Bitcoin Mining Indicators Point to Potential Market Turnaround
Proof-of-work (PoW) is a fundamental component of Bitcoin that is critical to its long-term sustainability and capacity to create unforgeable costliness. The mining market subsequently functions as a marked indicator of the overall health and security of the network while also proving a useful metric from which to gauge Bitcoin’s spot price momentum.
Besides the positive network metrics, news has been consistently developing about mining firms investing more money into hardware as they ramp-up for lower electricity prices in China. An estimated 600k miners shut down their rigs towards the end of 2018, leading to a sharp decline in Bitcoin’s hash rate.
However, it appears that miners are once again turning on their rigs, coinciding with developments of several major mining firms investing millions into new hardware equipment in the run-up to summer.
Mining Metrics Indicate a Healthy Bitcoin Network
Over the long-term, Bitcoin’s hash rate has grown exponentially. The hash rate is the amount of computing power that is dedicated to mining on the network and is currently mirroring levels from August 2018 following the late 2018 decline. A stronger hash rate means the network is more secure as it requires more computing power (i.e., hardware and electricity costs) to attempt a 51 percent attack.
Bitcoin’s hash rate hit a 6-month low in December 2018 but has since consolidated, leveled out, and begun steadily increasing over the beginning months of 2019. Compound this with the fact that Bitcoin’s difficulty adjustment ticked up for the first time since early February, which indicates more miners on the chain, and it is becoming clear that the mining market is reflecting positive sentiment as spring starts.
Similarly, Yassine Elmandjra, a cryptoanalyst at ARKinvest, noted on Twitter that Bitcoin’s hash rate growth has outpaced mining hardware performance — an excellent indicator of miners competing over energy rather than ASIC rigs. Such a dynamic also can reduce centralization of mining powers, further decentralizing the Bitcoin miner ecosystem.
The sharp rebound in Bitcoin’s hash rate and mining market is indicative of miners still viewing significant value opportunity in mining on the legacy cryptocurrency. They are taking advantage of better profit margins when electricity costs are down, and the difficulty is lower from numerous miners previously shutting down.
Mining Firms Raising Capital and Gearing Up
Robust network metrics are not the only indicators of a potential price momentum reversal for Bitcoin. Canaan, the creator of the Avalon Bitcoin miner, is reportedly seeking to launch an IPO with the Shanghai Stock Exchange — the 4th largest of its kind in the world.
The news follows rumors that Canaan has even spoken with Nasdaq and the NYSE about its potential IPO. Canaan also reportedly raised ‘hundreds of millions’ of dollars in a private investment round only a few weeks ago.
Interestingly, Ebang, another mining firm, is exploring an IPO even despite ‘significant drops’ in profit during the end of 2018.
Bitmain, Canaan’s larger competitor, recently had their IPO filing with the Hong Kong Stock Exchange expire, but they are deploying 200k new mining units into Southwestern China for the summer. The influx of their leading Bitcoin miners could push the hash rate up a reported 7.9 percent, a sizeable increase.
Bitmain and other mining firms learned harsh lessons from the bear market — particularly Bitmain in overestimating hardware demand. As such, these developments should be taken with a positive spin as the companies likely are taking a much more prudent approach to the market this time around.
All of this news coincides with Bitcoin continually testing and re-testing the $4,000 price point, where it currently resides. Although Bitcoin’s mining market and spot price are strongly correlated over the long-run, there is a noticeable delay between one’s influence on the other.
Some critics attribute the delay to the well-known off-by-one bug in Bitcoin’s difficulty adjustment algorithm, which causes the adjustment at every 2015 blocks instead of the accurate 2016. As a result, the difficulty adjustment responds to hash rate changes with a delay, causing price movements to be amplified in the direction of powerful hash rate alterations.
Bitcoin’s hash rate steadily increased throughout 2018 despite the spot price moving in the opposite direction for an extended bear market. Once mining margins became razor-thin or independent miners were operating at losses, many shut down their rigs, leading to the precipitous drop in the hash rate at the end of 2018.
The opposite effect may be occurring now, potentially reversing the current bear trend into positive upward momentum. As more miners join the chain to take advantage of less competition and better margins, Bitcoin’s market price is likely to follow suit, fueling more miners to take advantage of the higher price of Bitcoin by entering the market in a positive feedback loop.
Mining revenue has also leveled off following a one-year low at the end of 2018.
Bitcoin’s next halving event is only slightly more than a year away, which has historically been preceded by bull runs in the spot price. The halving event occurs approximately every 4 years and reduces the number of Bitcoin issued per block to miners in the Coinbase transaction by 50 percent. The next halving will reduce the block reward from 12.5 BTC to 6.25 BTC.
Bitcoin investors are primed for a long-awaited turnaround in the legacy cryptocurrency’s price, and evidence points to a healthy network and positive momentum going into the spring and summer.