Over the last few weeks, investors have been exiting from the risky assets and piling into cash and other safe assets as Covid-19 concerns push the global economy into recession territory.
As investors jumped into US bonds, cash, and gold, bitcoin prices just like other risky assets also took a beating as it crashed over 50% in a violent sell-off last week. Following one of its largest sell-off in history, bitcoin is today on a tear.
Up nearly 20%, BTC/USD is currently trading around $6,300 while managing $2.5 billion in real volume.
This positive move came after the world’s leading digital asset continues to decline in line with risky assets over the past month. However, despite that, the hash rate of the bitcoin network made a new all-time high on March 1st. A rising hash rate means miners are increasing their mining resources.
Amidst the rising price and hash rate, throughout January and February, Bitcoin miners were operating at “healthy” profit margins. Here, their break-even point was below bitcoin’s market but as miner break-even points remained high while the price of BTC fell sharply, miners went into loss.
As a result, the hash rate has taken a decline of 39.7% from its ATH. But given that bitcoin’s price is extremely low at current prices and miners are still unprofitable, the hash rate is likely to see a larger drop.
“No matter how little or how much hashrate the combined mining network produces, the Bitcoin protocol will automatically adjust the difficulty such that new blocks are found every 10 minutes on average,” said Christopher Bendiksen, CoinShares’ Head of research.
“Due to the declining BTC price, it is now unprofitable for many miners to continue their operations,” noted Glassnode. “Since its peak on March 7th, the 7DMA of Bitcoin’s hashrate has fallen by ~16% – with hashing power disappearing even faster after the drop to $5k.”
Declining hash rate means the mining break-even points will also drop, allowing miners to start recording healthier margins.
What will remain unchanged is the number of bitcoins that are to be produced as the protocol is designed to adjust the difficulty as per the hash rate every 2016 blocks, approximately 14 days.
This is because no amount of additional hash rate could make bitcoin produce faster or slower if the hash rate drops, meaning, the cost of mining always tends towards the market price of bitcoin.
Hash rate has already dropped and negative network difficulty adjustment is coming next week.
The bitcoin network, Bendiksen said, was designed to handle exactly the situations like these. Moreover, the dramatic pullbacks or surges in the price of bitcoin aren’t unprecedented and nor are the halvings, this being the third one.