Bitcoin (BTC) Fluctuation in Hashrate Is Tied to its Inflation Rate, Analyst at Compass Mining Explains

Compass Mining, which claims to be the first and largest online marketplace for Bitcoin mining hardware and hosting, has commented on the relationship between BTC’s hashrate and the leading cryptocurrency’s issuance rate.

According to mining analyst Mitch Klee, the inflation rate is “tied to hashrate fluctuations.”

Klee noted that difficulty adjustment “makes sure the block interval is at an average of ten minutes.” He explained that when the hashrate (or the amount of computing power securing the Bitcoin network) “drops dramatically, the block interval slows down causing reduced inflation.”

Klee added that Bitcoin “doesn’t just mine a static number of Bitcoin per hour, it is calculated in each block to mine a certain number of Bitcoin.” But the blocks can “come faster and slower depending on the fluctuation in hashrate,” he added.

Klee further noted:

“Bitcoin is currently mining 6.25 bitcoin per block. If new blocks come every ten minutes (600 seconds) then this translates out to around 1.8% inflation currently. But that exact inflation percentage changes periodically based on short term fluctuations in hashrate.”

There are “some correlated drops in Bitcoin’s inflation rate and hashrate,” Klee added while noting that it is “safe to say that if there is a quick drop in the hashrate this translates to a short lived drop in inflation.”

However, Klee questions why this is happening.

He explained:

“Simply put, the difficulty adjustment keeps the number of blocks mined to an average rate of 10 minutes(600 sec). But this difficulty adjustment only adjusts every 2016 block. So as the hasrate drops dramatically in one difficulty period, you could see a significant rise in the block interval. The block interval is the number of seconds between each block.”

He also mentioned:

“When ASICs were first being deployed in 2013, there was a quick and consistent rise in hashrate. It was consistently more hashrate than the difficulty adjustment could handle so it led to a lower in the average block interval, eventually slowing down enough for the block interval to adjust.”

Klee added that “over the long-run, this doesn’t affect bitcoin’s inflation too much outside the short term inflation rate and after the next halving, bitcoin’s inflation rate will be lower than 1%.”

Klee clarified that there are “still only 21M Bitcoin and as of December 2021, 90% of all bitcoins have been mined, only getting more scarce.”

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