In brief

  • Data firm Coin Metrics has laid out a new way to calculate Bitcoin’s hashrate in its latest state of the network report.
  • The new metric calculates hashrate by taking block times over a 48-hour window and multiplying this by the time it took to find the most recent block.
  • If the measure proves to be more reliable than current methods, the tool could help create derivatives for Bitcoin’s hashrate which miners could trade to hedge their operations.

Blockchain data firm Coin Metrics is asking the Bitcoin community to reconsider how it measures Bitcoin’s hashrate, and it’s offering alternatives that could provide a statistical backbone for financial products that would help miners hedge for hashrate volatility.

In its latest State of the Network, Coin Metrics proposes a new tool to gauge Bitcoin’s hashrate, or how hard mining computers are working to find new blocks on the network. Currently, there’s no reliable metric with which to measure hashrate accurately, the data firm contends. 

The best we can do, according to Coin Metrics, is to run a ballpark estimate by using Bitcoin’s difficulty (an internally-correcting measure that dictates how hard it is to find a block) and the frequency with which blocks are produced.

“In a distributed process like mining, it is near impossible to obtain reliable hash rate figures from the universe of miners,” Coin Metric’s Ben Celermajer wrote in the post. “Therefore, the current best practice of deriving hash rate is to generate an implied value from the rate at which blocks are produced at a given difficulty level.”

Gunning for a more precise data point, Coin Metrics first looks at what it calls “implied hashrate.” This metric, instead of looking at block times for each 24-hour period and combining this with Bitcoin’s mining difficulty to calculate hashrate, looks back 48 or 72 hours. By widening the window, Coin Metrics can better account for Bitcoin’s hashrate volatility.

Once you have implied hashrate, you can then multiple this by the time it took to mine the most recent block on the network. From this equation, you could extract a more precise figure for Bitcoin’s hashrate, Coin Metrics argues, with what it calls “Observed Work.”

“By introducing both the implied hash rate level and the time taken to find the most recent block, this representation of work conducted is more reactive and responsive to the realities of mining activity when compared with chainwork,” Celermajer wrote.

And, according to the firm, better hashrate metrics would mean new financial products for Bitcoinproducts that are specifically tailored towards Bitcoin miners. 

With reliable data, market makers could create futures contracts that bet on Bitcoin’s future hashrate. This would give speculators another market to bet on, sure, but it would also provide miners a hedge against their own operations.

For example, because of the nature of Bitcoin and the costs involved, miners are always long Bitcoin. But with a derivatives option like this, they could short Bitcoin’s hashrate just in case their operation becomes less profitable in light of a difficulty adjustment, change in power rates,  or even, yes, the soon-to-come halving of Bitcoin mining rewards.

Denis Rusinovich, who runs a mining operation in Kazakhstan, told Decrypt that “collar hedging strategies like we have for traditional mining” don’t exist for this industry. So if Coin Metric’s new hashrate measure catches on, it could facilitate a financial product that, as Coin Metric points out in its blog, could cater to the venture capital and private equity crowd that continues to fund Bitcoin mining setups.

After all, this crowd is accustomed to hedging options like this and it could help inspire more confidence in a young but quickly maturing sector.