The Daily Dive - Mining Dynamics Update
Hash Ribbons
In today’s analysis we cover the dynamics in the mining industry, with a particular focus on hash ribbons as a market indicator. We have covered the hash ribbons market indicator multiple times in previous daily issues, in particular on August 10, titled “One of The Biggest Indicators In Bitcoin Flashes,” before bitcoin rallied 50% over the following three months.
Hash ribbons take the 30-day and 60-day moving average of the Bitcoin hash rate, which is used to determine when sufficient miner capitulation has occurred.
Hash ribbons serve as such an effective and historically accurate buy indicator for bitcoin because it uses the changes in bitcoin hash rate to measure miner capitulation in the bitcoin market.
During periods when mining operations are turning off their rigs, it shows that it is uneconomical to mine. Hash rate declines, blocks are mined slower than the 10-minute block target, and eventually difficulty will adjust downwards to encourage these miners to plug back in.
While the hash ribbons indicator has not yet flashed, hash rate has fallen 3.5% month-over-month, with the previous two difficulty adjustments having been downward for the first time since the summer of 2021. A logical reason for the latest drop in hash rate could be Kazakhstan confiscating $200 million in mining equipment from unregistered miners.
Shown below is the historical chart of when hash ribbons have flashed, which has historically come during bear markets when miner profit margins had been significantly squeezed.
Another metric we can use to evaluate mining profit margins is the bitcoin hash price, which divides daily miner revenue by hash rate. Currently hash price is at $0.19/TH/day, which is more than 50% its 2021 highs. At the current bitcoin price and hash price, miner profitability is still in a strong place.
We can also take daily miner revenue and compare it to its 365-day moving average to determine how hot or cold the market is in the mining space in particular, which often sells as little bitcoin as possible. This comparison to the 365-day moving average is named the Puell Multiple after on-chain analyst David Puell.
Currently the Puell Multiple is in a bear market reading.
We will have to wait and see whether the hash rate continues to fall. It should be noted that many industry analysts are calling for 300 EH/s by the end of 2022, with a current reading of 205.87 EH/s.
As of the two most recent difficulty epochs, the short-term trend has been lower hash rate. Yet if we are in a secular trend of increasing hash rate, expect mining-related equities and bitcoin mining machines themselves to likely underperform bitcoin the asset during times when hash rate rises faster than the price of bitcoin. This is due to the inelastic supply issuance of the asset in an increasingly competitive global mining arms race.