In this week’s insights to all things investing in cryptocurrencies we decided to zoom in on Bitcoin (which currently makes up close to 80% of the DCX10), and asked Earle to unpack the hash rate of Bitcoin as a potential indicator to the health of Bitcoin mining. Quick crash course! What is hash rate?
The hash rate is a general measure of the processing power of the Bitcoin network. In traditional gold mining terms, it’s a bit like the number of miners a mine has available to mine gold. The more miners the higher the probability that more gold will be mined.
Now we all know that the price of Bitcoin has been hovering around the $10 000 mark for a few weeks now, and is up roughly 150% YTD, steadily reasserting its dominance over other cryptocurrencies. But when you scratch under the surface, so to speak, and ignore price movement for a moment, an interesting trend seems to be emerging. Since January the hash rate has been increasing to all-time highs.
The estimated number of tera hashes per second (trillions of hashes per second) the Bitcoin network is performing.
Source - blockchain.com
Well, given our analogy to gold miners above does this then mean that there is a higher probability that more Bitcoin will be mined?
No, as it’s important to note that the computing power growth is not the same as the speed at which the blocks are being mined, and therefore the number of transactions it can process. In fact, Bitcoin is designed to mine a block roughly every 10 minutes, and if that speeds up the difficulty of the puzzle is adjusted.
Back to our gold mining analogy. As more miners mine surface gold and recover the easy pickings, there is less surface gold to mine, forcing miners to mine deeper. The result? Whilst there are more miners mining for gold the recovery of the gold is now more difficult, and therefore the outcome is that the miners are not in fact recovering more gold. The resultant effect is that more labour is being applied to recover deeper lying gold. Therefore the unit cost of mining gold has gone up, and economics teaches us that this should have a resultant price effect on the price of gold.
So then is the increase in the hash rate a positive indicator for the bitcoin price?
Here again we need to return to our gold mining analogy. Unfortunately, understanding the price of gold is not as simple as determining the unit cost of mining gold! There are tons of other factors to consider...
However we can conclude that sentiment seems very positive. There are more miners applying more resources to mining bitcoin, with industry insiders, if you like, taking the view that the future of Bitcoin is looking better… Time will tell if it’s a gold rush or a fake find 😉. One thing's for sure is it's worth keeping an eye on.