Crypto mining is the true fundamental limit of all PoW cryptocurrencies. Transactions, a somewhat softer fundamental, can also provide some guidance. Learn the basics of the nature of these crypto fundamentals.Fundamentals · [basics] · Author: KarlVonBahnhof
Immutability as a fundamental
Cryptocurrencies operate in a drastically different way than fiat money as we know it today. Cryptocurrencies are based on blockchain, a ledger that gets generated in a sequence that cannot be reshuffled.
Blockchain shares all of its data equally between its participants. Any changes brought to the blockchain are publicly recorded, and these records cannot be tampered with. That provides it with a digital, but nonetheless real fundamental - it is impossible to generate a coin out of thin air based on the order of some authority.
The only type of cryptocurrencies where this doesn’t hold true are IOU-type coins, such as some stablecoins.
Proof Of Work
Rather than keeping all data in a single central hub, on blockchain information gets distributed in nodes called blocks. To add new information to the blocks, a member of the network would have to provide the so-called proof of work, or PoW, by solving complex mathematical problems.
One type of such “new information” are crypto transactions. In the case of PoW cryptos, that’s also how new coins are made - a process called mining.
If you want to at first learn about the very basics, and if you at the same time like straight to the point stats and numbers, just scroll down to Bitcoinfy’s infographic below.
For more advanced stuff, keep reading!
Mining as a fundamental
In PoW mining, mining devices are set up to look for a solution of a mathematical problem. When a solution is found, a new block in the ledger is found; the block is broadcast and the miner collects a reward.
An important metric called “hashrate” is the speed at which mining devices are completing this operation. Higher hashrate in the network means there is higher opportunity of finding the next block and receiving the mining reward.
There have been only a few people who studied the relationship of hashrate with a PoW cryptocoin’s price, and the amount of traders who consider this is even lower.
It makes sense, because hashrate vs price dynamic in Bitcoin or other similar cryptos it is not a quick one to react. If most crypto traders are daytrading rather than making decisions for longer horizons (say, less than ten trades a year), naturally most people in the trading community will study momentarily chart patterns instead.
There are traders who claim that “Bitcoin is structured so that hashrate follows price”. The reason is meant to be the same one as the one that contributes to the jumpy character and overreactions we keep seeing in crypto: Vague and delayed decisions.
In a bear market, a lot of miners will keep mining at a loss, hoping they will survive long enough to realize the profit once the slump is over. Traders and hodlers do a very similar thing. When it starts looking like the price is reversing, pretty much no traders are jumping in until there is some sort of confirmation. In mining, as miners drop out, the profitability of mining will start increasing to lure them back in, but just as with traders, very few are eager to make that move without confirmation. Once that comes, a whole crowd of both traders and miners return to the market.
This is why crypto mining is a fundamental aspect of PoW cryptocurrencies: It limits the movements of the market.
If it is a limit, for a trader or an investor it will make more sense to look not at the short term hashrate movements but instead at the places where the direction changes.
For that, also consider “hashprice” instead of “hashrate”. Hash Price measures the daily mining profits, it is the ratio of daily mining revenue and the hashes generated per day. Hashrate fluctuates a lot, hashprice gives a much clearer picture.
On the chart from here you can see that both hashrate and hashprice of BTC started reversing upwards when the market overreacted with the drop to 3K USD.