Watch Out – Ethereum Hashrate is Unstable

Bob Mason
Watch Out – Ethereum Hashrate is Unstable

Ether fell below $190 at the end of the last week, a 13% fall on 14th July alone, in what had been a choppy week, with prices having fallen to sub-$200 levels for the first time in a month, to mark a whopping 50% decline from its June all time high of $415.31 and prices are still on the slide, with the price of Ethereum sitting at $165.98 at the time of the report.

Cryptocurrencies have been taking a hit across the board, though perhaps more alarming for investors will have been the Ethereum flash crash, where the price of Ether fell to as low as 10 cents before rebounding, the 10 cent value well below Ether’s $8 value at the start of the year, the value of Ether having bounced 2000% since January, and that’s after factoring in the latest 50% slide from its peak, which would place Ethereum in a bear market, if there was such a term for cryptocurrencies that have delivered investors substantial returns, timing is everything of course.

The flash crash was a matter of seconds, with Ether’s price rebounding to $319, with flash crashes not uncommon in other tradable assets, the collapse in the pound last year certainly one to remember.

The Ether crash was attributed to a multi-million Dollar market sell order, which resulted in orders being filled on a downward price range, leading to stop loss orders and margin funding liquidations being acted upon, driving prices down to $0.10 before a recovery, leaving those with stop loss orders and liquidations out of pocket, a flash crash certainly detrimental to the more cautious investor prone to protecting the downside, or those with inadequate margin limits in place to capture such a decline, not that any investor would have had adequate margins for such a move.

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Uncertainty had been on the rise before the flash crash however, with investors looking to lock in profits and a lack of investor understanding within the cryptocurrency space becoming all too apparent ahead of an event at the end of July, the outcome of which is uncertain as is the effect on investors holding Bitcoins and other cryptocurrencies.

Ethereum, Bitcoin and others have been on the losing end of increased market risk appetite in recent weeks and, with such sizeable declines and the number of cryptocurrencies increasing, some consolidation will be needed though unlikely to materialize anytime soon.

What is Hashrate?

Ethereum networks require multiple calculations, which is then measured by the amount of data ‘hashed’ in a given time by the machine in question.

Each miner, depending on the hardware used, will have a particular calculation speed, which is commonly referred to as the hashrate.

There is a general relationship between a miner’s hashrate and income, which is ultimately related to the complexity of the puzzles being solved.

As an example, if an investor has a hashrate of 10 Ethers per day and puzzle complexity rises by 30%, the investor’s daily mining income at the same hashrate, but with increased complexity, would fall and the more miners that enter the greater the fall in income, the calculation above, assuming that no new miners enter, the investor’s money would fall by 23%, 7.69 Ethers.

Hashrates are therefore of particular importance in both the trading and the pricing of cryptocurrencies, with any increase in a cryptocurrency’s exchange rate also driving up the mining’s hashrate, which tends to lag whilst proportionate to the size of the exchange rate moves, the two being correlated.

As a miner, your profit will ultimately be dependent upon how much hashing power you contribute to the network. Assuming your hashrate remains the same, as the network’s total hashing power increases, the investor in question’s hashing power falls relative to the network.

The more hashing there is, the less profitability there is for an individual miner.

To fully understand why hashrates are important, it is relevant to understand the mining process and the calculations involved:

Cryptocurrency Mining

Mining is the process by which transactions are verified and added to the blockchain, with mining also the process through which another coin is released.

Appropriate hardware and access to the internet is needed for an investor to mine, the actual process being the compilation of recent transactions into blocks in order to solve complex puzzles. The person who solves the puzzle first is permitted to place the next block on the blockchain and reap the rewards, which include transaction fees associated with the transactions carried out in the block, together with a newly released coin, the amount of which is referred to as the block reward.

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The difficulty in mining is adjustable and is adjusted every 2016 blocks, equivalent to around every 2-weeks, with the adjustment made to ensure that the block rate discovery remains constant, the difficulty is therefore adjusted to the computational power used for mining.

Why Ethereum Prices Crash? Twice?

So, it’s certainly been a tough time for Ethereum traders, particularly those who were unfortunate enough to have priced out as a result of stop loss orders or due to inadequate margins leading to an immediate sale at a loss.

The 21st June flash crash on the GDAX exchange, which saw Ethereum prices slump to just $0.10, has certainly left investors facing the possibility of a loss on investment despite the likelihood of the investor sitting on sizeable gains, a flash crash momentarily reversing the gains as a result of a sizeable sell-order than needs to be filled.

The investor may have bought at $225, introduced a stop loss once the value of Ethereum had hit $400 levels, only to end with a loss, the size of which depended upon the risk appetite of the investor, the lower the stop loss, the greater the loss.

There was plenty of speculation in the wake of the flash crash, with the VP of the GDAX stepping out and noting that there had been no market manipulation, with the flash crash having been attributed to a multi-million Dollar sale order that result in orders being filled in at Ether values of as low as $224.48, the exchanges moves to liquidate positions due to margin issues and stop loss orders leading to a cascade effect.

Unlike the currency markets, Cryptocurrency exchanges are unregulated and any such events leave investors largely in the dark, with any possible manipulation unpunished. A possibility of investor gain through manipulation and gaining from a flash crash is certainly there for exchanges to consider and in the best interest of cryptocurrencies as a whole, some formal oversight would iron out investor concerns from a manipulation perspective, law enforcement involvement likely to deter the manipulator…

If things weren’t bad enough for Ethereum, rumours hit the wires on 25th June that the creator of Ethereum, Vitalik Biterin, had died in a car accident, with the news wire reporting that there was big trouble ahead for Cryptocurrencies.

It was fake news at its best, causing Ethereum to fall 12% in the hours that followed the news wire, prices partially recovering after the founder tweeted a picture of himself overnight telling investors that he was alive and kicking. Another possible example of the ease with which price direction can be manipulated by anyone with the willingness to create such news in the interest of self-gain.

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Investor confidence is a known commodity for the markets and the dire impact of market manipulation and fake news on unregulated exchanges have certainly weighed on appetite for cryptocurrencies and all of this comes ahead of a possible Bitcoin Fork event at the end of the month that has not only weighed on cryptocurrency prices in July, but may well add further losses through the early part of August.

At the time of writing, Ethereum stood at $165.98, down from the highs of mid-June, but still delivering solid returns to those that got in before May, when the rally had started with earnest.

Those getting in late may have gotten out licking their wounds, having missed out on one of the great investor return stories of modern times, with those who got in early enough are likely to have decided that the time was ripe to head for the door and lock in the gains.

Those hoping for a rebound will be watching closely as prices continue to fall as uncertainty builds, with price manipulation having been evident on more than one occasion.

What’s Next for Ethereum?

It’s certainly looking bearish for Ethereum prices and cryptocurrencies in general over the near-term, particularly ahead of what lies ahead at the end of the month, with so much uncertainty over the possible outcome of a Bitcoin Fork event that is expected to impact not only on pricing for not just Bitcoin, but cryptocurrencies in general.

As was the case with the much talked about Millennium Bug, it could all end up to be little more than hyped up speculation, weighing down on prices, but until there is some clarity over what lies ahead, prices are likely to remain under pressure through to the first few days of August, where there is even speculation that Bitcoin losers could see their wallet value fall to zero.

Adding to the negative sentiment is the uncertainty over how cryptocurrencies actually work, talks of hard forks, soft forks, blockchain splits and so on likely to have created significant confusion in the market place.

So, with prices on the slide, Ethereum having fallen 30.83% over the last 24 hours alone, getting in on the slide would certainly be inadvisable when considering what lies ahead.

We will need to see the Bitcoin move in 2-weeks to go smoothly and for the blockchain to remain intact without a split and significant investor loss, for some appetite to return to cryptocurrencies.

For the more risk taking investor, the short-term bet would be for the blockchain to remain intact, though it would probably be unwise to make any investment until the last day of the month, though one does need to be cognizant of the downside, irrespective of the outcome of the expected Fork action.

As some investors would have learned following the June flash crash, stop loss orders come with their own risks, but in this scenario, any downside would be in response to the 31st July Bitcoin’s SegWit2x event.

There are other factors to consider for the markets, which include the rising number of ICO (initial coin offerings), where funds are being raised through the exchanges, with the fund raisers then looking to dump at the end of the ICO in the open market, the market being flooded with coins amidst a period of falling demand and of course, there’s always the noise of ICO scams, with investors being duped out of hundreds of thousands, if not, millions of Dollars.

While Ethereum prices may be on the decline, identifying a viable ICO would provide some buffer, with demand for a particular ICO instilling some value, though when considering the size of the losses at present, even the ICO market may look to take a breather, the actual funds raised by a project or company through an ICO prevalent on Ethereum value and of course at what Ethereum value the company closed out its ICO.

With the value of Ethereum on the decline, we could see projects or companies needing to sell an increased number of cryptocurrencies to raise the necessary funds, raising questions over demand and the outlook on prices, should the current momentum in ICOs persist.

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For now, it’s hard to get bullish with prices almost in free fall, particularly from a new investor perspective, and with existing investors likely to continue cashing in, holding out until the ship steadies would certainly be the wisest choice, though investors are going to need to brave the elements once the market stabilizes, with flash crashes, increasing volume of ICOs, unregulated exchanges and fraud all there for the investor to lose a sleepless night over.

Oh Yes, August 1st

It may perhaps be compared to the millennium bug of 01/01/2000 for us pre-millennials who wondered whether New Year’s Day, at the turn of the millennium, would not only include a hangover, but something more of a doomsday.

In the end, all of the unknowns ended in a normal morning, with the world functioning as normal, no aircrafts falling out of the sky or nuclear missile launches taking place due to computer malfunction.

So, what’s going on in just a couple of weeks?

The majority of Bitcoin nodes will be looking to force miners to implement a protocol upgrade request known as BIP148. The proposed upgrade is expected to bring to an end a lack of agreement on the debate over Bitcoin block size, which has pegged back the advancement of Bitcoin and other cryptocurrencies in recent times.

A Segregated Witness, more commonly referred to as a SegWit, is being used by developers, programmers and investors to deliver a user-activated soft-fork (“UASF”), which will ultimately deliver the BIP148 upgrade request.

For SegWit to occur, there will need to be 80% of Bitcoin miners in support, which appears to have already been reached, where SegWit2x will deliver the SegWit, with a 2MB block size increase then scheduled for November.

The issue of a split comes as there remains disagreement on a proposed increase to the block size and with SwgWit2x and the user-activated soft fork, commonly referred to as BIP148, inter-connected, SegWit2 supporters looking to push through the 2MB increase to the blockchain by way of a user-activated hard fork (UAHF”) may result in the much talks about split, though it’s not just the hard fork that can cause the split, with sufficient support for the “UASF” also capable of creating a split should there be sufficient support for their version of the blockchain to continue, whilst others push for the hard fork, ultimately resulting in a Bitcoin split.

The difference between a UASF and UAHF is that a soft fork is a temporary divergence in the blockchain create by non-upgraded nodes not following new consensus rules, whilst a hard fork is a permanent divergence in the blockchain.

Transaction fees have been on the rise as a result and with 1st August looming, there is a degree of uncertainty over how things will play out on 31st. and the days that follow.

Holders of Bitcoin will ultimately be concerned over a possible chain split, resulting in two different Bitcoins, an event that occurred last year to Ethereum, the split having being carried out in response to a hack.

As things stand, in event that a Bitcoin holder does not have control of the keys during the split, there are a number of possible outcomes to the chain split, as a token holder:

  • The value of the Bitcoin held will reduce to zero do to the wallet selecting the wrong chain from the split.
  • The value of the Bitcoin will remain unchanged and it is business as usual.
  • The wallet holder will be given an option to keep their Bitcoin balance on both chains or to opt for one chain.

Having control of the keys is certainly the way forward, though the general view is that Bitcoin value will fall as a result of the split.

If you don’t have your Bitcoins in a private wallet over which you have control of the private keys, making the move in the days ahead and well before the end of the month is certainly advisable, with it being wise to hold the Bitcoins in the private wallet until the dust settles over the first few days of August.

There is uncertainty, but there are also some certainties over what is the best approach, so eliminate as many of the uncertainties as possible, else risk holding a blockchain vapour trail.

Investors will certainly be grappling with what all of this means and, while the returns have been tremendous for many, the confusion in the weeks ahead is unlikely to be well received. Other cryptocurrencies are likely to also suffer as a result, with blockchains a common theme and similar events just as likely across other cryptocurrency exchanges.

Forks are ultimately compared with price adjustments or clawbacks and even stock splits, which are common theme in the mainstream, but there is still a long way to go for the John Doe investor to catch up on how it all works.

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