The most fun Bitcoin chart to watch is not the price but the hashrate. For starters, nobody ever pollutes the conversation with technical analysis about the hashrate. “zOMG, this is a descending Schrödinger wedge formation, entry signal when the 30MA trapezoid breaches resistance!”
Even better though, it’s comfort food because the trend is even more “up only” than price.
At the moment, the drop in mining hashrate is looking to be the most notable dip in mining power since three years ago, and both of these are relatively minor blips. It’s debatable, but hashrate and price are probably somewhat correlated. You can be the judge, here’s the price graph on the same scale:
Or as one graph…
Squint and it sort of looks like the two big plummets in hashrate almost coincide with the major price drops. But squinting and reading charts is like technical analysis 101, can we do better?
Here’s our basic analysis, feel free to replicate. To replicate, simply download a csv of the hash rate and price data from blockchain.com into the same folder as this notebook and run it yourself. I’m using the past 3 years worth of data.
Off the bat is there an obvious trend between daily change in hashrate and price? Not necessarily. We only see about a 10% correlation.
But say we want to smooth out the noise. Daily hashrate and price can fluctuate wildly, but we mostly care about the long-term trend, right? The only important effect of short-term fluctuations is whether I should expect bull or bear memes when I log into social media. Don’t we really just care if a sustained drop in hashrate also causes a sustained drop in price?
Let’s first take the 30 day moving average of hash rate and compare against 30 moving average of price. In other words, price goes from this noisy graph
To this…
All of a sudden, we see a bit more of a trend.
While the first scatterplot was just 9.6% correlated, the newest one is up to a 34.8% correlation. It’s by no means perfect, but while the upside trend is more scattershot, the downside trend is fairly clear. Whenever hashrate is in a sustained plummet, price often tends to fall with it — at least over the past three years.
Supply and Demand 101
When plebs ask me why the price of Bitcoin is (usually) soaring or (occasionally) dumping, I usually break it down into supply and demand. Supply is pretty easy, a fixed cap of 21MM. Some people go into coins on exchanges, coins locked in cold storage, potential governance changes, but it’s overcomplicating things. Easy enough to just say supply is fixed.
Demand is more complex, but what’s an easy way to gauge demand? I tend to engage in some Socratic dialogue. To start, I ask if they believe Bitcoin miners behave in an economically rational manner. The answer pretty much has to be yes. Most miners are quite profitable. If they answer “no”, then how do irrational actors so consistently generate profits?
Then I probe some corollaries. Will a miner mine a Bitcoin if they expect the market demand will cover energy costs? Will a miner stop mining if they do not expect market demand will cover energy costs? Must miners forecast market demand to make this calculation? Since we said miners are rational, should we trust their forecast? Etc.
Since hashrate is essentially the raw weight of mining power thrown at Bitcoin, I argue hashrate is a fair proxy for “demand” in the Bitcoin universe. Whether its miners themselves demanding the coin, or miners gauging market demand for the coin is irrelevant, it suffices to approximate demand for Bitcoin at any moment. The amount of raw energy being burnt has a real world cost, so miner behavior roughly tracks just how badly the network wants the next coin. It’s of course more complicated, difficulty adjustments, regulation, blah blah blah… but can anybody else propose a better and more easily explainable gauge for demand?
If you accept supply is fixed, and demand (indicated by hashrate) generally goes up, it explains why prices usually go up. Or in our current case, if hashrate is slashed, prices drop and drag all of crypto with it.. It’s Economic Physics 101.
For what it’s worth, I’ve been following Bitcoin for seven years now. I’ve used hashrate as a rough proxy for demand throughout this time, and it’s held up reasonably well as a rule of thumb. Maybe it’s just a placebo, but it still helps me get a solid 6 hours of sleep each night.
愚蠢的想法
Now China’s actually shutting down a bunch of Bitcoin miners, and it’s causing a measurable effect on hashrates.
It’s a questionable decision, and I tend to agree with the take that it more than likely harms their country in the long run.
Who knows why they did it, but historically China has shown itself to be shockingly gullible. They often tend to fall victim to the trendy panic that later proves to have been overblown.
When Paul Ehrlich published his neo-Malthusian “The Population Bomb” in 1968, the conventional wisdom was that Earth was doomed due to exploding birthrates. The catastrophe never materialized, and most people nowadays don’t give his ideas much credence. Still, China fell for it hard. They implemented their draconian one-child policy. In hindsight, most people seem to agree it was a bit of a flub. Maybe it even provided a strategic benefit to the west, perhaps staving off the Chinese flippening for at least a couple of years?
Is China again falling victim to the latest misinformation campaign? Or are they doing it strategically, perhaps to prop up demand for a stableyuan? I have absolutely no insight into the internal decision making process of the CCP.
I am in the camp that believes this is a strategic blunder for China. However, in fairness, I’ll point out China is obviously quite shrewd… you don’t become the planet’s economic powerhouse by accident. Clearly some of their strategy has played out quite well, even if the strategy may appear confusing at times.
Yet I can’t even begin to fathom the strategic benefit of ceding majority control of a rapidly growing global currency. Can any tacticians explain the multi-dimensional chess gambit here if there is one? If not, then I’m delighted. It’s objectively good when any entity that is “not me” suffers harm and I subsequently benefit as a result.
Lest you accuse me of snorting too much hopium, this move is indeed bad for Bitcoin. Traditionally I saw some major utility in Bitcoin serving as a convenient channel between closed economies and highly manipulated currencies. It’s less interesting if it merely enables value transfer among countries where such transfer is just as easily facilitated by the dollar. While some degree of BTC participation will surely continue in China at a smaller scale, this cuts off a large amount of wealth from the network.
In the long term, though, I can’t particularly say I’m all that worried. The BTC network is still absurdly powerful. It’s absorbing the shutoff of maybe the majority of its miners, without any particular negative consequences. If adoption continues, China will have to limp in later as a minority power.
Plus, as Popeye points out, it opens the mining game to the rest of the world.
Historically Bitcoin hashrate has always gone up with only brief dips. It would take a prolonged drop in hashrate to make me anything but a raging bull. Whenever this current miner shutdown ends, the competition for Bitcoin will surely remain intense and hashrate will continue to grow, because greed is right up there with lust in terms of most powerful catalysts within behavioral physics.
For my sake, I’m going to keep increasing my exposure even though I expect a drawdown in the short-term.
My vehicle of choice (NFA) is the new Curve Tricrypto pool. It’s an easy way to toss in spare dollars today and hedge access to both Ethereum and Bitcoin. Plus those juicy Curve rewards. USD, BTC, ETH, CRV — the four coins I’m most bullish on.
To the moon!
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