Bitcoin Difficulty True Driver of Price: Analyst

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According to analysts at Messari Research, the situation with Iran seems to have driven the Bitcoin price this week.

Bitcoin & Iran; Causation & Correlation

The firm put out the following infographic:


However, Forbes writer Billy Bambrough says that it’s just as likely that the recent increase in both hashrate and difficulty on the Bitcoin network has a lot more to do with the price spike.

When the difficulty of Bitcoin rises, the amount of time it takes the same group of machines to find a block increases. The increase comes about when more people participate in Bitcoin mining.

Bitcoin mining is a game of diminishing returns. In a few months, a “halvening” will take place, which will effectively cut the profits of Bitcoin mining by half, everything else remaining equal. Instead of an inflation rate of 12.5 coins every block, just 6.25 new BTC will be mined roughly every 10 minutes.

Many expect this process to boost the price of Bitcoin by a long shot. An important aspect of the “digital gold” belief system is the scarcity of the asset. If the inflation rate cuts by half, will the price double?

There’s effectively no reason to expect it, but it’s not impossible, either. Such is the madness of crypto markets.

The Production Cost of Bitcoin

The cost of mining a Bitcoin is reportedly around $6300 at recent rates. Some believe this makes a basement for the Bitcoin price, but it’s important to remember that the market must be willing to pay the price demanded by miners.

Many miners are operating on thin enough profit margins that a few weeks of low prices is enough to shut down, while others will continue to mine for philosophical reasons.

The situation is not unlike when Saudi royals and others in the Middle East commit to drilling and selling oil, no matter where the market goes.

There’s an argument that “Bitcoin doesn’t care about your politics.” In essence, the argument is couched in the idea that when external events get chaotic, people flee to assets like Bitcoin.

However, Bitcoin has more than once proven that it won’t always serve as a secure store of value, with serious market downturns bankrupting some investors from time to time.

Regardless, Bambrough quoted eToro’s Adam Vettese, a senior account manager, as saying:

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.

Bitcoin markets don’t always behave rationally, however. Besides potential market manipulation, a driving force behind the massive price gains in 2017 was “fear of missing out,” or FOMO.