Ethereum's Static Hashrate Puzzles Amid Price Volatility

Ethereum’s hashrate has not moved at all during the extraordinary events of the past two months even as price volatility led to utter chaos in some defi dapps.

You all heard about DAI struggling to keep its peg, spiking to $1.08 from the supposed $1.

It still has managed fine all considered, but what on earth is going on with the hashrate which, as shown in the featured image, has not moved at all.

That goes against all we know about hash, with the key rule being that hash follows price, or it leads – it depends, but it moves either before or after price moves.

The other general rule is that static hash is a rarity, even in normal times. It goes up or it goes down, but it does something especially when eth’s price goes from $80 to $280 to again $80 and now $160.

Bitcoin kind of did the same thing, albeit at different price levels, and here it all looks a lot more familiar.

We can see bitcoin’s hash was gradually rising until late January when it is a bit static. There’s a small fall in early February, to stabilize. Then it starts rising after China opens in late March.

Interestingly bitcoin’s price didn’t care at all about China shutting down its economic activity. To the contrary, price actually rose.

That too is puzzling and suggests China’s recent enforcement of the closure of bitcoin exchanges has actually worked or the Chinese were buying in anticipation of yuan devaluation.

Then in March everything crashes as Milan is curfewed, and so we have here the fall in price and hash for bitcoin. While for eth, nothing:

There was a time when eth’s hashrate also behaved like normal. Up and up as price mooned, down as price crashed, then a bit up as price went a bit up, then a bit down as price went a bit down, and then the hashrate doesn’t care about price anymore.

But why? Eth plans to move to Proof of Stake (PoS), so investing in new mining gear might not make too much economic sense because it might not recuperate that investment before PoS, let alone make a profit.

Nowadays mining is giant industrial farms with their own hydraulic power and so on. You need space in a factory, you need preferably your own electricity, you need to do this preferably cheaper than anyone else, and even then you’re taking a risk because price might crash.

For bitcoin, that risk taking can have the perspective of decades. For eth, it is potentially just months.

In addition the ease with which bitcoin’s hash moves might indicate it is significantly centralized, in China of course, because that huge drop in March was pretty much in line with the price.

So there might actually be some algo controlling the asics in line with price feeds, hopefully from many exchanges rather than just one.

This could potentially even be at a pool level, if people agree to it, so it doesn’t necessarily have to imply centralization, but why are eth miners not doing the same?

One reason might be because ethereum is sort of merge mined with all the other GPU coins. That technically makes it insecure, but this is all game theory in any event.

The important point is that if all other coins move at the same ratio, and presuming all the GPU hash is distributed to all these coins, then there is no reason to change the hash distribution because it’s same profitability.

There’s a flaw in this analysis however. If price rises, then all these coins become more profitable, and the hash of all of them should rise under the same presumption that all the hash has been attributed and distributed while the ratio remains the same.

The PoS analysis may have a flaw too in as far as the chart above shows the availability of at least twice the current hashrate, therefore up to there, there isn’t necessarily a need for new investment. More just turning on gear.

Thus the only rational conclusion has to be that mining ethereum currently is not profitable.

Hobby miners and the like might nonetheless be mining it just because they want eth, while industrial miners may be at about profitability but perhaps not sufficiently so.

Making this similar to bitcoin 2015-16 when miners went under, as ethereum miners most probably are.

In theory eventually some smart miners might realize they should not be selling eth, they should be trying to survive on fiat, so as to take new supply out of the market to create a floor of sorts a bit like the OPEC cartel that increases or decreases production.

That’s what bitcoin’s miners did, which you can clearly see from Bitmain’s bitcoin address that was used at the time.

You can clearly see initially they were just insta selling, but at some point they probably realized they were the reason why price was falling, so they started holding up to 100,000 bitcoins, back then probably around 1% of the supply.

Then they sell arguably a bit too quickly, but presumably they had to survive, so they may not have had much choice.

Whether the same would apply for eth too, is anyone’s guess, but the story where supply is concerned is similar on two fronts.

Bitcoin merchants back then would insta sell, so putting pressure on the price, while for eth the ‘merchants’ were ICOs which pretty much did the same.

Bitcoiners then turned against merchants, as did ethereans against ICOs, with the miners then coming for assistance too as shown above.

While for eth its ratio has fallen arguably far too much, and that must be either from miners or ICOs, but the latter have limited supply which probably has mostly gone now, while miners of course have a continuous new supply.

So they may be shooting themselves on the foot by insta selling, or the effects have just not been felt yet, or, and actually most likely, bitcoin miners didn’t do this sponteniously.

In 2016 there was the halvening, so rather than any conscious price flooring attempt, what the above chart shows is miners preparing for a reduction in supply, so saving during the good times out of need rather than some plan to floor the price.

It of course has the effect of the latter, but it just shows how genius the design is, and also explains why we argued for a reduction of eth’s new supply at the same time as the difficulty was delayed on New Years Day.

No one listens to Trustnodes though, even while shown right time and again, with bitcoin continuing to do a lot better, up 33% over last year, while eth is down 5%.

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