Hashrate is the computing power that the miners contribute to the network to process transactions which are then added in blocks to the blockchain.
The Bitcoin Network rewards miners for solving the Proof of Work (PoW) with newly minted BTC.
The higher an individual miner's hashrate hashrate, the more likely they are to solve a block and earn the block reward and fees.
Because miners can join the network and turn off their computers whenever they choose, Bitcoin's hashrate is highly variable. That hashrate variability is not only related to the difficulty adjustment of Bitcoin, but also to changes in the price of bitcoin. Let's see why.
Based on the profitability of Bitcoin mining, miners, and market, analysts claim that there’s a correlation and that the hashrate varies according to changes in the price of Bitcoin, and not the other way around.
In a nutshell, it’s often said that the hashrate follows the price of Bitcoin.
Bitcoin miners are the first recipients of BTC, and their sales have made it possible for the Bitcoin economy to flourish and distribute amongst a wide variety of shareholders.
Among the miners, there will be those who need to sell part of their funds to continue mining operations such as, covering expenses in electricity, Internet, cooling, housings costs, equipment maintenance, and even the acquisition of new, increasingly specialized ASIC miners.
All these costs, and especially that of electrical energy, influence the overall profitability of Bitcoin mining.
In a bear market, less efficient miners may become unprofitable. It’s likely that during certain periods there will be miners who prefer to turn off their equipment, possibly because the price of Bitcoin at that time and their income doesn’t cover their operating expenses.
With the exit of competing miners due to a bear market, the profitability of the larger miners would increase, which would increase their dominance and the probability of obtaining the BTC rewards. However, it’s also possible that there are miners working at short-term losses, hoping for long-term returns following bullish sentiments.
Similarly, bullish Bitcoin cycles tend to attract more miners to the network, since in this context less efficient equipment can still be profitable, due to the wide profit margin in fiat currency.
Also, a bull market is the best scenario for Bitcoin miners to sell part of their BTC and earn more profit in the currency with which they must pay their operating costs. Likewise, these profits can also be invested in the expansion of their business, thus increasing the Bitcoin hashrate in the short, medium, and/or long term.
A strong hashrate represents a lot of computing power contributed by the miners, furthering the security of the network, as well as a higher difficulty and competition to solve the PoW and earn the BTC reward.
Behind a strong hashrate there is a huge investment of resources by the miners, faster and better ASIC machines operating the network, and new participants entering the market.
Additionally, it's important to note, a strong hashrate contributes to the security of a network. While Bitcoin's security lies primarily in consensus between nodes, the computing power provided by miners protects Bitcoin from cyberattacks, such as 51% attacks, which are often successfully executed on networks with low hashrates.
The claim that the hashrate follows the price of Bitcoin has received mixed reviews. Among them, it has been commented that the changes in the hashrate do not only follow the changes in the price of BTC, but also other external causes that influence mining.
An example of this would be the ban on Bitcoin mining enacted by China in May 2021, which led Chinese miners to stop their mining activities, sell their equipment, and incur logistics expenses, in order to relocate to another country.
In addition to state bans in notable mining jurisdictions, the Bitcoin hashrate can also fluctuate for other reasons, such as rising electricity costs; new investments of mining companies at different terms; times of cheaper energy (rainy seasons), price increases in supply chains; more taxes on mining, interruption of operations in countries with crisis, among others.
It has also been mentioned that this correlation would supposedly be the other way around: that the price follows the Bitcoin hashrate. But if it were, miners would not be forced to sell their BTC or turn off their equipment in bear markets.
Even Satoshi Nakamoto mentioned that in our times the price of Bitcoin would dictate its cost of production, and not the other way around, as miners are speculators after a profit.
The relationship between miner production costs and the price of Bitcoin is summarised best by Satoshi himself:
“The price of any commodity tends to gravitate toward the production cost. If the price is below cost, then production slows down. If the price is above cost, profit can be made by generating and selling more. At the same time, the increased production would increase the difficulty, pushing the cost of generating towards the price.
Satoshi also notes that as block subsidy gets halved every 4 years, the market forces will dictate the cost of production.
"In later years, when new coin generation is a small percentage of the existing supply, market price will dictate the cost of production more than the other way around."
Another criticism is that the correlation does not exist, alleging that in certain periods the price of Bitcoin has fallen significantly, while the hashrate has continued to rise.
The above doesn’t invalidate that the hashrate follows the price of Bitcoin.
The fact that several factors can influence both variables, and that the follow-up of the hashrate at the price of Bitcoin occurs with a difference delay (similar to the hashrate-difficulty relationship) and that it’s not reflected instantly, it doesn’t mean it doesn’t happen.
To conclude, it's impossible to say for sure what the correlation is between bitcoin price and hashrate. However, it is clear that both the price and hashrate are highly volatile, and that they both have a lot of influence on each other.