On Apr 18, Bitcoin Crashed when Bitcoin Hash Rate Collapsed: Here is What Happened

May 18, 2021 - Crypto News, Expert Commentary

Bitcoin Crashed

Everything that happens around Bitcoin nowadays is significant. 

More people in the financial sector pay attention to this asset than ever before.  Accordingly, when the Bitcoin Hash Rate fell by 40 percent on Apr 18, 2021, many took notice.

The hash rate is a cumulative measure of the processing power of the Bitcoin network. Computers on the network make intensive calculations to secure the cryptocurrency. 

These computers earn block rewards and transaction fees for their efforts. Therefore, mining plays a vital role in the security of the Bitcoin network. 

Diagnosing the Cause of The Dramatic Hash Rate Fall

The consensus among Bitcoin enthusiasts is that the higher the hash rate, the more secure the network. 

A 40 percent decline in the Bitcoin hash rate is alarming. 

To use a different analogy, this is a national security event. 

Segments of the Bitcoin mining community attributed this dramatic slump to a blackout in Xinjiang province. Now that is quite something. Surely, a single province can’t have that big an effect on the Bitcoin hash rate?

That is until you account for the fact that 60-70 percent of all Bitcoin mining is in China. One province in China can indeed represent such a significant share of the total hash rate.

A significant coal mining accident in Xinjiang caused the blackout. This blackout affected the big data centers (includes Bitcoin mining farms). They had to suspend operations for the fire inspection temporarily and will resume soon. The immediate result was an immediate hash rate drop of over a third. 

Still, even with the drop, the Bitcoin mining hash rate was above 130 million Terahashes/second. It is still the most secure cryptocurrency in the world by a country mile. Even if a government targeted Bitcoin mining by limiting power sources, the cumulative Bitcoin hash rate in other jurisdictions is large enough to continue securing the network. 

Xinjiang is a massive province. It is four times the size of the state of California. This places into perspective how it could have such a dramatic impact on the Bitcoin mining hash rate. Most of these miners are also independent. 

Regardless, this is yet another exhibit of the need for Bitcoin mining geographical decentralization. 

A Corresponding Decline in Prices 

Bitcoin reached a record high of $64,000 in the week leading up to Apr 18. 

However, it took a dramatic tumble in the subsequent week, losing about a fifth of its value by press time. Needless to say, these trends are all too common in Bitcoin. Seasoned traders don’t have the least bit of panic about this latest crash. 

Prognosticators were out of all manner of theories as to the root cause of this decline. The default place to start is to look at the activities of whale clusters. 

As the name suggests, whales are high net worth investors who own large amounts of crypto. Their activity can move prices significantly. 

There may indeed have been a sell-off that contributed to the slide. 

Data from Whalemap indicates that there was considerable whale activity at around the $58,000 mark.  This indicates that whales and high net worth hodlers may have contributed to the sell-off. 

Nonetheless, the unusual events surrounding the hash rate may have triggered the market slide. Alternatively, it could just be some whales deciding to cash out. 

That said, this is likely to be another short-term retracement that will soon be over. This retracement should not be viewed as a direct bear market indicator. It could be that Bitcoin is on the cusp of another rally. 

Further Analysis into The Bitcoin Price Drop 

Adam Cochran, a professional crypto analyst, contends that the worst of this rout has passed. The expected rally would be because many whales would look to buy more Bitcoin at lower rates. 

There could be some selling from the shaken retail market here and there, but the trajectory is likely to go one way. A 20 percent correction in any bull market is an indicator of trouble. However, in crypto, investors take it in stride because it has higher volatility. 

Cochran does not believe that the drop is attributable to a single cause. The crypto community would naturally like to justify such a dramatic slump on a single causative event. He claims that data cannot justify the correlation between the hash rate drop and Bitcoin prices sliding. 

In his Twitter analysis, he points out the unusual activity in the Binance futures market, which tanked hardest and furthest. This phenomenon could be a failure in arbitrage and backdrop, eventually dragging everything else down. The liquidation of a $63 million position may have pushed the market over the edge. 

He concludes that it is difficult to place the blame squarely on one factor. The crypto market has a lot of moving parts. This could be a situation where the market just had a perfect storm, and the inevitable happened. 

Bitcoin pros are unfazed by such phenomena. 

Bulls like the Winklevoss twins are always encouraging people to buy the dip. It is difficult to argue against their resolve, noting the insignificant fact that they are Bitcoin billionaires. 

Still, There Is A Need for Hash Rate Geographical Decentralization

Bitcoin miners are usually independent entrepreneurs who want to make the most of this opportunity. Yes, even the Chinese miners. They are simply clustered in one jurisdiction. 

Is that a problem? Well, it depends on what happens. Bitcoin will be secure even if the Chinese government decides to crack down on all mining activity. Currently, miners in the Inner Mongolia province know this can happen. 

Regardless, for Bitcoin to be very secure, the Bitcoin hash rate should be as widely distributed as possible. Even if a few governments decided to attack mining, they couldn’t possibly take on the entire global infrastructure. 

Such an event is improbable. However, the Bitcoin community has to work to ensure that it is almost impossible. The way to achieve this is by distributing mining as widely across the globe as possible. The geographical distribution of mining ensures that the network decentralization on two fronts is as entrenched as possible. 

China currently has the plurality of Bitcoin mining hash rate. For now, this geographical decentralization is not a direct problem to the security of the Bitcoin network. However, a situation where the mining hash rate is more evenly distributed would make a situation like the power outage in Xinjiang not have as big an impact on the mining hash rate. Such distribution is possible if more miners in other continents take up the mantle and invest seriously in mining.

Advanced Mining is Actively Promoting Geographical Decentralization 

There is great potential for mining activity in North America. Many warehouses and similar facilities lie in decline as the decades-long manufacturing exodus continues to linger. Similarly, there are many cheap sources of power and even cheap renewable sources of electricity. 

These sites can facilitate efficient Bitcoin mining. Advanced Mining data centers, for instance at Montana, utilize renewable energy. Such a remote location provides cheap renewable power, vital for mining Bitcoin. 

Accordingly, we procured 3,000 ASIC mining rigs in December 2020 from Bitmain. It should be noted that rigs were scarce and not available to most miners because of the disruptions caused by the Coronavirus pandemic and the high demand. However, our direct link with the world’s largest chipset manufacturer made this possible.

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