Hashrate Index Launches Hashprice Tracker
The value of hashrate is one of the most misunderstood concepts in mining. Hashrate itself has value and is traded OTC between miners and mining pools. On Hashrate index there is now a tracker for this:
The true value of hashrate is the weighted average price at which mining pools are buying hashrate from miners.
The first thing we do is take the Full-Pay-Per-Share (FPPS) rate for Bitcoin mining pools. The FPPS rate represents the expected value for both the block reward and the transaction fees. Given transaction fees are unknown we use a rolling 24-hour average to estimate them, similar to the Luxor Mining Pool. We estimate that around 52% of the network operates on an FPPS payment method, and another 44% on a PPS+, which is quite similar. A full guide on FPPS and PPS+ can be found here.
Once we have established the FPPS rate we can estimate a weighted average fee across pools. This estimation is based on our conversation with miners to understand their existing fees. The FPPS rate minus the weighted average fee is the closest approximation to how much hashrate is worth in the current Bitcoin mining pool landscape.
This metric is incredibly important for miners. It represents their top line and is the largest variable in their operations. Typically their power consumption is set, as is their cost to run machines. So the profitability of their operations depends highly on how the value of their hashrate changes.
Volatility of Hashprice
When calculating the standard deviation of returns you realize that hashprice is an incredibly volatile asset. Over the past two years, it has had a standard deviation of ~13%. This is ~3x Bitcoin, ~6x WTI Oil and ~12x the S&P 500.
Hashprice is extremely volatile, and miners take the full brunt of this in the current system. The ability to transfer risk will aide miners greatly in a quest to build stable, long-term businesses.
We think hashrate is an incredibly interesting asset that is based on many strong macro fundamental factors. The fundamental component mixed with the volatility will make it an attractive asset class for traders to engage with.
Will Hashrate Trade Mostly in Backwardation?
It is important to understand the relationship between network hashrate, difficulty and mining reward.
What we have observed overtime is that network hashrate increases. This is largely due to new technological innovations (i.e. new chip technology) as well as more machines added onto the network.
The mining difficulty directly reflects the amount of hashrate that the network has. For Bitcoin, the difficulty is adjusted every 2,016 blocks (~2 weeks) so that the average block solution time is 10 minutes.
If difficulty increases it is harder to find a block. So all else being equal the value of a unit of hashrate decreases.
On a USD basis you can see that the price of hashrate has trended downwards over the long term. However, there are spikes in revenue with the bull runs of crypto.
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