The amount of computing power needed to power the Bitcoin network, also known as the network’s ‘hash rate,’ has reached a new all-time-high on May 3rd, just ten days before the network’s scheduled ‘halving’ of coin rewards for miners–two factors that a number of BTC community members say will drive the price of Bitcoin up.
Why is this? There are a few possibilities.
— glassnode (@glassnode) May 3, 2020
Does the price follow the hash rate?
There are a number of analysts in the cryptocurrency space who believe that Bitcoin’s price will follow its hash rate: that if the hash rate goes up, Bitcoin’s price will eventually follow.
— Max Keiser, tweet poet. (@maxkeiser) August 8, 2018
After all, there are some historical correlations between Bitcoin’s and fluctuations in the amount of hash power on the network–for example, the price dips that BTC experienced near the end of 2018 (and the recovery it experienced during 2019) were preceded by changes in its hash rate.
Indeed, in September 2018–with a hashrate around 56 Exahash per second (EH/s)–the price per BTC was roughly $6,500 per coin. From September to December 2018, the BTC network’s hashrate fell to 31 EH/s; by December of 2018, the price of Bitcoin had fallen between $3,200 and $4,000.
However, there is some debate over whether the relationship between price and hash rate is merely correlation without any causation, and that (as market analyst Alex Kruger once explained), “hash rate follows perceived mining profitability.”
Ready to kick-off your Trading Game with Manchester United?Go to article >>
Price does not follow hash rate.
Price follows supply & demand.
Hash rate follows perceived mining profitability.
— Alex Krüger (@krugermacro) September 24, 2018
The bump in hash rate could signify more miners entering the Bitcoin network
In other words, an increase in hash rate may signify an influx of new miners, or at least, more mining equipment onto the Bitcoin network, presumably because miners believe that they can make a profit.
However, with the halving approaching, this particular hypothesis may have some scratching their heads–after all, the halving will literally cut coin rewards for miners in half. As such, many have predicted that small- and medium-sized miners will be forced to cut their losses and shut down their operations.
Of course, it’s possible that the new hash rate all-time-high could signify one final ‘push’ to make a profit before the halving occurs, at which point, mining rigs may be turned off.
However, others believe that the bump in hash rate could be because of possible anticipation of an increase in price: earlier this year, Jeremy Britton, the chief financial officer at Boston Trading Co., explained to Finance Magnates that the reason for a possible price has to do with possible scarcity: “as with mining any scarce resource (e.g. silver or gold), if mining becomes more difficult or more expensive, the price of the underlying asset will increase,” he said.
“At present, it costs around $3000 just in electricity to mine a single bitcoin (notwithstanding the cost of hardware, and internet access),” Britton explained. “This is why, when BTC ‘crashed’ earlier in 2019, the price did not go below $3000; miners did not wish to sell for a loss.”
Therefore, when the next halving occurs in May, “the price to mine a single bitcoin will increase to a minimum of $6000. Whatever the new ceiling is, the floor will be $6k, as miners will refuse to sell for a loss.”
Of course, the spread of the coronavirus has had a significant impact on the price of Bitcoin–one that could change the relationship between hash rate and price forever (or at least, for the time being.)