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Of hash rate, difficulty adjustment and the BTC price

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  • The Bitcoin hash rate has recorded one of its biggest declines and because of this, the hottest debate has been how this drop and difficulty adjustments affect the price.
  • One analyst has even devised a chart that can predict the BTC price depending on the hash rate, and according to this chart, the bull market ends in October.

Bitcoin’s hash rate took a nosedive in recent days following widespread crackdowns in China on BTC miners. The Asian country accounted for up to 75 percent of the global Bitcoin hash rate at some point, making the crackdown greatly significant. Since then, analysts have been crunching the numbers to determine how the hash rate drop and the consequent difficulty adjustments have affected the price.

At this point, any crypto enthusiast knows that China has been cracking down on BTC miners. However, the extent to which this crackdown has affected the crypto may not have been as apparent. Last week, it became clear just how bad it has been. As we reported, the flagship crypto noted the biggest difficulty adjustment in its 13-year history.

Read More: Bitcoin mining difficulty records biggest drop in history

Once the mining difficulty was adjusted downwards, it meant that it takes fewer resources to mine Bitcoin. Some like Pennsylvania-based Stronghold Digital Mining have even boasted of taking up just $3,000 to mine one BTC, which today is trading for $34,365.

This environment won’t last forever, of course. According to Alex De Vries, a BTC energy consumption expert and the founder of Digiconomist, this may not even last that long.

I do expect this to be a temporary thing. These miners are now relocating elsewhere and if you’re a miner you want to get those idle machines back online as soon as possible.

How will this affect the Bitcoin price?

So, while it’s easier for the miners, how will you as a BTC holder fair through all this hash rate and mining difficulty adjustments?

One analyst and investment manager believes he has figured out a mathematical formula that shows the relationship between hash rate and BTC price. Cane Island Digital Research’s Timothy Peterson, shared his formula, which he branded the ‘hash rate model’ on Twitter.

“The ratio of Bitcoin price to hash rate is useful for identifying historical bubbles,” he stated.

He added:

Based on the current trend in P(h) [hash rate], this bubble would finish collapsing by 31 October. The ratio includes any combination of a higher hash rate and lower price. So increasing hash rate and stable price also resolves the bubble.

Whether Peterson’s formula works remains to be seen. However, it’s clear that the drop in hash rate is bringing with it a drop in other metrics aside from the price. One of these is active BTC addresses. On July 4th, this number stood at 916,000 according to data by Glassnode. While it’s a slight recovery from the 855,000 recorded on May 27, it’s still way down from the 1.36 million recorded in mid-April.

Charlie Morris, the chief investment officer at ByteTree Asset Management believes this could spell doom. He remarked:

The decline in active user participation is a sign of weak demand. The hype cycle is over for now, and the market is unable to attract new entrants at the same pace.

 


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