Ecoinometrics - Hash rate

July 05, 2021

China kicked Bitcoin miners out of the country. The hash rate dropped. Miners sold their coins. Panic ensued. But is it really warranted? 

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Hash rate

You know the story. A lot of Bitcoin miners are in China. Many people have complained about this saying that:

  • Bitcoin mining is too centralized.

  • China is not using green enough energy sources.

Next thing you know, China is cracking down on Bitcoin and miners are forced out of the country… and this is bad too as people complain that:

  • The hash rate of the network is dropping by a lot.

  • China is a big market effectively banning Bitcoin (once more) so that means BTC is dead (once more).

  • Chinese miners are gonna liquidate all their coins which is going to crash BTC even more.

So yea, you can always find people to complain about something…

Things aren’t all bad though. But let’s back off a minute.

China is getting rid of miners. Those miners have spent the past few weeks unplugging their mining rigs to move them out of the country. 

That has resulted in a drop of the hash rate and created some slowdown in the network.

A slower network is not great. But it turns out the Bitcoin network is built to adapt. 

Less miners? No problem. The difficulty adjustment mechanism kicked in with the largest downward adjustment ever. Mining is now easier and that means the network is back to working at its normal pace of roughly one block every 10 minutes.

Remains the problem of the hash rate. 

The larger the hash rate, the more expensive it is to conduct a 51% attack on the network. Which means hash rate is security. 

As Bitcoin is getting more valuable, it makes sense that the hash rate is also increasing. By and large this is what we observe.

So when the hash rate drops you might start being worried that the blockchain is becoming less secure.

Right now the hash rate fell back down to levels last seen in 2020. That means in absolute terms this massive correction isn’t dramatic. Bitcoin was by far the most secure blockchain back then and it still is now.

At the same time, when the hash rate was at this level in 2020, the market cap of Bitcoin was half what it is now. Thus in relative terms this move isn’t great. 

As an aside, it is an interesting question to ask how large should the hash rate be as a function of Bitcoin’s market cap and some security goals. We’ll have to look into that one of these days.

That being said, I think the net result of this whole thing will be positive.

First, in the short term the difficulty adjustment means the remaining miners are going to be more profitable. If you own any share of the publicly traded miners that’s good for you.

Second, this whole thing is a temporary situation. Miners are going to relocate and in time the hash rate will recover.

You also have the fact that miners moving out of China will remove some of the criticisms associated with the concentration of mining in a single country.

The question of “green mining” will probably remain problematic. This is after all the main attack vector for the anti-Bitcoin crowd these days. You can’t expect they will drop that so easily.

Finally, after miners are done relocating, they should stop putting a downward pressure on the price. Right now they are probably forced to sell to finance the migration, but again this is temporary.

So if BTC can stay above $30k until this reorganization of mining is done we should be in pretty good shape.

Let’s see how long it takes to get back to normal.


Time for our monthly review of Bitcoin vs Ethereum. 

Nothing has changed.

See you next month…

No? Ok, let me elaborate a little bit then.

Obviously both assets are still in the middle of a prolonged drawdown. Nothing much has changed since last month. But if this correction is teaching us anything, it is that Ethereum is not decoupled from Bitcoin.

Just check out the one month correlation between ETH and BTC (below). Focus on the last “V-shaped” move:

  • BTC topped around $64k while ETH was still rising. At that time the correlation between those two was decreasing but still high (above 50%).

  • Then BTC started its big correction and of course ETH followed. The correlation climbed back to something like 90%...

  • Now that BTC has stopped falling and we just have some sideways trading action the correlation remains very high (above 80%).

See for yourself.

That’s interesting because very little of what caused Bitcoin to dip concerns Ethereum directly:

  • Elon Musk dissing Bitcoin over energy usage. Does not concern Ethereum...

  • China crackdown on Bitcoin miners. Does not concern Ethereum...

Regardless, ETH is falling all the same. Conclusion decoupling hasn’t happened.

What could happen in the short term then? Nobody knows of course but we can compare this cycle to the previous one to see if we notice anything interesting.

So where are we at?

420 days after the Bitcoin halving it is good to remember that both BTC and ETH have outperformed the growth trajectories of the previous cycle for a while. At times they did so significantly.

Now, after the big correction, both of them have fallen below the trajectory of the 2017 bull market.

See for yourself.

So what does that mean? Well that means it is too early to make any conclusion on where we are going this cycle.

Clearly we don’t have strictly diminishing returns since for more than a year this cycle outperformed the previous one.

At the same time, this cycle’s peak is, so far, much below 2017 for both BTC and ETH. Thus we cannot rule out that we’ll see diminishing returns in terms of where this cycle tops.

My bet is that we haven’t seen the end of this bull market. After all there is a little less than 3 years left for this cycle to play out so anything is possible.

That is when it comes to absolute growth. 

But what about relative growth between ETH and BTC? Let’s see.

ETH has a much smaller market cap than Bitcoin, that’s one reason why you can bet it will grow faster. 

There is also the psychological effect that 1 ETH is “cheaper” than 1 BTC. So people who think in those terms might decide to put some money on the former rather than on the latter. 

Finally there is a good potential for some hype surrounding Ethereum’s switch to proof of stake (whenever that happens). That’s also another reason why you could see more money flow towards ETH instead of BTC.

So there are many reasons to think that over the short term ETH/BTC might continue to rise and maybe even match the peak ratio of the previous cycle. If you feel like trading that might be a good bet. 

But unless ETH can decouple from BTC, gravity is likely to snap back the ETH/BTC pair towards the mean in the next bear market.

So the only real question is: are we heading towards a decoupling?

I’ve seen the argument here and there that the total addressable market of Ethereum applications should be larger than that of Bitcoin. Thus it’s market cap should be larger too.

And in theory that sounds like an ok argument. But in practice there are many unknowns. 

From a technical perspective it isn’t clear that Ethereum can deliver smoothly on all its promises. As someone with a software engineering background, looking at the Ethereum roadmap gives me cold sweat.

If they continue in that direction, who knows when they will have something stable enough that people are ready to stake big money on it.

Meanwhile Bitcoin is pretty stable as it is so you could see layer 2 do DeFi at scale before Ethereum is ready.

Honestly I don’t have any prediction one way or another. Just trying to imagine the range of possibilities.

In my opinion Bitcoin still feels like the safer bet but that doesn’t mean there is no money to be made on Ethereum.

So let’s see how that plays out.

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