Non-technical readers might be wondering what hash rate means. To put it simply, the hash rate of a network (like Bitcoin) is an estimate of computing required to run (verify transactions in Bitcoin’s case) that particular network. The second question naturally arises as to who provides the computing power. This is where a group of people known as miners come into the picture. Miners, with their hardware equipment and supply of electricity, run computer code in order to contribute to the hash rate of Bitcoin’s network. Miners are incentivized through the production of more Bitcoins as a reward for their contribution to the functioning of the network.
Take a look at the trend of hash rate produced by miners in the Bitcoin network in the image shown below. Despite the 70% decline in price of Bitcoin over the last couple of months, hash rate has been climbing higher ever since with only a few major drawdowns.
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<source: glassnode>
A growing hash rate is always good for a network from a security standpoint because it will require a lot more computing power in order to perform a 51% attack. Networks like Bitcoin are designed in such a way that if a group of miners take more than 50% of the network’s hash rate, nodes can be compromised to alter the network’s history.
Coming back to our trend, a growing hashrate also means an increase in the number of miners or number of equipment by a select few. While it's a good thing overall, it's a bad thing for small and inefficient miners because they get squeezed out badly. Hash ribbons indicator tries to identify periods when Bitcoin miners are economically struggling to operate in the short term. The difference between the 30-day moving average (30 DMA) and 60-day moving average (60 DMA) gives us the Hash ribbons number.
.png?w=640&auto=format%2Ccompress)
<source: lookintobitcoin.com>
If you see the image shown above, you can spot periods where the 60 DMA crosses 30 DMA. During those periods, the price of BTC also took a hit. Typically, one can assume that some of the miners who might have entered the mining market during the frenzy might become inefficient as a result of the BTC price crash (as rewards get less) while still paying for electricity. The author of this indicator does point out by saying that “when miners give up, it is possibly the most powerful Bitcoin buy signal ever”.
There is an increasing probability a miner capitulation might be on the cards. The sudden urge in hash rate could be a new player -despite the challenging market conditions- trying to undermine the inefficient miners and acquire their assets. Consequently new miners should be wary of the market conditions because short-term gains are hard in this bearish climate. Hash Ribbons will be a leading indicator to watch out for in the coming weeks.
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Disclaimer: This article was authored by Giottus Crypto Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.