Bitcoin price and Bitcoin mining have a very strong correlation. The fall in Bitcoin’s price has brought in huge losses to Bitcoin miners, which eventually have led to the dumping of several mining rigs. When the prices of assets like gold fall, it is a huge loss for the miners; the same thing applies to the cryptocurrencies as well. But what exactly does the term “Bitcoin Mining” means, and how is it related to the price fluctuations of Bitcoin. Let’s find them out in detail.
Before going into the details of Bitcoin Mining, let’s put it in simpler ways. Traditional currencies like Dollars or Euros are controlled by the Central banks that have the power to issue new units of these currencies whenever they think is perfect for the improvement of the economy. But, where do these Bitcoins and other cryptocurrencies come from? They do not have any central bank to support them.
Unlike other assets like gold which are mined from the underground, Bitcoin mining is done by high powered computers called “nodes” after solving complex computational mathematical problems. When these powerful computers solve these complex mathematical problems on the Bitcoin network, they produce new units of Bitcoins. These “nodes” perform the same function as the Federal Reserve and other central banks do to issue new currencies. However, there are a few differences between both approaches. Nodes store information about prior transactions, thus verifying their authenticities. The Bitcoin miners also, by this method, make the Bitcoin payment network more trustworthy and secure even for bitcoin dice. This is done by verifying every transaction that takes place in the Bitcoin network at the time of Bitcoin mining.
Any financial transactions are recorded in banks or through physical receipts. With mining, the Bitcoin miners achieve the same thing but without the interference of any central authority or banks or any financial institutions. Miners clump up the transactions together in “blocks” and add them to an immutable public ledger called the “blockchain.”
Relationship Between Bitcoin Price and Bitcoin Mining
The market for cryptocurrencies like Bitcoin depends on the interests of the investors and the investors tend to look for tangible metrics like mining. Mining verifies the transactions and then new Bitcoins are added in the blockchain. The miners need to make a lot of effort to solve a cryptographic problem, and for all these efforts that the miners do in bringing forth a Bitcoin, they are rewarded with a Bitcoin. There are certain factors that drive the relationship between Bitcoin price and Bitcoin mining. Those factors are discussed hereunder, have a look below.
More Miners Entering The Market
Gone are those days, when earning extra income by mining was very easy; all it needed was a personal computer. However, now with the entry of hundreds of miners (sophisticated computers) into the market, the competition has become more complex where only the best miners can survive. These miners are now trying to reinvest their capital to get a competitive advantage over other miners to survive in the ecosystem. The entry of the new miners has yet again been raising serious concerns over a slight price drop of Bitcoins.
The mining performances are commonly known as the “Hash Rate.” It is the speed at which a miner (computer) can complete a single operation in the Bitcoin code. A higher hash rate means the mining device is completing more “hashes per second,” thereby increasing the pace at which the next block can be solved and a Bitcoin reward can be received. When the hash rate for Bitcoin goes low, it takes a longer time for verifying transactions and therefore, new mining of Bitcoins gets delayed. On the other hand, when there prevails a high hash rate in the network, it takes lesser time for verifying transactions and therefore, Bitcoin mining can be faster.
Therefore, Bitcoin’s price has a direct correlation to how well the Bitcoin miners are performing, which is measured by the networks’ “hash rate.” As Bitcoin price rises, it becomes more profitable for the miners to mine cryptocurrencies on the Bitcoin network. On the other hand, when the prices of Bitcoins fall, the hash rate of the network also drops, which means it becomes less profitable for the miners, which leads them to turn off their mining equipment.