Moving averages have been used in the technical analysis (including cryptocurrency niche) forever. In this article, we introduce a notion of Hashrate Moving Average.

There is no Bitcoin without the miners. More mining power (greater hashrate) results in more security for the network, but it also decreases the probability of mining a block. Ceteris paribus, if you are a miner and you observe the network hashrate going up and the price of bitcoin not increasing proportionally, your revenue will decrease. On the other hand, many consider that this distributed mining power is one of the key value drivers of bitcoin; if so, the increased hashrate should lead to a higher price. Although it’s not clear which factor is leading and which is lagging, this positive correlation between the two factors had been holding true for most of the Bitcoin’s existence until 2018.

Chart 1: Bitcoin Price vs. Hashrate

We would have expected to see a considerable decrease in hashrate starting in January or February of 2018; however, although the hashrate reached its maximum in August, the slope of the hashrate line doesn’t become negative until late October – early November.

There is one obvious reason why a price drop doesn’t immediately lead to a decrease in the hashrate: miners have high fixed costs and relatively low variable costs. Miners don’t make a decision on whether to mine or not to mine based on today’s price, but rather on the price history over the past months and the expected price in the coming months.

Chart 2. Hashrate vs. Bitcoin Price 365-Day Moving Average.

This hypothesis is supported by the chart above – the hashrate closely follows the 365-Day Bitcoin Price Moving Average. In fact, in 2018, the correlation between the two factors was 0.9.

But can we deduce anything from the hashrate about the future price of bitcoin?

Chart 3. Bitcoin Price vs. Hashrate Moving Averages.

November 9, 2018, both the 9-Day Hashrate Moving Average and the 21-Day MA cross the 100-Day MA from above; three days later, the $6,000 support is broken. At the same time, the slope of the 100-Day MA became negative. More recently, on December 18, 2018, the 9-Day MA crossed the 21-Day MA from below and we experienced a minor rally.

If we go back to Chart 1, the time between the beginning of the bitcoin price slide and the time when we first observe a steady decrease in the hashrate, in addition to purely economic factors could also be explained through psychology: the miners still had a positive outlook on the market.

Why would miner sentiment have any effect on the bitcoin market formation?

1,800 bitcoins get mined daily or 657,000 annually with annual emission of less than 2 percent. It’s a relatively small number, however, we need to consider two factors magnifying this effect:

Most of the freshly mined bitcoins are presold and hit exchanges immediately, thus perhaps, making it the most liquid part of the total supply; The role which miners hold in the ecosystem.

Once we take into account these two factors, it becomes more probable that the miners’ sentiment may affect the price.

It still remains to be seen if these tools can be used for reliable market predictions or at least, whether it can serve as a Consumer Confidence Index (CCI) for the crypto industry.