Notes 9/27: Bitcoin Price, Ethereum PoW Hash Rate

Bitcoin price rose in tandem with equities this morning. The cryptocurrency, which had traded below $20,000 most of last week, breached that mark and climbed to a high of $20,356.87 at 8:57 EDT. It has retrenched those gains, since, and is currently trading at $18,878, down almost 1.47% from its price the same time a day ago.

In explaining the price movements of cryptocurrencies, analysts often cite events that may have incited a reaction from traders. But Bitcoin’s recent moves are not correlated to developments in crypto markets. Rather, they continue an established pandemic pattern of mimicking movements in equity markets. Bitcoin’s price this morning jumped with valuations of equity markets and is testing new lows in close correspondence with them.

A New Narrative

That rollercoaster of price movements, however, offers little comfort to investors looking for hedges to a dire macroeconomic environment of rising interest rates and record inflation. Bitcoin markets remain unregulated and shielded in technobabble unlike the well-developed equity markets.

Even if the cryptocurrency does manage to sustain its price patterns and ride out the economic storm roiling the markets, its narrative since inception – as a hedge against inflation and stock market volatility – will have suffered serious damage. It will need a new story, possibly one that highlights its returns, to attract investors to the platform and retain its status as a store of value.

Ethereum Hash Rate Plummets After Merge   

An increase in hash rates – the amount of computing power deployed in mining – should be good news for a cryptocurrency because it is an indicator of popularity.

Miners flock to a cryptocurrency when its price is on an upswing and has the potential to offer attractive profits relative to their investment. For example, Bitcoin’s hash rate rises when its price increases as more miners join its network for promised profits.

The opposite is happening for Ethereum’s Proof of Work (PoW) mining chains. After a move to a Proof of Stake (PoS) system replaced mining with staking in its ecosystem, miners were expected to migrate to other Proof of Work (PoW) chains, such as Ethereum Classic, to keep their machines and income streams running. Their move, in turn, would have boosted prices and demand for tokens operating in those blockchains.

But that is not what has happened. The Defiant reports that eight out of 10 Ethereum miners have shut down their machines rather than operate at a loss. Ethereum Classic, the top choice for PoW miners, saw its hash rate crash by 47.6% since the day of the Merge. [The chain recorded its highest ever hash rate that day].

In anticipation of the Merge, a fork called Ethereum Proof of Work (PoW) was also launched with its own token ETHW. The fork was engendered to support PoW miners after the move to staking by Ethereum. On the day of Ethereum’s merge, it had 79.42 Th/s computing power devoted to it. That figure dropped to a low of 27.96 Th/s, a week after the merge. As of this writing, it has a hash rate of 49.14 Th/s. Prices of tokens operating on these blockchains have also crashed.

Ethereum Proof of Work Mining Future

All of this means that the outlook for Ethereum PoW mining is not good.

A high market cap and sufficiently liquid markets for the coin being mined (for example, Ethereum or Bitcoin) ensures miners can ride out volatility for future profits. The markets for Ethereum Proof of Work chains have thin trading and it is not enough to sustain the influx of new miners angling for a share of the rewards. The price for Ethereum Classic’s tokens, which hit record highs during the pandemic, have zigzagged in a downward spiral since. The tokens are also speculative plays: they do not have defined use cases or narratives to pin down their price action.

But they still manage to generate impressive rewards for what is, in effect, a worthless token. According to The Defiant, ETHW, the token for Ethereum PoW, generates $144,500 worth of rewards daily. Will the rewards last? Probably not. But mining pools will have already booked their profits by then.

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