Bitcoin’s network took an abrupt turn this month as a prior rally for bitcoin’s hashrate took a swift dive down 40%.
Data from Blockchain.com shows bitcoin’s hashrate flash crashing from a previous high of around 100 exahashes per second (EH/s), to a relatively lackluster 68 EH/s, in the space of 24 hours. Oscillating fluctuations of this nature are relatively common in bitcoin’s hashrate – as depicted by the chart above. However, this crash marks one of the most significant pullbacks in hashing power in over two years.
The drop is even more astounding given that hashrate has been on a massive roll this year. In fact, according to the data, since December 2018, bitcoin’s network has been on a solid run – despite the usual fluctuations – and even hit a milestone high of 100 EH/s just last week.
Why Did The Hashrate Flash Crash?
As for any explanation, there is no overtly apparent reason. One could surmise that this is an exodus of miners, leaving due to a lull in bitcoin’s price. Miner profitability depends on several criteria; the equipment used; the cost of the miner’s electricity bills; BTC price; and the mining difficulty. If any or all any of these factors stray from equilibrium, the miners may decide to shut up shop, resulting in a drop in hashrate. Indeed, this means if a big mining firm theoretically drops out, we could see a crash much like today.
The importance of hashrate cannot be undermined; it not only denotes the growing strength and security of the network but popularity too. Essentially, hashrate measures the amount of computational power within bitcoin, the higher the hashing power, the more miners are contributing to the network; the more miners there are, the more secure the network becomes. However, as hashrate increases, BTC becomes harder to mine, due to difficulty adjusting accordingly.
What Does This Mean For Price?
Interestingly, some believe there is more behind the growth of hashing power than merely bolstering the underlying network. Bitcoin bull, Max Keiser has been a massive proponent of the theory that hashrate relates to price action. Following bitcoin’s milestone of 85 EH/s in August, Kieser tweeted, “Price follows hashrate, and hashrate chart continues its 9 yr bull market. #Bitcoin.”
This caused quite a stir within the community, giving rise to much discussion. The argument goes, that as network health increases, so does sentiment and confidence in bitcoin, thus leading to further investment.
Supposedly supporting this hypothesis is proprietary data supplied to CCN via fintech analytics company, Digital Assets Data.
According to the firm, a rolling 12-month correlation between the monthly percent changes in bitcoin price and bitcoin hashrate has escalated the past year and a half from an inverse relationship back in 2018, to a stronger, positive correlation. This change in behavior could be due to bitcoin’s price reprisal this year, alongside an increase in mining activity and hashrate.
Correlation or Coincidence?
However, as noted the relationship between hashrate and BTC price isn’t exactly highly correlated; to the point where an inverse correlation was depicted back in the crypto winter of 2018.
Speaking to CCN on this contentious point, Ryan Alfred, President of Digital Assets Data, explained that a more solid association might be forming:
While it is indeed possible that the correlation is circumstantial, we feel that the hashrate responsiveness to the pullback in BTC/USD towards the end of 2018 along with the corresponding recovery of both throughout this year may be signaling a more persistent relationship.
Although Alfred believes a corrective relation is building between price and hashrate, he caveats that more exploration is needed:
Drawing inference from the amount of data analyzed can be challenging and continued observation will be necessary for a further understanding of the true connection between hashrate and price. That said, given the more recent divergence in hashrate(all-time high) and BTC price, if the relationship does hold it is fair to expect that we may experience some mean reversion (either hashrate growth steadies/declines along with BTC price or BTC price resumes its climb alongside hashrate).
However, if further proof is what we’re waiting for, this latest dive in hashrate following bitcoin’s price lull could well provide.