Bitcoin has rallied this week, up around 10% since the start of 2020, with many pointing to rising U.S. tensions with Iran as the catalyst.
The bitcoin price has almost halved since its 2019 high set in July though appears to have found a temporary floor and may even have begun to act as a so-called safe haven asset.
However, bitcoin's rising hash rate, which as hit record highs over the last week, might actually be the behind the bitcoin price rally—potentially casting doubt on bitcoin's growing reputation as "digital gold."
A higher bitcoin hash rate, which rises as more so-called miners add their computing power to the bitcoin network, means a greater degree of network decentralization.
Bitcoin's network hash rate has previously correlated somewhat with the bitcoin price though the bitcoin network's hash rate has risen more consistently than the price.
The so-called crypto winter of late 2018 and early 2019 saw a fall in the bitcoin network hash rate but its subsequent rise has since far outpaced the price.
"It is possible that speculation on bitcoin's rapid growth in hash rate is also contributing to the price action lately," said Mati Greenspan, founder of crypto and financial analysis outfit Quantum Economics.
"However, let's be clear that there's a huge difference between hash rate growth and cost of production. The latter is what more strongly correlates with bitcoin's price but is also unfortunately much more difficult to determine."
When the bitcoin price dropped below $4,000 late last year some miners were forced to turn off their machines while others rushed to reassure the market they were not about to shut down.
This year is going test many bitcoin miners. Bitcoin's looming May halving event will see the block reward cut to 6.25 bitcoin, down from 12.5 bitcoin today. Some expect the coming bitcoin halving to send the bitcoin price higher, though there's no guarantee of that.
Last week, U.K.-listed bitcoin miner Argo Blockchain revealed plans to increase its mining capacity four-fold ahead of the May halving.
If the bitcoin price fails to rise ahead of or shortly after the coming bitcoin halving many miners may see their operations become unprofitable, forcing them to turn off their machines.
Others remain confident the correlation between the bitcoin price rise this week and global geopolitical risk means bitcoin is at least somewhat acting as a safe haven asset.
"I wouldn't go as far as to say the hash rate is behind the rise instead of U.S.-Iran tensions," said Adam Vettese, senior account manager at brokerage eToro.
"Whilst we have seen some correlations between hash rate and price, it isn't always the case. The rally is much more likely a combination of the geopolitical situation and also a strong bounce off technical support. Coincidentally, we have now seen the situation subside at the same time the price reached a key resistance level."
The bitcoin price […]