Bitcoin’s hashrate has increased to some 80 quintillion hashes per second or exahashes (EH/s), up significantly from 64.49 EH/s on July 23, 2019.
The recent threshold was crossed as Bitcoin’s mining difficulty was adjusted at block height 586,672 on August 5, 2019 by 6.94EH/s, an increase of about 10.8%.
That upwards increase has been continuing since December (pictured above) in a somewhat straight vertical direction.
Bitcoin’s price on the other hand was very horizontal until April, so did hash predict price?
Correlation obviously does not mean causation, but if there is any relationship it could be explained by Metcalfe’s Law which states that the value of a network is proportional to the square of the number of its users.
This law applies to bitcoin according to studies, with hash potentially being an imperfect proxy of measurement for the number of users.
Imperfect because one user can obviously buy many asics, but if hash was in this case a leading indicator, then it may well be that people started betting bitcoin’s price will go up either by buying asics or by turning them on.
As bitcoin is an open network with its data immediately available (pending the two weeks difficulty adjustment), then this increase in hash can potentially be reflected on charts earlier than price.
That’s because there’s quite a bit that goes into the setting of price as Over the Counter (OTC) demand and supply gradually starts being reflected on open exchanges.
Meaning demand could rise without it being reflected on charts for weeks. While with hash it’s all mathematical code based like: if more demand (asics) then increase difficulty.
Some however take the view that the opposite is the case. That hash is a lagging indicator and follows price.
Does Hashrate Follow Price?
Bitcoin’s record setting hashrate and overall interest in BTC mining appears to coincide with the significant increase in the cryptocurrency’s value with its price surging by as much as 265% since January.
In June 2019, crypto Bull Max Keiser argued that the Bitcoin price follows the hashrate.
In response to Keiser’s assertion, Jameson Lopp, chief technical officer at crypto custody solutions provider Casa, questioned whether the Wall Street veteran arrived at his conclusion based on the Labor Theory of Value (LTV).
According to its standard definition, LTV theory argues that “the economic value of a good or service is determined by the total amount of ‘socially necessary labor’ required to produce it.” Keiser further noted:
A very high hashrate indicates that there is a large amount of computing power being used to secure the Bitcoin network. Miners would only contribute their computing resources to the BTC blockchain if it were feasible to do so, meaning that it should be profitable to mine the cryptocurrency.
If the Bitcoin price is too low, then miners might not be able to cover the costs associated with running an energy-intensive mining operation. However, the Bitcoin price has again surpassed the $10k mark this year, which means that more miners can afford to mine and profit from doing so.
Hash as Demand?
Hash however can also be seen as demand itself. That’s because alongside the normal ways of buying bitcoin, such as on an exchange or peer to peer, one can also acquire it by mining.
It may therefore be the case that for whatever reason, individuals or entities might not quite care much about the price, but just want to mine bitcoin so that they can have bitcoin.
One somewhat easy example may be a country under sanctions. They might not be able to buy bitcoin because they can’t access the banking system, but are very free to mine it.
By doing so they may well be paying a premium, which they might not mind because now they can pay for international goods or services with bitcoin.
That’s obviously demand, but not necessarily reflected on price at least initially. As time goes on, because they are mining for use rather than as an industrial business operation to just sell it, that sell supply might reduce, so thus finally reflecting on price.
Meaning hash could be a leading indicator, and although an imperfect one because of industrial business operations which just follow price, it could still at least in hindsight suggest that real demand has increased or otherwise.