proposals to improve Bitcoin – many of which have been accepted or in draft mode.
Bitcoins have a finite limit and there will only ever be 21 million in circulation. As of writing this article just over 12 million had been found, so we’re just over half way. It will be fascinating to see how the price reacts to scarcity and if alt-coins (such as Litecoin) will follow the same trend.