Price leads hashrate not vice versa! (heck price leads everything!)

[RationalSpeculator]

I really don't understand how some think hashrate leads price. So if anyone can explain that to me, please.

Why I strongly believe price leads hashrate is powerfull logic.

The higher the price of btc, the more profitable mining becomes. Hence, more start mining, and hashrate goes up.

The lower the price of btc, the less profitable mining becomes, and it becomes even a losing proposition for the least efficient. They are forced to shut down, hence hashrate goes down.



Now, you could say that the btc price is influenced by speculators, looking at the hashrate. The higher the hashrate, the higher they value btc, and they bid up the price of btc.

But this has no empirical proof. It's like saying, btc prices went up due to Cyprus. Maybe so, maybe no. You cannot know why prices of a certain asset went up or down. It's an end result of market ask/demand.

But what is the most believable explanation that btc prices go up? Because speculators see that hashrate went up? Or because speculators believe in bitcoin?

Obviously it's the latter. If people believe in bitcoin, price will go up, hence hashrate will follow. If people do not believe in bitcoin, prices will go down, and hashrate will drop.


I think this can also be said about the whole economy around bitcoin, and even the press it gets.

If people believe in bitcoin, price will go up, and only because price is going up, 90% of people get into building the bitcoin economy, offering services and products. Also the press, 90% of it, only comes because the price has gone up.

So my thesis is, speculation is actually the most important thing in bitcoin. As the price decides how big the economy around it will be, not vice versa.

I understand there is a feedback loop in that, people will generally believe more in bitcoin, as more economy is build around it. But for me the big question is, what leads? I think it is price. You think different?

[mestar]

I really don't understand how some think hashrate leads price. So if anyone can explain that to me, please.

Why I strongly believe price leads hashrate is powerfull logic.

The higher the price of btc, the more profitable mining becomes. Hence, more start mining, and hashrate goes up.

The lower the price of btc, the less profitable mining becomes, and it becomes even a losing proposition for the least efficient. They are forced to shut down, hence hashrate goes down.

Nobody disagrees with this.  This is a simple market force argument.  And it also means that mining can never be a hugely profitable, at least not for long.


For the other side, since miners have to pay their running costs in other currencies, they must sell their bitcoins on the exchanges, and this tends to push the price down.  There is no specific target price, just that the effect is always downwards.

[Timo Y]

There is one measure that does lead price sometimes: Bitcoin days destroyed.

[RationalSpeculator]

There is one measure that does lead price sometimes: Bitcoin days destroyed.

could you explain?

[RationalSpeculator]

I really don't understand how some think hashrate leads price. So if anyone can explain that to me, please.

Why I strongly believe price leads hashrate is powerfull logic.

The higher the price of btc, the more profitable mining becomes. Hence, more start mining, and hashrate goes up.

The lower the price of btc, the less profitable mining becomes, and it becomes even a losing proposition for the least efficient. They are forced to shut down, hence hashrate goes down.

Nobody disagrees with this.  This is a simple market force argument.  And it also means that mining can never be a hugely profitable, at least not for long.


For the other side, since miners have to pay their running costs in other currencies, they must sell their bitcoins on the exchanges, and this tends to push the price down.  There is no specific target price, just that the effect is always downwards.

I've seen prominent bitcoiners use hashrate as a bullish indicator. I think this is wrong. It's like calling a lot of press articles a bullish indicator, or google trends a bullish indicator. All these just follow price. Not lead it. Ofcourse it's a feedback loop. Higher hashrate strengthens the network, more press articles attracts more people, more services broadens the economy. But the first thing that needs to be done is people believing in the future of bitcoin and bidding up the price. Without this all else comes to a halt. So the believe that people have in bitcoin and the speculation they do in bidding up the price before all else is there, is the most important.

Ie: the act of acquiring and hoarding bitcoin and that way bidding up the price, is undervalued by many.

Agreed with your other points. Good insights.

Indeed, miners are the ones doing the bitcoin 'inflation'. Meaning they bring more bitcoins to the market. Indeed, if they want to continue mining they need to sell most coins, this means per definition a downwards effect on price. Unless they hold on to them and use other fiat to invest in mining, in which case they are actually also adding more fiat to the economy.

edit: I'm not suggesting miners that sell their coins are bad. They perform a very valuable service by mining, even if they sell all coins and reinvest it in more mining equipment.

[mestar]

I've seen prominent bitcoiners use hashrate as a bullish indicator.

They are wrong. 

Indeed, miners are the ones doing the bitcoin 'inflation'.

Exactly.   However it is much worse than that.

When US dollars inflate, Fed buys government bonds on the open market, and then it can take a long time for this to be felt in the purchasing power of the dollar, or in the exchange rate.  If it was done the bitcoin way, 50 cents of each inflated dollar would have to be sold outside of US for Euros, Yens or gold.  It wouldn't be a simple inflation, it would be a import export balance catastrophe as well.

[RationalSpeculator]

Indeed, miners are the ones doing the bitcoin 'inflation'.

Exactly.   However it is much worse than that.

When US dollars inflate, Fed buys government bonds on the open market, and then it can take a long time for this to be felt in the purchasing power of the dollar, or in the exchange rate.  If it was done the bitcoin way, 50 cents of each inflated dollar would have to be sold outside of US for Euros, Yens or gold.  It wouldn't be a simple inflation, it would be a import export balance catastrophe as well.

I don't think it is true that money printed by the fed and used to buy government bonds, does not create instant inflation (rise in price levels). As the money they print to buy government bonds goes directly to the government, who spends it immediately to government employees, medicare, roads, army, etc. This money thus comes directly in the economy and pushes up the price levels of everything. And indeed I estimate real inflation (increase in living expenses) to be around 5% annually.

If it was done the bitcoin way, 50 cents of each inflated dollar would have to be sold outside of US for Euros, Yens or gold.  It wouldn't be a simple inflation, it would be a import export balance catastrophe as well.

I don't understand what you mean here?     

[Timo Y]

There is one measure that does lead price sometimes: Bitcoin days destroyed.

could you explain?

It's risky to keep money in exchanges instead of your own offline wallet. So it's reasonable to assume that the bitcoin rich only move larger sums into the exchanges just before selling.

A spike in bitcoins days destroyed could be a sign of "old money" moving into the exchanges a couple of hours before a major dump.

[RationalSpeculator]

There is one measure that does lead price sometimes: Bitcoin days destroyed.

could you explain?

It's risky to keep money in exchanges instead of your own offline wallet. So it's reasonable to assume that the bitcoin rich only move larger sums into the exchanges just before selling.

A spike in bitcoins days destroyed could be a sign of "old money" moving into the exchanges a couple of hours before a major dump.

Thanks for explaining. Makes good sense. Just checked, and indeed, days destroyed peaked right before the crash

[bcpokey]

On another note I'd say that price and hashrate have shown themselves to be loosely linked at best. And it would be best for people to divorce the notion of the two being tied together either way.

I sometimes wonder if a 51% situation would even effect price.

[odolvlobo]

There is one measure that does lead price sometimes: Bitcoin days destroyed.

could you explain?

It's risky to keep money in exchanges instead of your own offline wallet. So it's reasonable to assume that the bitcoin rich only move larger sums into the exchanges just before selling.

A spike in bitcoins days destroyed could be a sign of "old money" moving into the exchanges a couple of hours before a major dump.

That is not realistic scenario.  A better explanation is simply that if bitcoin days destroyed goes up, then bitcoins that were previously sitting idle have been put back into circulation. More supply of bitcoins means a lower price if demand does not also increase proportionately.

[johnyj]

If a person want to get bitcoin, he have 2 choices: Mine or buy. If difficulty is high, he will buy, which will push the exchange price up. If difficulty is low, he will mine, which reduce the support for the exchange price

[odolvlobo]

If a person want to get bitcoin, he have 2 choices: Mine or buy. If difficulty is high, he will buy, which will push the exchange price up. If difficulty is low, he will mine, which reduce the support for the exchange price

That is very insightful. It may have been true one or two years ago, but now that exchange volume is so much higher than the mining revenue (120,000 vs. 3600), it can't be a significant factor.

[Impaler]

The reason that price would follow hash rate is because miners costs are 'stickier' then the exchanges price.  The miner has captiol expenditure that needs to be payed back so electricity (which is purely a marginal cost) is not the only cost of mining.  You also have the several days necessary for difficulty to adjust in response to hash rate, and then their is the 4 year reward-halving cycle which is guaranteed to drive mining into negative profitability when it occurs.  With all these sticky costs miners are forced to offer their coins at a higher price and this eventually works its way through the market causing a price increase.

If it was the other way around then the reward-halving would have cause the mining rate to permanently drop by half, but it did not, rather we saw a modest drop of only about a quarter in hash-rate and then a gradual price doubling which restored hash-rate and miner profitability.  That phase was ending right at about the beginning of February which is when I think the bubble really started.  The later dizzying heights of the bubble were clearly another phenomenon but we can see that in a frenzy demand is the driver, but in normal times supply is the driver.

[blazespinnaker]

Transaction fees leads fundamental value of the bitcoin.    You can fake bitcoin destroyed days or number of transactions, but why would you fake transaction fees?   Not sure anyone is that dumb.

Not sure of about price being lead or leading though, that's some particularly crazy number subject to the madness of crowds.