A leading-edge research firm focused on digital transformation.
Subscriber Account active since
Bitcoin’s hashrate metric hit an all-time high on January 2, according to data from analytics tool Glassnode.
This is a milestone for the network and demonstrates the recovery following China’s ban on crypto mining in early 2021.
Many miners were forced offline as a result of the ban and estimates suggested Chinese miners made up about 75% of the world’s mining power.
“The complete recovery of the more than 50% drop in bitcoin’s hashrate following the ban of the activity in China in May underscores the network’s flexibility and resilience,” said Noelle Acheson, head of market insights at Genesis Trading, over email.
Despite the hashrate sitting near all-time highs, bitcoin has been edging down for weeks. It’s down 38% from its all-time high of around $69,000 in November, according to CoinMarketCap.com
And this week, the price fell 9% from $47,343 at the start of the week to below $42,000 by Friday. This occurred alongside a deterioration in equities, as investors fled risky assets after Federal Reserve meeting minutes showed a hawkish stance towards monetary policy.
Insider spoke to eight crypto experts to understand how investors should leverage the hashrate metric, what the recent price action means for bitcoin in 2022 and whether there are crypto alternatives to consider for the new year.
Bitcoin’s hashrate is a key security metric. The higher the computing power (hashrate) of miners, the greater the security and resilience of the overall network.
After China’s ban, there were concerns the network would become less secure as the hashrate dropped 50% below the current rate of around 178 exahash per second.
However, in the face of the reduction, the network showed itself to be secure, said Acheson.
“Today, it would cost an attacker or entity over $1.5 billion to reverse the state of bitcoin transactions for just an hour,” said Eliézer Ndinga, research lead at digital asset firm 21Shares, over email.
It also signals long-term investment.
“The continued investment in mining power shows strong optimism from a cohort widely regarded as industry ‘insiders’,” Acheson said.
Mining requires significant upfront investment, said Stephen Ehrlich, CEO and co-founder of crypto broker Voyager Digital, over email.
In previous years, bitcoin mining expansion was funded by the sale of bitcoin, Acheson said.
This tended to be a driving force of selling pressure, Ehrlich said. But with the industry maturing and gaining access to other financing methods, this is reducing that pressure.
“Given recent funding and capacity expansion announcements from several bitcoin miners, we can expect the hashrate to continue to increase over the next few months,” Acheson said.
However in the middle of this week, civil unrest in Kazakhstan created challenges for bitcoin miners in the region to operate at full capacity. This put some pressure on the hashrate and could continue to do so in the weeks to come.
Investors can use the hashrate to gauge the strength of the network, said Matteo Perruccio, partner and president international of Wave Financial, over email.
However Charlie Morris, CIO and founder of ByteTree Asset Management puts less weight on this metric because it’s a lagging indicator, which reflects decisions that were made months ago by miners.
“I would caution investors against putting too much weight into any single metric,” said John Warren, CEO of GEM Mining, in an email. “People must realize that there is a direct correlation between hashrate and the price of BTC. As the hashrate climbs, many older miners will stop mining unless the price of BTC continues to increase as well.”
Investors can also look at other metrics. 21Shares’ Ndinga looks at the derivatives market to gauge sentiment and volatility .
Investors can understand the amount of leverage in the market by looking at the futures open interest leverage ratio, Ndinga said.
Open interest is particularly interesting right now, said Marcus Sotiriou, an analyst at digital asset broker GlobalBlock, over email. Despite $812 million liquidations from the recent fall, there is still substantial open interest, he added.
“I think if the open interest was aggressively long rather than short, we would have seen a bigger cascade of liquidations, hence meaning a move to the upside may occur soon to liquidate shorts,” Sotiriou said.
To get a sense for volatility, Ndinga suggests looking at DVOL, which is the VIX of the bitcoin market based on the options traded on Deribit, the largest crypto options exchange.
For fundamentals, Ndinga suggests monitoring developer activity. Developers tend to set the tone for innovation at the base and application layers in the industry, he added.
Taking into consideration fundamentals, metrics and technicals, many experts have a subdued outlook for bitcoin in the short-term.
“Short-term caution as the network is softening and more generally, there is a move towards risk-off in financial markets,” ByteTree’s Morris said.
Wave Financial’s Perrucio is remaining bullish unless bitcoin breaks below $28,727.
JC Parets, the founder of AllStarCharts.com, focuses purely on technical analysis and has had a neutral view on bitcoin since it fell below $53,000
“Currently BTC is in range, continuing to absorb all of the overhead supply from April & May of last year,” Parets said. “This is a process and is still taking place.” Parets believes bitcoin will eventually rally above $100,000. “We’ll buy the breakout whenever that occurs,” he said.
“While the year ahead can go in any direction, it is not out of the question to consider that bitcoin could cross the $100,000 threshold at some point, nor would a $5 trillion market cap for the overall crypto market be the unrealistic suggestion it once seemed,” Voyager’s Ehrlich said.
With the short-term outlook subdued, investors might want to look at other tokens in 2022. The experts share their contenders.
“Terra is the strongest name out there showing the most relative strength. If it is above $80, we’ll continue to own it with a target of $130,” said Parets, who is long Terra’s LUNA and Harmony’s ONE. “Also relative strength seen in avalanche and Harmony.”
As the space consolidates in 2022, Morris expects tokens with real uses to do well. He highlights Polygon (MATIC) as interesting because it enables cheaper transactions and Arweave (AR) because it provides “permanent” data storage for a one off fee.
Based on developer activity, 21Shares’ Ndinga highlights Terra (LUNA) and Solana (SOL) as the fastest growing ecosystems. Voyager’s Ehrlich also expects these blockchains to enter a race in 2022 alongside Avalanche (AVAX) , Polkadot (DOT) and Ethereum (ETH).
“There are a number of crypto assets that hold strong potential upside for the upcoming year. ADA, LINK, AVAX, LUNA, MATIC, and ALGO to name a few,” Wave Financial’s Perruccio said.
Similar to Morris, GlobalBlock’s Sotiriou expects assets with real use cases to do well. He expects Decentraland (MANA) and Sandbox (SAND), the two blue chip metaverse assets to capture this trend.
ZK-rollups, the technology that enables cheaper and faster transactions, could also outperform bitcoin.
“Loopring (LRC) is a standout asset that falls under this category,” said Sotiriou.
Check out: Personal Finance Insider’s picks for best cryptocurrency exchanges