Bitcoin Price and Hashpower: Why They Can Move Differently
The Common Assumption
A common assumption is that Bitcoin’s price drives mining activity. When the price rises, mining becomes more profitable, encouraging miners to bring more machines online. When the price falls, profitability declines, and miners may switch machines off. Under this picture, the network's total computing power follows the price with a short delay.
That computing power is called hashpower. Miners compete to add the next block of transactions to the blockchain by making guesses at a puzzle, and hashpower is the total number of guesses per second made by every machine on the network. It is measured in units such as exahashes per second (EH/s), where one exahash equals a quintillion guesses.
However, Bitcoin’s price and network hashpower can move in opposite directions for extended periods. One reason is that mining infrastructure takes months to order, manufacture, ship and connect to power. As a result, new machines may come online based on market conditions that existed months earlier. Regulatory changes can also force large numbers of machines offline within weeks, regardless of Bitcoin’s current price.
What Hashprice Measures
Hashprice is the revenue that miners earn for each unit of hashpower over a set period, usually a day. It links the bitcoin price and hashpower into a single figure.
The calculation takes the bitcoin that the protocol pays out per block, divides it by total network hashpower, and multiplies the result by bitcoin's price, with transaction fees adding to the payout.
The protocol fixes the payout per block, so the formula shows how the two variables pull against each other: a higher price lifts hashprice, whereas more hashpower lowers it because additional machines share the same payout. Hashprice therefore falls when hashpower grows faster than price and rises when hashpower falls faster than price.
How Difficulty Keeps Pace With Hashpower
The protocol aims to produce a new block about every ten minutes, and it controls that pace with a setting called difficulty, which determines how hard the puzzle is.
Every 2,016 blocks, which takes about two weeks, the protocol compares how quickly blocks actually arrived with the ten-minute target. Blocks that arrived faster point to more hashpower on the network, so difficulty rises, and blocks that arrived slower point to less hashpower, so difficulty falls.
Because of this schedule, difficulty reflects where hashpower stood over the previous two weeks. A machine's chance of finding a block depends on difficulty, so earnings per unit of hashpower change only when the next adjustment arrives.
If hashpower has increased since the last difficulty adjustment, blocks are produced faster than the ten-minute target. The next adjustment will then raise difficulty, reducing the revenue earned per unit of hashpower (provided other factors such as price and transaction fees remain equal). Similarly, if hashpower has declined, blocks arrive more slowly, and the next adjustment will lower difficulty, increasing revenue per unit of hashpower.
Traders can watch block timing during each two-week period for an early indication of the direction of the next adjustment, although the size of the change is not known in advance.
Three Ways Hashpower and Price Diverge
Network hashpower and bitcoin's price do not always move together. When there is a divergence, the separation tends to take one of three forms.
Each pattern below describes how hashpower moves relative to price and shows what that movement does to hashprice. Every pattern includes a practical example with hypothetical numbers, which are illustrative only and do not represent market data. The examples assume that the payout per block and transaction fees stay unchanged, so hashprice varies only with bitcoin's price and network hashpower, and they show hashprice after difficulty has adjusted. Network hashpower in the examples is measured in EH/s (exahashes per second), a unit of total computing power.
Pattern 1: Hashpower Keeps Rising After Price Falls
In this pattern, bitcoin's price turns down while network hashpower keeps climbing, so the two move in opposite directions.
This happens when machines ordered when mining looks highly profitable arrive months later, and buyers who have already committed to the purchase have reason to switch them on whatever the price has become by then.
Practical example: Bitcoin's price is 100 and network hashpower is 100 EH/s when a wave of machine orders is placed. By the time the machines are delivered, the price has fallen to 50, yet the new machines lift hashpower to 125 EH/s. Hashprice then falls to 40% of its starting level (50 divided by 125, compared with 100 divided by 100), because the price is lower and each unit of hashpower shares the payout with more machines.
Pattern 2: Hashpower Falls While Price Holds
In this pattern, network hashpower drops sharply while bitcoin's price stays roughly where it was, so the two move independently of each other.
Normally, this is caused by external events. A regulatory action can switch off a large share of the network's machines within weeks, even when the action has no bearing on demand for bitcoin.
Practical example: Bitcoin's price is 100 and network hashpower is 200 EH/s. A regulatory action switches off half of the network's machines over several weeks, which leaves 100 EH/s, while the price stays at 100. Each remaining unit of hashpower now shares the payout with half as many machines, so hashprice doubles (100 divided by 100, compared with 100 divided by 200).
Pattern 3: A Delayed Response
In this pattern, bitcoin's price falls first and network hashpower follows later, so hashpower trails the price by a stretch of time. The cause is that machines and facilities already paid for take time to redeploy. Operators with high costs also tend to switch machines off only after their earnings stay low for a sustained period.
Practical example: Bitcoin's price falls from 100 to 50 while network hashpower holds at 100 EH/s for several months, which leaves hashprice at 50% of its starting level (50 divided by 100, compared with 100 divided by 100). Higher-cost operators then switch machines off and hashpower eases to 80 EH/s, lifting hashprice to 62.5% of its starting level (50 divided by 80, compared with 100 divided by 100).
Why Price Alone Gives an Incomplete Picture
A chart of bitcoin's price describes only one of the two variables behind mining revenue.
During a period of heavy machine deployment, hashrate can push hashprice down even while bitcoin's price is flat or rising. During a period of falling hashrate, hashprice can rise even while the price declines.
Anyone who tracks the economics of mining through the price alone misses the second variable, and the three patterns above show that the two can point in different directions for extended periods.
Why the Gap Forms a Market for Traders
The relationship between hashrate and price is measurable, because both variables are published continuously and hashprice combines them into one figure. Hashrate derivatives, financial contracts whose value follows hashprice, give traders a way to hold a view on that figure directly. A trader can then take a position on hashprice itself instead of an undifferentiated view on bitcoin's price.
Suppose bitcoin's price and transaction fees stay unchanged, and network hashrate rises 20% once difficulty has adjusted. Each unit of hashrate then earns about 83% of its previous revenue (1 divided by 1.2), so hashprice falls about 17% even though the price did not move.
A trader who expected that outcome would hold a view on hashprice that differs from a view on bitcoin's price. The percentages in this example are round illustrative numbers and do not represent market data.
Because the two variables can move independently over some periods, a trader can form separate views on bitcoin's price and on hashprice. Past divergences do not guarantee that future periods will follow the same pattern, and a view on hashprice carries its own risk of being wrong.
Summary
Bitcoin's price and network hashrate are linked through mining economics, but they respond to different forces on different timescales. Machine orders and regulatory changes can move hashrate away from the price for extended periods, and difficulty adjusts only every two weeks to reflect it. Hashprice combines the variables into one measurable figure, and that figure is the reason hashrate forms a market of its own.