2019 Bitcoin (BTC) Retrospective – Fidelity Digital Assets
Limitations in measuring hash rate. An interesting shortcoming of measuring hash rate was brought to light in September when the estimate fell significantly in a short period of time. The key limitation is that it is impossible to know the real hash rate without plugging into every miner and operation globally. Rather, the hash rate that data providers display is an estimate calculated based on the number of blocks generated in a period (generally 24-hours) and the expected number of blocks. The expectation is that one block is produced every 10 minutes, and 144 blocks are produced in 24 hours. In reality, there is a small probability of significant variations in block time. It can take the network an abnormally long or short period of time to generate a block relative to the 10-minute target. It’s important to be aware of such abnormalities that can skew hash rate calculations. A rolling average can help smooth out anomalous fluctuations in hash rate.²³
Developments that could lead to additional hash rate increases. 2019 also saw major developments and investment activity in the mining sector that could bring additional significant hash power online. Layer1 raised $50 million from Peter Thiel and others to develop end-to-end mining infrastructure, including proprietary cooling technology that the team believes will make Texas a viable and competitive location for mining operations driven by relatively friendly regulation, low electricity costs, and renewable wind and solar energy sources. The company hopes to take share from Chinese mining operations (according to CoinShares Research December Bitcoin Mining Update, as much as 65% of the Bitcoin network’s hash rate resides in China).²⁴
Crusoe Energy also collectively raised $70 million in equity and project financing to open new bitcoin mining operations in Texas. The firm plans to direct natural gas that would have otherwise been burned (i.e. gone unused and waste) to mine bitcoin. Bitmain, the largest manufacturer of ASICs, also opened a mining plant in Texas to take advantage of the state’s low power costs (the fourth lowest for industrial users in the country). The new Texas operation is the manufacturer’s largest mining project. Separately, Coindesk reported that Bitmain has filed with the SEC to conduct an initial public offering.²⁵ Canaan (CAN), another major mining hardware manufacturer with over 20% market share (according to BitMEX Research) raised $90 million in a U.S. public offering on November 21st.²⁶
Another key development was the launch of Blockstream’s new mining efforts. Blockstream Mining provides colocation services to institutional customers, such as The Fidelity Center for Applied Technology, and LinkedIn co-founder Reid Hoffman, in the company’s data centers in Quebec, Canada and Adel, Georgia to help businesses set up and maintain mining operations more effortlessly. The facilities are said to generate 6 EH/s of hash rate at full capacity using the latest mining hardware. At the same time, Blockstream announced a new mining pool that aims to enhance mining decentralization through its use of the Betterhash protocol.²⁷
Efforts to decentralize mining. The Betterhash protocol was developed by Matt Corallo (now working at Square Crypto) to address mining pool operator control over transaction selection and potential transaction censorship, while maintaining consistent payouts and profitability associated with participating in a mining pool. Braiins, the company behind Slushpool and the widely adopted Stratum mining protocol, adapts this feature of Betterhash into Stratum V2 to address a key centralizing force in bitcoin mining.²⁸
All-time highs across multiple address bands
Given the rich data and transparency of the Bitcoin network, it is possible to apply different filters to map out different address bands. The number of addresses is considered an imperfect proxy for the number of users. While the metric has its limitations, tracking addresses with a bitcoin balance does provide a directional estimate of adoption. We look at the change in addresses with a range of balances, e.g. addresses with a balance between 0.001 to 1 BTC²⁹, addresses with 1 to 10 BTC, addresses with 1K to 10K BTC, and so on.
Limitations. Addresses do not correspond to users on a one-to-one basis. For example, users can (and should) have multiple addresses for privacy and security purposes. In fact, the best wallets automatically generate a new address following each transaction. On the flip side, many holders store bitcoin with custodians and exchanges that hold assets on behalf of many users in one or a few addresses. These factors lead to a dynamic of under- and over-statement.
All address bands saw notable increases over 2019. The average number of addresses holding 0.001 to 1 BTC saw the most substantial increase in December relative to the beginning of 2019. Addresses with a balance that is relatively small may be connected to retail participants. Average addresses holding between 1K to 10K BTC were up 16% (an increase of ~280 addresses). The number of addresses in this band reached an all-time high of 2,082 on September 27, 2019. Addresses holding such a large portion of BTC may be connected to businesses, though it is unclear whether multiple addresses are controlled by a single entity for security management purposes or whether the addresses correspond to different individuals or entities.
Published at Thu, 09 Jan 2020 20:47:03 +0000
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