On 23 September, Coindance recorded Bitcoin experiencing a sudden price drop below the $10,000 mark, to sell at $9,650 from $10,030. This marked the first time in over nine months since bitcoin experienced such a huge hashrate slump in November 2018.
This comes a week barely after Bitcoin hit an all-time high hashrate on 19 September 2019. Blockchain monitored Bitcoin to become the first cryptocurrency to hit a hashrate of over 102 trillion tera hashes per second. The mysterious hashrate drop is estimated to be at 40% and has so far remained explainable.
As of Thursday 26 September 2019, the Coin360 market data shows Bitcoin price to be holding its grounds at $8.4k in the last week. Market analysts like Michael Van Poppe expressed concerns earlier that Bitcoin needs to close today at above $8.8K to have any hope of preventing further downfall.
Like all cryptocurrencies, Bitcoins are a sequence of virtual data that can be exchanged for real currency. For programmers around the world to earn Bitcoins, they have to solve complex algorithms and endorse Bitcoin transactions for them to be rewarded with Bitcoin digital coins. This process is referred to as Bitcoin mining.
Bitcoin miners are high-powered computers that miners (programmers) need to solve the complex computations to earn Bitcoins. Bitcoin mining results into new Bitcoins and makes the Bitcoin network’s payment system secure and trustworthy, through transaction verification.
A hashrate is a measure of performance of a Bitcoin miner. It is essentially the computational power of a crypto-miner in a decentralized Proof-Of-Work Network (POW). A higher hashrate indicates that there is a lot more mining activity on Bitcoin, and the network is faster and more secure. In the same way, a drop in hashrate indicates the network has become weaker in all three aspects.
What Caused the Hashrate sudden Crash
Experts are speculating that miners, leaving the Bitcoin network, due to a drop in Bitcoin prices, could have caused the hashrate drop. For miners, their profitability depends on factors like cost of mining equipment, mining electricity bills, the price of Bitcoin and complexity of mining process.
When these factors fail to balance, miners may decide to move on, which could result in a drop in hashrate. For instance, if a large mining firm decides to close shop, the drop in hashrate would be significant and possibly lead to a crash.
Since bitcoin is designed in a way that hashrate, follows the BTC price with modulation from increased gear efficiency, when the BTC prices increase, the hashrate also increases and vice versa.
Hashrate is therefore critical to a cryptocurrency network. If the hashrate drops, so do the security, growth, and the popularity of a cryptocurrency network. A network needs to have a high hashrate to stay alive and hence needs more miners. The downside to this is that as the hashrate goes higher, the network becomes more secure, but mining BTC becomes harder.
Bitcoin Proof of Work (PoW) Vulnerability Speculations
Users on the Bitcoin network who sell Bitcoin for fiat currency cause downward pressure on the price of Bitcoin. That’s because there is no incentive by many digital coins like bitcoin to urge users to hold on to their digital money.
Many Bitcoins are exchanged daily to pay for utility bills, while many miners exchange their rewards as soon as they get them for real money. Others sell at daily and weekly intervals causing daily pressure on the price of bitcoin.
The Proof-Of-Work systems dictate that the likelihood of a miner successfully mining a block depends on how much work they do. This means that if a person owns 5% of the bitcoin mining network, they have a 5% chance of mining blocks on the network.
The disadvantage of Proof-Of-Work Systems is that it can result in a network security compromise through the process of Tragedy of Commons. This means that as mining rewards grow smaller and smaller for the miners, it can cause the network to be vulnerable to the notorious 51% attack.
The 51% attacks occur when a group of miners gain control of more than 50% ownership of the network’s hashrate for mining power. They would be able to prevent new transactions from being validated and therefore enabling them to stop payments between users on the network.
They would also be able to cause double-spending, which involves reversing transactions that were completed before. Double spending is unique to cryptocurrencies since it is a process of reproducing digital information by clever people who understand the inner workings of blockchain technology. Double spending earns you two Bitcoins at the price of one.