In a Proof of Work blockchain, miners participate in validating transactions by solving complex algorithms. Therefore, it makes it necessary to acquire mining equipment that will compute these complex algorithms. The effectiveness of a mining device depends on its hash rates, which shows the speeds at which the device can solve questions.
Asides from purchasing mining instruments, miners will also incur hefty electrical bills since PoW procedures consume a significant amount of energy.
Studies from Galaxy Digital suggest that the annual energy consumption by Bitcoin alone stands at 113.89 TWh, with gold leading on the list with a total consumption of 240.61 TWh.
So what is the correlation between Bitcoin’s prices and BTC hash rates?
Impacts of Hash Rates on BTC Prices
A miner with powerful mining equipment has an immense advantage of solving questions and adding transactions to a block on a blockchain network. Consequently, a higher hash rate signifies that miners have invested in the most modern mining devices to compete in validating transactions.
From an investor’s point of view, monitoring the hash rate levels can explain two aspects simultaneously- one being the network’s overall transaction performance and an approximate estimation of BTC’s price in the future. A dedicated team of analysts on TradingView relies on the hash rate metrics to make specific investment decisions.
Moreover, when the price of Bitcoin increases, the hash rates also increase since miners will accumulate more profits if they are rewarded in bitcoins. The vice versa is also true because miners may withdraw from BTC mining activities if the coin’s value plunges, ultimately giving them lower rewards. Max Keiser, a well-known Bitcoin advocate, also supports the ‘price follows hash’ theory as portrayed in most of his comments.
According to him, the value of BTC may experience an upward trend if the hash rates continue to achieve new all-time highs. On some occasions, a higher hash rate could signify an increased selling momentum by miners who sell off their BTCs to compensate for the expensive mining activities. In this case, miners selling off their holdings create a continuous downward pressure which impacts BTC’s price.
The correlation, however, may not be entirely existent following 2019’s metrics which indicate that the value of bitcoin plunged by 30% even after a 64% increase in hash rates.
BTC Difficulty Level
The mining difficulty may also be another factor that affects the mining hash rates, which will later reflect on BTC’s future value. Difficulty refers to a measure of how challenging it is to compute complex equations on the blockchain.
If the hash rate is lower, computing the hash value might take a long while; at the same time, it becomes easier to calculate if the hash rate is higher. This scenario may create irregularities when attempting to solve and validate blocks on the blockchain. Thus, difficulty ensures that the block verification time constantly remains at 10 minutes by changing the difficulty level after every 2016 block, approximately two weeks.
Additionally, if the network experiences a lower hash rate, the mining difficulty is equally lowered to ensure a slightly shorter block verification period. If the network’s hash rate surges, the difficulty level increases, which subsequently reduces the chances of instantly verifying a block.
Difficulty maintains the price of Bitcoin to some extent, mainly because it adjusts based on the network’s overall hash rate. As such, purchasing BTC during a hash rate surge may encourage a rise in BTC prices.
Global Hash Rates Power Distribution
Going by the Bitcoin mining map designed by the University of Cambridge in 2020, China ranked as the first region with the highest hashing power. The findings covered the period between September 2019 and August 2020. In essence, China produced 65% of the global hashing power, most of it emerging from the Xinjiang region.
Coming in second and third place included America and Russia, who accounted for a hash power of 7.24% and 6.9%, respectively. Malaysia and Iran both showed a total of 4.33% and 3.82%, while the remaining 6% represents the rest of the world. Cheap renewable energy is a significant contributor to China’s considerable mining power as it is a leading producer of renewable energy in the world.
Nonetheless, Bitcoin mining in China is facing backlash from the Beijing government, which initiated a major crackdown on any BTC mining or trading within the country. All the same, China remains the epicentre for Bitcoin mining ventures.
There is a clear link between BTC’s hash rate and bitcoin’s prices, particularly when miners commit to improving their mining equipment. By upgrading and investing in powerful machines, miners boost Bitcoin’s network, signaling a possible price increase in BTC.
A rise in prices also incentivizes miners to take advantage of the rally and reap more profits. The only downside is that the hash rates may bring numerous speculations in the trading market. On the bright side, hash rate metrics can be appropriate when making crucial trading strategies.