Bitcoin Hashrate Still Growing Despite The Lower Price - Is This A Bullish Sign?

Bitcoin mining becomes less profitable when the price goes down, but despite the bear market the hash rate behind bitcoin is skyrocketing. Nine exahash, more than two times the total BCH hash rate was added to BTC in the last month while the hash rate on BCH remained steady. Many see this as a bullish sign and think that it will push the price up. It this assumption true?

https://bitinfocharts.com/comparison/hashrate-btc-bch.html#6m

How does mining work

Mining is the solution for a payment network to process transactions in a secure way without the need to trust anyone. Miners compete for the chance to process the next block by sacrificing real world resources like electricity and hardware and will be rewarded when they win and create a block. This creates the incentive to play by the rules since cheating will lead to loss of invested funds while not being rewarded.

This mechanism is called Proof of Work (PoW) and enables the network to be truly peer to peer, extremely secure and decentralised and thus without a single point of failure. This is one of the most important pillars that makes Bitcoin successful and when you don’t fully understand it you MUST educate yourself on this subject if you want to be successful in the crypto world. Here my article focussed on PoW:

https://steemit.com/bitcoin/@michiel/proof-of-work-pow-a-critical-pillar-for-the-strength-of-bitcoin

Miners solve certain math problems by allocating computing power to the network and the miner who solves it first can create the next block and is rewarded with 12.5 BTC + network fees (at the time of writing). A block takes around ten minutes to be found. When the BTC price goes up more miners will join the network because it becomes more profitable and blocks will be found faster.

This is where the difficulty adjustment comes in: Every 2016 blocks the math problem becomes more or less difficult to solve so that the moderate time that a block is found remains ten minutes. The result is that the addition of hash power will not increase the supply of bitcoins, but only increase the security level of the network.

Does hash rate follow price or price follow hash rate?

In the scaling debate and the discussion before the (cancelled) Segwit 2x hardfork there were different opinions whether the price follows hash rate or vice versa. Around 95% of the miners were signalling for S2X and their supporters claimed that the price of S2X would skyrocket after the fork because they had much more hash power behind and that the legacy chain should tank.

The other camp was claiming the opposite: Since the future market revealed that the users valued the legacy chain much higher (85/15), miners would shift to the most profitable coin and in no time most of the hash rate would be back on the legacy chain because miners will eventually always choose for the most profitable option even if it is against their political stand.

Directly after the cancelation of the S2X hardfork we got the answer when the flippening attack of BCH on BTC happened. BCH managed to take 70% of the total hash rate by using the cancellation of S2X, market manipulation and the flawed EDA. In this event the hash rate was almost instantly following the profitability (would be the price in a normal situations without EDA). Added hash rate does increase the value of the network and eventually the price will follow, but hash rate follows price instantly and price follows hash rate delayed.

The BCH flippening attack on BTC has proven that hash rate follows price, this means that miners are mainly driven by greed and politics are of lower priority. The game theory works!

Why is more hash power added despite the lower price?

In theory the hash power should go up when the price goes up and should go down when the price goes down. Obviously this is not the case for the last 6 months, it is rising faster than ever. Since it is not possible to see who exactly the miners are (only what pool they use), we can only speculate about the reasons and it could be bullish, bearish and neutral as well.

Delayed hardware delivery (Neutral)

When you order a miner today you won’t receive it tomorrow. Mining hardware was very scarce during the bull run and delivery times were long and when they are finally delivered they have to be installed too. The miners added today could be ordered in the bull run when it was extremely profitable, but just now delivered and added to the network hoping to be (come) profitable through future price increase.

I think this is the most likely reason whether or not in combination with other factors described below. When the rise is caused by delayed delivery it will not really be bullish for the price. The only bullish fact is that miners will probably sell less on the market because they expect to get more for it later and because the network is more secure and thus more valuable. However, I expect these effects to be small and maybe not even relevant.

Use of more durable energy sources

When mining becomes less profitable it will be more important to be efficient. Since electricity is the biggest cost in the process miners will start to search for cheaper sources. It is possible that the lower Bitcoin price drove miners to renewable sources and places with a surplus of electricity. By lowering the cost of mining more hash power can be created with a lower Bitcoin price. Also replacing old with more efficient and newer miners can contribute to the rise in hash rate.

Miners know something (Bullish)

Some people are speculating that miners know something that the market doesn’t know yet (e.g they could have heard that the China ban will be lifted) and are already anticipating on a future price rise because when a new bull market is coming soon this is the best time to start mining since it is now easy to get cheap miners. If this is true it could signal that a new bull run is coming soon, but I think it is not so likely that this is the reason.

Monopoly Bitmain broken (Bullish)

Bitmain was in a monopoly position as mining hardware manufacturer and as miner as well. It is possible that they were limiting their production / supply of miners to enable themselves to mine an as big as possible part of the available supply of bitcoins while the competitors were not able to buy miners for a proper price.

Since competition is coming out now and among them the Japanese internet giant GMO with more efficient miners and deep pockets, it would be dumb for Bitmain to keep restricting the supply of miners since competitors will fill the gap and Bitmain will lose market share. It is very possible that this created a higher supply of miners while the demand is still not filled.

I think it is quite likely that this is (partly) the reason that the hash rate is growing because competition will increase the supply while lowering the price and it is a fact that the supply was tight during the uptrend. The bullish effect will not influence the price in the short term, but in the long term it is extremely good for Bitcoin that behaviour of miners is influenced by upcoming competition.

Big coordinated attack (Bearish)

When a powerful attacker like a government or a group of bankers want to attack Bitcoin this is the best time. Miners are easily available now and when you are willing to mine at al loss this is the time to drive out the current miners and displace them by a group of controlled miners. By mining at a loss you will drive up the difficulty and with a low price it will become unprofitable for more and more miners and some will take their hardware offline and sell it (to the attacker).

When the group of controlled miners is big enough they can attack the network by jumping off (or to BCH) just after the difficulty adjustment and hugely extend the block time and thus make the network slow and mining less profitable for a while. They can also attack Bitcoin by organising a huge 51% attack and let the mainstream media write that Bitcoin is hacked. However, it is not so likely to happen because it will only damage and not destroy Bitcoin while the costs are enormously. The existence of BCH makes it more likely because the expensive hardware will not be useless after this attack, it can used to mine Bitcoin Cash.

So actually BCH is a HUGE attack vector for Bitcoin

Conclusion:
It is hard to say what the reason behind the skyrocketing hash rate is and when there is no malicious player behind it it is in general bullish. However, when it is just because of delayed delivery of hardware the bullishness could be heavily overdone since the influence will be minimal. Anyway, the hash rate is a measure of security of the network and still growing!

Disclaimer
This is no financial advice, just my view on the market.

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