Hashrate crash, overheated market and liquidation cascade: what triggers a decline in the price of Bitcoin

The hashrate of the leading bitcoin pools plummeted last week amid power supply problems in China. A few days after the incident, the price of the first cryptocurrency suddenly fell by about 10% – from levels above $61,000 to levels below $52,000.

Discussions about hashrate and price correlation have flared up in the community with renewed vigor. Some are convinced that there is a significant causal relationship between the indicators. Others insist on the opposite – in their opinion, the correction is due to a combination of factors.

We figured out what was happening, collecting various opinions about the latest developments in the market.

  • Shortly after the collapse of the hash rate, the price of bitcoin fell by 10%.
  • Experts disagreed on the main reasons for the market correction.
  • Major players saw what was happening as a good opportunity to build up their positions.

What happened in China?

Methane exploded in a coal mine in Shanxi province in late March, according to Xinhua News Agency. On April 9, a gas release occurred during coal mining in Guizhou, and on April 10, a mine in Xinjiang Autonomous Region flooded.

Dovi Wan, Managing Partner at Primitive Ventures, has reported massive power outages due to comprehensive security audits. According to her observations, the bitcoin hash rate “instantly” collapsed by about 30%.

Wang expressed her hopes for stabilizing the power supply in the coming weeks, as well as “for a more distributed hash rate in the future”.

She also presented a list of mining pools, the computing power of which dropped the most in a day.


Bitcoin crash following hashrate

On the eve of the blackouts, the bitcoin hash rate reached an all-time high near 200 EH/s.

Bitcoin crash following hashrate

On April 17, the indicator fell to 106.7 EH / s, falling from the maximum by 46%.

If you smooth out the 7-day moving average chart, the hash rate volatility range will decrease significantly and the indicator will fall by only about 10% over the corresponding period.

Bitcoin crash following hashrate

Against the background of a decrease in hashrate, the average commission on the bitcoin network exceeded $ 60. The last time the same high rate was observed at the end of 2017 – at the peak of the last bull market cycle.

Average transaction fee
Data: blockchair.

The decrease in the total computing power of the network with the same complexity led to an increase in the interval between blocks to 15 minutes.

Bitcoin: Block time
Data: BitInfoCharts.

So far, the network complexity of the first cryptocurrency is at a record high level – 23.58 T. The BTC.com service predicts a decrease in the indicator by 7.2% based on the results of the upcoming recalculation, which will take place approximately in 11 days.

Insights difficulty
Data: BTC.com.

Shortly after the collapse of the hashrate, the price of bitcoin dropped by about 10%.

Price of bitcoin dropped by about 10%
Binance 4-hour BTC / USDT chart from TradingView.

Against the background of the correction, the volume of liquidations of long positions in 24 hours amounted to $ 9.26 billion, which became a historical record.

Total Liquidations
Data: bybt.

The market capitalization of bitcoin still kept the $1 trillion mark, although it came close to this milestone several times. This could indicate the formation of solid support in the $53,500 region, corresponding to $1 trillion in the total value of digital gold.


On-chain data

The Short Term Holder SOPR indicator (the profitability ratio of the spent output in the context of short-term coin holders) fell below 1, to the January marks.

Bitcoin: short terms holder
Data: glassnode report.

This means that a significant part of investors holding assets for less than 155 days sold bitcoins in panic.

The Coin Days Destroyed and Average Coin Dormancy metric, which takes into account the movement of older coins, was relatively calm. However, there is little momentum in the “north” direction. Further development of this trend will indicate profit taking by medium and long term investors.

Bitcoin: Coin Days Destroyed
Data: glassnode report.

Long-term SOPR values indicate no panic among holders holding coins for more than 155 days.

Bitcoin: Long Term Holder
Data: glassnode report.

Expert opinions

Some analysts are confident in a strong causal relationship between power outages in China and the fall in the first cryptocurrency.

In support of the thesis, the expert provided a graph illustrating a similar situation in November 2017.

The Block researcher Larry Cermak ironically reacted to Willy Wu’s arguments.

He stressed that corrections are natural after price rallies. Also, according to Cermak’s observations, the market was overly optimistic against the backdrop of news about Coinbase. The analyst is confident that a whole range of factors played a role, including a cascade of liquidations of leveraged positions.

Larry Cermak @lawmaster: The best advice in this market is to stop looking for reasons and always be ready for large 20% down moves that have always happened. Stop massively overleveraging and you’re gonna be fine homies. Hashrate has nothing to do with these, just market exhaustion

Cermak sees no reason to panic because of the hashrate drop, calling the incident a temporary phenomenon. Moreover, the May rainy season is approaching in hydropower-saturated Sichuan. During this period, the fixed costs of miners should be significantly reduced due to the decrease in the price of electricity.

Larry Cermak @lawmaster: Regardless of what it is, this is a temporary decline while miners can’t really do anything if they’re not getting electricity. On top of that, hydro season starts in late May and will get significantly cheaper. No reason to panic

Cermak is also confident that the dynamics of the overall hash rate is highly distorted if moving averages are not used. In his opinion, it is better to study data on individual mining pools.

Larry Cermak @lawmaster: Hashrate estimators calculate it from the number of blocks being mined in the last 24h and the current block difficulty. On a daily basis, it’s often not accurate because it’s skewed without looking at moving averages. Always better to look at what the pools are reporting

He later announced that the hashrate was recovering as the power supply situation in China stabilized.


Another well-known analyst, Nick Carter, described the Xinjiang incident as a natural experiment and a very useful source of information.

In his opinion, the recent drop in hash rate is not statistically significant. Carter stressed that the picture will become clearer on longer timeframes.

nic carter @nic__carter: BTC hashrate down 40% day over day, but much of that could be variance. Whole decline not statistically significant (HR variance extremely high). Need to look at longer timeframes (ideally 7d) to determine effect on hashrate

The expert admitted that the share of Xinjiang in the total hashrate is not so large, and also that miners can migrate outside of China.

nic carter @nic__carter: Based on data that comes in we could end up learning that Xinjiang is a smaller share of the network than we thought (cbeci is great but data is a year old now). My theory has been that HR is migrating out of China, would be great to see confirmation

Finally, Carter added that a potential mining ban is not capable of destroying the first cryptocurrency.

nic carter @nic__carter: Lastly – to those ppl who think a China ban of mining would kill bitcoin – this is what it would look like – blocks would be slow for a while and that’s it. Banning mining in 1 place doesn’t make bitcoin any less secure – no “required” threshold for hashrate.


Well-known trader Ton Weiss suggested that many market participants succumbed to panic after the news from China came out. He called the period of massive sales a good time to buy an asset.

A similar opinion was expressed by Ledgermatic CEO Luke Sully, according to whom many traders sold on the news.

“The Bitcoin network is decentralized, which is not the case for mining,” added Sally.

Sovryn co-founder Edan Iago saw nothing extraordinary in what happened.

“Usually, sharp jumps in hash rate do not cause a drop in prices. A decrease in the hash rate slows down transactions, which, paradoxically, makes it difficult to transfer coins to exchanges for their subsequent sale. The recent fall in price is within the range of typical volatility. This is noise, not a signal”.

BitBull Capital CEO Joe Di Pasquale, speaking with CoinDesk, noted that market sentiment could have worsened news from Turkey, where the central bank has banned payments in cryptocurrencies.

FUD could also play a significant role due to the tweets of the FXHedge account, popular in cryptocurrency circles, which, citing its own sources, reported that several financial institutions were accused by the US Treasury of money laundering through digital currencies. The tweets were subsequently deleted.

Orca Traders option trader Viktor Franken directly linked the fall in bitcoin price to the massive liquidation of long futures positions.

“Besides, it was a weekend, the market liquidity was insignificant,” the analyst added.


Hashrate, moving averages and timeframes

The notes on the hashrate chart on Blockchain.com say the following:

“Daily values can periodically rise or fall sharply due to randomness when finding blocks. Even with a constant hash rate, the number of mined blocks can change from day to day. Our analysts concluded that the 7-day moving average is best suited to represent the underlying power”.

According to the methodology provided on the same service, the hash rate is estimated based on the number of blocks mined in the last 24 hours and the current complexity of the network.

The hashrate formula looks like this:

H = 2^32*D / T

Where

D – difficulty;

T – is the interval between blocks.

The chart below shows the historical dynamics of the interval between blocks.

Bitcoin: Block time
Data: BitInfoCharts.

It shows that this interval is not always 10 minutes, as originally conceived by the creator of bitcoin under the pseudonym Satoshi Nakamoto. Blocks are often located in 8, 9, 11, 12, and sometimes in 15 minutes, as it was the other day.

Consequently, the hashrate, depending on the interval between blocks, has no less high volatility. Therefore, it is not in vain that Larry Cermak and Nick Carter recommend smoothing the moving average indicator and looking at the picture on large timeframes.


Whale reaction

NYDIG strategist Greg Sipolaro said that large clients of the platform took advantage of the sharp decline in the price of bitcoin to build up their positions in the cryptocurrency.

“Our platform has been exclusively on the side of buyers for the last 24-48 hours,” the analyst wrote.

Cipolaro stressed that NYDIG clients are not afraid of the high volatility of bitcoin, they are “ready to buy back any kickbacks”.

“In our opinion, the current decline is due to repositioning in longs due to a large amount of leverage, and not a change in the fundamental background,” the expert explained.

He also noted a significant excess in the price of Bitcoin on Coinbase relative to Binance. Cipolaro concluded that the main pressure on the price came from the holders of the first cryptocurrency from Asia.

According to the latest report from CoinShares, from April 12 to April 18, the inflow of assets into investment products based on cryptocurrencies amounted to $233 million, including $108 million in bitcoin. The value became the maximum over the past five weeks, which confirms the thesis about the inflow of large capital into the industry during periods of sales.


Conclusions

The growth of any asset cannot be endless – sooner or later corrections take place. In all likelihood, the reason for the recent price pullback was a whole range of factors, not just the hash rate or cascade of liquidations. This means that understanding the market requires a complex picture rather than simple explanations.

The mining industry is actively developing not only in China. Australian firm Mawson Infrastructure recently agreed with Canaan Creative to supply 11,760 AvalonMiner A1246 devices. Canadian DMG Blockchain Solutions has acquired 3,600 ASIC miners to increase the company’s hashrate from 140 PH/s to over 500 PH/s.

A study conducted by the Center for Alternative Finance at the University of Cambridge says North America has the highest rate of renewable energy use in mining. Increasing computing power in more stable and “energy efficient” jurisdictions is beneficial for the environment, decentralized mining and the industry as a whole.

Despite the recent correction, the price of bitcoin has risen more than 80% since the beginning of the year. Capital inflows from large investors are increasing, bitcoin ETFs are being launched, more and more companies are accepting payments in cryptocurrency. This means that mass adoption continues, the industry develops and market participants have no reason to be sad.

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