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The US now dominates Bitcoin mining – does price follow hash rate or hash rate follow price?

The Bitcoin mining industry has moved from China to the U.S. What are the implications for the network, and does price follow hash or does hash follow price?

Bitcoin’s hashrate has risen aggressively in the second half of 2021 confounding many market observers. The recovery in hashrate has happened in parallel with a major regulatory clampdown on the cryptocurrency industry in China. Once the undisputed global leader in mining power, following a number of threats made by government agencies, Bitcoin’s hash power has been forced out of the country. But despite the sharp plunge in Bitcoin’s hashrate when Chinese miners turned off their machines, the recovery in hashpower has been faster than expected.

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Source: BTC.com

Three months ago in mid-July the hashrate of the Bitcoin network was 121.38 exahashes per second (EH/s). Currently, it is up ~21% and sits at 146.53 E/Hs. Since the hashrate of the network capitulated on June 27th and hit a low of 57.47 E/Hs, it is up ~155%. It remains on an upward trajectory and will soon approach its previous all-time-high hashrate of around 200 E/Hs from mid-April 2021.

The rising hashrate has coincided with an even more aggressive surge in the price of BTC over the last 90 days. The price of the Bitcoin network’s underlying asset has risen by ~90%. From a low of US$32,500 in mid-July, to US$64,000 today, Bitcoin is within striking distance of its all-time-high of ~US$64,800 reached in mid-April this year.

This article assesses the impact of the shutdown in Chinese mining, where the new hashrate is coming from, what the future of the Bitcoin hashrate looks like, and the relationship between price and hashrate.

The Chinese Exit

In May, at a meeting of China’s Financial Stability and Development Committee of the State Council, Liu He, a Deputy Premier, suggested China would soon “crackdown on Bitcoin mining and trading behavior” to “resolutely prevent the transmission of individual risks to society.“ Following his statements, rumors began circulating about a potential exodus of all crypto activity away from China.

There was an immediate impact on the price of BTC, even as industry insiders in China said the concerns were overblown. Popular Chinese blockchain journalist Colin Wu said the Chinese hashrate had seen no obvious fluctuations and suggested miners were just waiting to see the specific policies of the Chinese government. Beijing-based Venture Capitalist Matthew Graham of Sino Global Capital said Western observers had overreacted to what was a couple of lines in a very long speech.

Before the State Council meeting, the provincial authorities of major mining regions Sichuan, Xinjiang and Inner Mongolia had all introduced policies designed to suffocate mining in their regions. Regulators in the individual regions cited environmental concerns and excessive resource usage as reasons for the bans.

The real exodus appears to have begun on September 15th after a campaign was launched by the People’s Bank of China, backed by authorities like the Ministry of Public Security and the Supreme People’s Court, to completely stamp out cryptocurrency activity in China. The campaign explicitly warned foreign companies from offering crypto-based services and products to citizens in China, calling them illegal financial activity.

Since the launch of the campaign, at least 20 major crypto companies have announced they will completely cut off any services to mainland China. Binance and Huobi, two of the largest crypto exchanges in the world by trading volume, also stopped allowing any new users with mainland China-based phone numbers or addresses.

SparkPool, one of the largest Ethereum mining farms, announced that it would be stopping all services. Days after a preceding announcement that it would stop serving all Chinese users. Bitmain, one of the world’s largest producers of cryptocurrency mining machines, announced on Wechat that it would stop shipping its popular Antminer machine to Mainland China (excluding Hong Kong and Taiwan).

NBMiner, a company that develops management software for graphics cards, stated that it will no longer be offering tech support for users in China. Tech giant Alibaba Group Holding, announced that it would be banning the sale of cryptocurrency mining equipment on its global wholesale platform Alibaba.com.

The new Bitcoin Hashrate

A popular indicator for the geographical distribution of Bitcoin electricity is the Cambridge Bitcoin Electricity Consumption Index (CBECI), built by the Cambridge University’s Centre for Alternative Finance. Its mining power maps are based on an exclusive sample of geolocational mining facility data collected in partnership with several Bitcoin mining pools.

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The most recent geographical hashrate data was published by the CBECI on October 13th. It indicates the changing nature of the post-China Bitcoin mining industry. In October 2019, China contributed 75.5% of the Bitcoin network’s hashrate. By April 2021, this number had fallen to 34%. Today, according to the CBECI, China contributes no hashpower to the network and its data reflects the complete exodus of miners away from Mainland China.

Over the last two years, the hashrate in the United States and Kazakhstan have increased significantly. As of August 2021, the hash power contribution of the United States stood at 35.4% and Kazakhstan at 21.9%.

Other significant contributors include Canada (11.5%), Russia (13.6%), and Malaysia (5.5%).

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As well as an East-to-West miner migration, North American mining establishments are increasing their hardware capacities. Riot Blockchain, Marathon, and Argo Blockchain have all announced large investments in Bitmain and MicroBT hardware.

According to an October 5th press release from Riot Blockchain, the company produced 409 BTC, an increase of approximately 346% over its September 2020 production of 91 BTC. Year to date through September 2021, the company produced a total of 2,457 BTC, an increase of approximately 236% from its previous year’s output.

The company says it currently has a deployed fleet of approximately 25,646 miners, with a hash rate capacity of 2.6 EH/s. This equates to ~1.6% of the Bitcoin network hash power.

On October 2nd, following a Twitter Spaces forum, local Kazakhstani mining entrepreneur Didar Bekbau estimated that the country currently contributes 15-20% of the Bitcoin network’s hashrate. He also said that miners in Kazakhstan are not allowed to expand due to national grid electricity shortages. For this reason, he would be pivoting to off-grid natural gas.

In the United States, American-focused mining pools have risen to become some of the largest hash power contributors in the world.

Data from BTC.com estimates that at the start of the year, Foundry USA contributed 0.53% of the Bitcoin network’s hash power. Currently, it contributes 10.98% of the network’s hashrate and is the 4th largest bitcoin pool. 19.9% of Foundry USA’s hash power originates from New York, 18.7% in Kentucky, 17.3% is in Georgia, and 14% comes from Texas.

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Interestingly, the top two mining pools in the world were founded and based in China until the recent government crackdown. These pools remain operational but are based out of unknown locations now. F2Pool was founded in 2013 and originally known as Discus Fish. Antpool is owned by Bitmain, the largest producer of Bitcoin mining hardware in the world. ViaBTC was founded in 2016 and also operates an exchange and offers mining contracts.

On October 2nd the official F2pool Twitter account posted that the mining pool was beginning to set up infrastructure for mining operations in the United States.

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Another historically popular, originally China-based mining pool, BTC.com, was purchased by BIT Mining Limited (BTCM) a global mining company based in Hong Kong. BTCM is a publicly listed company on the New York Stock exchange and it appears that the group will move the BTC.com mining pool to the United States.

An 85MW industrial-scale US$12.14 million cryptocurrency mining data center in Ohio with access to a power capacity of up to 85MW is currently being developed by the group. The first phase of the centre’s launch is set to begin in mid-October 2021. The group has already launched a smaller capacity data centre (20MW) in Kazakhstan already in operation and it has proposed building another 40MW data centre in the country.

Environmental considerations

The most recent data from the Cambridge Centre for Alternative Finance (CCAF) says the Bitcoin network consumes ~115.84 Terawatt hours per year. This is about 0.46% of the world’s total energy consumption. It puts Bitcoin mining between the nations of the Philippines and the Netherlands as a global electricity consumer, however, the reality behind Bitcoin’s energy footprint is nuanced. Pure consumption data does not reflect the carbon footprint of bitcoin and the environmental impact.

There are signs, however, that Bitcoin’s hashrate is moving to cleaner energy sources. There is a growing narrative that Bitcoin miners are driving the consumption of renewable energy. The logic is that they will always pick the cheapest sources of energy available. Renewable energy sources are getting progressively cheaper and in many cases are already cheaper than fossil fuel-based energy. This considered, bitcoin miners should therefore encourage the buildout of renewable energy. Bitcoin mining is therefore beneficial for everyone.

This narrative hasn’t always played out, though. One reason it hasn’t is the low capacity factor of wind and solar energy in comparison to fossil fuel-based energy sources like coal and natural gas. Capacity factor measures the reliability of a power source or how often a plant running on that power source is at maximum power. Miners constantly face surging hashrate and intense competition for blocks, so unreliable up-times are not acceptable and thus coal and natural gas are often preferred as power sources for mining.

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There are other factors to consider when assessing the carbon footprint of the Bitcoin network. Different mining hardware uses power differently. 5-year-old Bitmain S9 hardware remains extremely popular and represents 30% of the network hash rate activity. These machines are cheaper to deploy and will remain so as long as they are economically viable.

Newer ASICs which require heavier upfront investments are likely to need high uptime power sources to remain profitable. Older machines, however, can remain profitable even with more unreliable power sources. As long as these older, still economical bitcoin mining machines can make their way to power plants using intermittent renewable energy sources they can help wind and solar power find relevance as bitcoin energy sources.

In America, there are reports that miners are using waste fuels like coal gob. They are helping to balance the electric grid in Texas by buying excess energy during periods of abundance and are tapping into the flares at oil-and-gas fields. Bitcoin mining is set to becoming a shock absorber for excess energy in a number of states.

Following major energy shortages in Texas during a winter deep freeze last year, 16 gigawatts of new wind and solar projects are set for construction in West Texas over just the next year.

The new renewable energy capabilities are there to ensure the state has enough power to handle extreme events like ice storms and summer heatwaves. Most years, however, they will produce significantly more power than is required. This is where Bitcoin miners come in. They buy up excess energy when it’s not needed and then shut down their mining rigs when demand surges, releasing power back onto the grid.

Bitcoin miners can use on-the-grid energy when it suits their needs and they are in an ideal position to purchase abundant energy when it becomes available.

The Future Hashrate

The USA, Kazakhstan, Russia, and Canada already appear established as new mining superpowers. Other countries looking to establish themselves as mining powerhouses include El Salvador and Iran.

Three months ago, the former president of Iran, Hasan Rouhani, put a ban on cryptocurrency mining due to the power outage issues the industry caused. On October 4th, the country lifted the ban and allowed miners to redeploy. Before the ban in March 2021, the CBECI estimated that Iran contributed ~7.5% of the Bitcoin network’s hashrate.

Iran has some of the cheapest electricity in the world thanks to the abundance of fossil fuels in the country like natural gas and crude oil. Market observers have suggested that BTC can be a haven of profits for a country that endures numerous trade sanctions from the United States. In May, blockchain data firm Elliptic estimated that Iran would earn US$1 billion annually given its rate of mining at the time.

It appears that this number will rise given the likelihood that Iran will capture some of the hash power lost by China.

El Salvador, a country that is banking its economic future on a Bitcoin-based monetary policy, has an ambitious bitcoin mining strategy. A 25-second video was posted by the country’s president Nayib Bukele on September 29th showing El Salvadoran government branded shipping containers dropping off ASIC mining equipment at an energy plant that appeared to be in the foreground of a volcano.

In June, Bukele had said that the country’s largest geothermal electric company LaGeo SA de CV was looking to offer facilities for Bitcoin mining that are very cheap. “100% clean, 100% renewable, 0 emissions energy,” he said. The mining will use energy from the country’s volcanos. El Salvador is often called the “land of volcanoes” and geothermal power accounts for about 25% of the country’s energy. Iceland has been using volcanoes for geothermal energy-based mining operations since the beginning of the Bitcoin network.

Does price follow hashrate?

Christopher Bendiksen, Head of Research at digital asset management company CoinShares, believes that Bitcoin is structured in a way that the hash rate follows the price.

In a blog post, An Honest Explanation of Price, Hashrate & Bitcoin Mining Network Dynamics, Bendiksen argues that there is a lag between price increases and increasing hash rates as miners need to order and install new, more efficient mining equipment when the block rewards become more lucrative as the Bitcoin price rises. Bendiksen explains that this is the reason why hash rate increases lag behind the Bitcoin price rise.

Further, he says that hash rate follows the price because miners are paid in Bitcoin while incurring local currency costs. This means that increasing the hash rate during a non-profitable mining environment would not make economic sense for a miner.

It would be illogical to keep mining if it was unprofitable, they will not simply keep mining to provide the community a service. A higher-priced BTC allows more miners to participate, not just ones with economies of scale. This makes the Bitcoin network more competitive (more participants) naturally pushing up the hash rate.

Advocates of the ‘price follows hash’ theory, such as outspoken Bitcoin advocate and media personality, Max Keiser, believe this to be the case. Keiser has claimed on numerous occasions that the Bitcoin price follows the hash rate.

Keiser reiterated this claim following a previous hash rate ATH in a tweet on July 8 2020, stating, “The constant 10-minute emission schedule of #Bitcoin is the lure that will always attract miners – even acting irrationally – that pushes up hash rate with price following.

For Kaiser, hashrate isn’t just a health metric of the network; it offers wider macro insight and is a measure of adoption and increasing disillusion with the financial system. It appears unlikely, however, that miners would act irrationally or be willing to mine at a loss.

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Price vs Hashrate: Since the inception of the network

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Price vs Hashrate: Year-to-Date 2021

Since the beginning of 2021, price and hashrate have quite closely followed each other. There was a period in 2019-2020 where price and hashrate appeared to decouple. For an extended period, the price moved sideways and trickled downwards while the hashrate of the network shot up. This suggests that during this period, despite the price of BTC sliding, it was still profitable for miners to keep deploying capital and generating hashrate for the network.

It was likely still economical for large miners to continue mining during that period. The operating cost was less than the profits they were earning from the BTC they were mining, even if the price of the asset was sliding. During this period the price did not rise alongside the hashrate. The rise in hashrate was perhaps creating some positive price pressure on the price of BTC, however, other negatives like fear of regulations and disillusionment from retail investors were stronger and dragged the price down.

This trend eventually changed. Around October 2020 the price of BTC began to surge, at a much faster rate than hashrate. This was again likely more down to other factors like retail speculation gaining momentum, derivatives trading and leverage, and the structure of exchange markets.

During this period price and hashrate shot up together. The already rising hashrate began to rise even more rapidly. New price and hashrate peaks were hit close together in mid April. Following this, both metrics started dropping rapidly between May and July. Hashrate recovered first and then price followed a few weeks later. In this case, the external factors driving down hashrate and price were connected. It was the regulatory clampdown in China.

For a definitive answer on whether the hash rate follows the price or vice-versa, we will likely need to wait another ten years to have a large enough data set to accurately analyze the correlation. What is clear, however, is that there is a relationship between these two metrics that investors need to be aware of and should keep an eye on. For example, if the hash rate is on the rise and the price of Bitcoin is rising alongside it, this could mean that miners are anticipating the rally to continue and are mining coins to take advantage of the higher prices.

Conclusion

The Bitcoin network’s hashrate is resilient. It has recovered a large chunk of the hashrate it lost when Chinese regulators clamped down on mining in the country. For years, China was far and away the dominant location of the Bitcoin mining industry and market observers were skeptical at how quickly the industry would be able to re-settle and deploy to new locations.

Those questions have been answered now. The USA has stepped up to become the largest Bitcoin mining location and hashrate has spread across regions like Eastern Europe, North America, and South-East Asia. Encouragingly, much of this post-China hashrate is set to be cleaner, geared up to be generated through renewables and abundant grid energy.

With the price shooting up thanks to external factors like the approval of a U.S. Bitcoin ETF and the future of hashrate looking secure, Bitcoin looks as healthy as ever.


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