Author: Dylan LeClair And Sam Rule

What Explains The Recent Uptick In Bitcoin Network Hash Rate?

https://bitcoinmagazine.com/markets/bitcoin-network-hash-rate-is-rapidly-growing

The massive growth in hash rate has some speculating on who’s behind such a sizable increase, plus an update of public bitcoin miners.


The article below is an excerpt from a recent edition of Bitcoin Magazine PRO, Bitcoin Magazine’s premium markets newsletter. To be among the first to receive these insights and other on-chain bitcoin market analysis straight to your inbox, subscribe now.

Hash Rate On The Move

The Bitcoin network hash rate is on the move this year, now at an all-time high of 350 EH/s and up 36.7% YTD. Hash rate has been following the surge in price, which is the likely result of more machines coming online at a more profitable price point. In 2022, there was a lot of unused, newer inventory of ASICs that sat idle at lower bitcoin prices and have now made their way onto the network as public miners continued to expand, most noticeably in companies like Marathon Digital Holdings, Riot Platforms and Cipher Mining Technologies.

The surge in hash rate is a result of longer-term investment and expansion decisions that are now materializing after a time lag. As noted, some miners kept their machines on the sidelines while the bitcoin price was lower and less profitable to mine. Another possibility, according to an analysis from Miner Mag, suggests a high share of miner rig imports into the U.S. in January may have played a significant role in the expansion of hash rate. Those shipments have since slowed down, which may indicate an upcoming period of cooling off after this recent hash rate growth. Estimating the breakdown and contributions of factors on why exactly the hash rate is rising is always layered in nuance. 

Average hash rate is growing at a staggering rate.

Hash rate in aggregate continued to steadily rise over the last few months while bitcoin holdings continued to decline. When we use the reported numbers for public miners’ hash rate at the end of February, the 292 EH/s at the end of February and the 350 EH/s online today, we conclude that public miners make up somewhere between 20% to 25% of total network hash rate on a given day. That’s likely a low estimate considering there are some smaller public miners we’re not tracking and public miner data is released periodically.

Public miners make up between 20% to 25% of total network hash rate.
Note: We’ve added more miners to these tables so the total comparison for hash rate over won’t compare perfectly with our historical data. 

Note: We’ve added more miners to these tables so the total comparison for hash rate over won’t compare perfectly with our historical data. 

Many are opining on hash rate hitting all-time highs nearly day after day (when using various moving averages to account for variability), but this level of growth isn’t out of the norm for bitcoin on a historical basis — although it is quite impressive as the absolute level of hash rate reaches numbers almost unfathomable only a few short years ago.

The recent growth of hash rate is not unprecedented.

Three-month hash rate growth is at a staggering 53%. There are only two times that can compare: the 2021 post-China-ban boom in mining and then in 2019, when there was massive growth in network hash rate after new hash rate finally came online after the orders were fulfilled from the previous bull market in 2017 and infrastructure was built out.

While most mining stocks have outperformed bitcoin by a wide margin in 2023, this can generally be attributed to two rather simple factors:Mining equities are much more volatile than bitcoin due to various factors, including:

1. Mining equities are much more volatile than bitcoin due to various factors, including:

  • Public equities trading at a multiple of future cash flows (sat flows anyone?).
  • Potential balance sheet leverage.
  • ASICs and other operational infrastructure being priced as bitcoin derivatives.
  • Much smaller market capitalizations, less global access to capital, more illiquidity.

2. Since the start of the year, price growth has exceeded hash rate growth, meaning hash price has risen. In our mining updates, we often revisit our over-simplified framework for bitcoin mining investing:

  • Hash price bull market = Bitcoin miners outperform bitcoin.
  • Hash price bear market = Bitcoin miners underperform bitcoin.

We use hash price as a simple gauge for investment into the mining market due to the empirical reality that mining revenue will continue to fall (in bitcoin terms) due to the asymptotic supply issuance of bitcoin, coupled with mining difficulty that continues to soar as a result of corresponding hash rate growth. Due to these dynamics, bitcoin performance needs to be adjusted against the relative growth in hash rate. For individual companies, it is important to measure their relative hash rate against network hash rate and mining difficulty. 

Public miners tend to trend down against bitcoin.

The performance of miners denominated in bitcoin closely correlates to the rise in hash price from cycle lows.

Hash price percentages from cycle lows.

Hash price lows are the default in the bitcoin industry. Gains in chip efficiency and a bitcoin exchange rate that continues to trend higher on a long time horizon means that miner revenue per terahash continues to trend lower. This is a feature, not a bug, but it makes bitcoin mining an incredibly difficult industry to invest capital into because of its cutthroat nature.

Hash price percentages from cycle lows.
Total bitcoin miner revenue in USD and BTC.

Final Note:

There has been speculation about the recent jump in hash rate, with some on social media pontificating about a potential operation at the nation state level. Needless to say, we are skeptical of some of these theories. Nearly 100% of the current total hash rate is mining in identifiable mining pools. If a nation state mining operation was being deployed at scale, it is likely they would operate in a sovereign mining pool or one attributed to a specific country outside the United States, whereas many mining pools are made up of miners from all around the world. This assessment may prove incorrect later down the line, and we will be more than willing to admit our misjudgment, but this recent growth doesn’t seem to be a nation state based on the data we are observing.

Most hash rate is in publicly known pools.

A more simple explanation for why the bitcoin hash rate looks to be going parabolic in recent months is that many participants simply forget to set their charts to logarithmic scale.

Average bitcoin hash rate on a log scale.

That concludes the excerpt from a recent edition of Bitcoin Magazine PRO. Subscribe now to receive PRO articles directly in your inbox.


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Public Miners Are Outperforming Bitcoin

https://bitcoinmagazine.com/markets/public-miners-are-outperforming-bitcoin

Even with the recent rise in the bitcoin price, public bitcoin mining stocks start the year with more impressive gains than the asset itself.

The below is an excerpt from a recent edition of Bitcoin Magazine PRO, Bitcoin Magazine’s premium markets newsletter. To be among the first to receive these insights and other on-chain bitcoin market analysis straight to your inbox, subscribe now.

Public Mining Update

Looking at the high-level view of bitcoin holdings, we’ve seen a declining trend in holdings across public miners throughout 2022, from 46,930 BTC at peak in April 2022, to 31,892 in January 2023 — a 32% decline in 10 months. With Bitfarms, Core Scientific and Northern Data shedding their bitcoin, holdings across public miners are now largely concentrated in Marathon Digital, Hut 8 and Riot Platforms.


The trend of hash rate expansion is “up only” with public miners growing their hash rate by 129% over the last year. This growth has been a significant driver of overall hash rate expansion with the network hash rate recently reaching 300 EH/s and public miners making up nearly 25% of all hash rate on a given day. That percentage is understated as we’re not including all public miners, like Cipher and Terawulf.


Mining Production Update Notes

Marathon made a statement about their choice to sell some bitcoin that the company mined, “With bitcoin production increasing and becoming more consistent, we made the strategic decision to sell some of our bitcoin, as previously planned, to cover some of our operating expenses and for general corporate purposes. We intend to continue to sell a portion of our bitcoin holdings in 2023 to fund monthly operating costs.”

In their announcement, they shared about places for further hash rate expansion. “The company still expects to have approximately 23 EH/s of capacity installed near the middle of 2023.”

Similarly, HIVE’s production update informed shareholders about bitcoin sales, “HIVE sells all of the Bitcoin earned from our GPU mining hashrate, with a focus to HODL the green Bitcoin mined from ASICs.”

Riot Platforms announced a delayed timeline for growing their hash rate, “Unfortunately, as a result of this damage, our previously announced target of reaching 12.5 EH/s in total hash rate capacity in Q1 2023 is expected to be delayed. We will provide additional updates as we obtain greater clarity on the impact to our planned deployment schedule. In the meantime, the remaining infrastructure build-out at our Rockdale Facility continues to progress, with Building E now at 50% completion and on track to be fully completed this quarter, and we are continuing to execute on the expansion at our Corsicana Facility.”


Iris Energy increased its mining capacity from 2.0 to 5.5 EH/s by using prepayments to acquire new miners.

In other public mining news, Hut 8 shared about a recent merger and their HODL strategy:

“On February 7, 2023, Hut 8 announced a merger of equals with U.S. Data Mining Group, Inc. dba US Bitcoin Corp (‘USBTC’) which is expected to establish the combined company as a large scale, publicly traded Bitcoin miner focused on economical mining, highly diversified revenue streams, and industry-leading best practices in ESG.

“We have been intentional and strategic in pursuing our HODL strategy: by building a large, unencumbered stack, we have afforded ourselves the optionality to strategically use a portion of it to cover operating expenses rather than having to seek other financing options with less attractive terms,” said Jaime Leverton, CEO. “I am confident that selling production while we focus on closing the merger with USBTC is the right approach, as we expect to create a strong self-mining, hosting, managed infrastructure operations, and HPC organization in the long term.”

Hash Rate All-Time Highs

With some help from cost-sensitive miners turning rigs back on, Bitcoin’s mean 7-day hash rate has once again broken to new all-time highs, with a weekly average of 303 EH/s. 


With network hash rate pushing to new highs, the next difficulty adjustment is projected to be +12.0%, likely occurring on February 25. 

(Source)

The expected ratchet upward in mining difficulty will take away some of the relief that operations were feeling in recent weeks, due to the increase in USD-denominated revenue. Miner revenue denominated in bitcoin terms will once again head to new lows.

As hash rate, and subsequently mining difficulty, continue to stretch toward highs, older generation machines and inefficient operations will continue to get squeezed at the expense of more efficient businesses with newer generation mining machines.

Public Miner Performance

Public miners have been among the best performers in the equities markets year-to-date, with shares of Iris Energy leading the way at an impressive 255% gain, and shares of Bitfarms, Hut 8 and HIVE Blockchain following. 


These companies’ performance against bitcoin is equally as impressive because every major public miner in our closely followed basket has outperformed their baseline (BTC) to start 2023. 


On longer time horizons, we find bitcoin outperformance to be a very tall order, given the ruthless competitiveness of the global mining industry, coupled with a programmatically decreasing block subsidy that continues to occur every 210,000 bitcoin blocks — approximately once every four years. 


Regardless of the next direction taken by bitcoin or equity markets more broadly, mining equities will continue to offer investors volatility galore, with the right market conditions presenting much of that volatility in the form of upside appreciation.

Final Note

Global investors will be hard-pressed to find anything on the planet that continues to flourish and grow at a comparable pace to the bitcoin hash rate. The story here that has been unfolding for more than a decade’s time is the evolution of the strongest, decentralized computing force the world has ever seen, yet most miss the forest for the trees. 


Short-term market correlations and exchange-rate performance aside, bitcoin remains the world’s singular best chance at achieving a globally neutral, monetary protocol for final settlement.


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