Hashrate beats the S&P 500 or A word on the benefits of hashrate rental.
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The story of Warren Buffett’s $1 million bet is well known. Without going into detail, we can say that index funds are completely superior to all other forms of asset management. Interestingly, after the announcement of the bet’s terms, which claimed that no professional could build a portfolio that would beat the S&P 500 in 10 years, the managers did not flock to get easy prey or take advantage of this excellent chance to publicly prove their worth. Protégé Partners was the one company that accepted the call with one qualification: the names of the funds it selected would not be disclosed.
As a result, 10 years later, Buffett clearly proved he was right - even with the choice of the top fund, long-term returns can’t match those of the main index fund.
The reasons certainly lie much deeper than it might seem, but they are based on the important fact that funds primarily enrich themselves, and last of all — those whose money they use. In other words, ordinary users of financial services, who invest their money and pay insane commissions, are actually supporting a horde of professional financiers who don’t aim to provide them with maximum income. It’s hardly a surprise that the index of the 500 top US companies over 10 years shows much better results, since it reflects the true dynamics of the development of the American economy, rather than the personal appetites of stock traders.
But if the S&P 500 is this attractive, a fair question arises: could any cryptocurrency index bring the same, or maybe even greater profitability, perhaps not over 10, but over 5-6 years? This is definitely the right train of thought, but the whole thing is that the cryptocurrency market is too young and immature. Over the years, a huge number of coins have been replaced in the top five, and even more of them - in the top-10 or 100 They were mostly pushed up by speculative hype, so the idea of compiling an arbitrarily reasonable index out of all this still looks premature.
Nevertheless, let's assume that six years ago we compiled an index of 10 leading cryptocurrencies in terms of capitalization in appropriate proportions. As of January 2015, it would include Bitcoin BTC 81.2%, Ripple XRP 14.2%, Litecoin LTC 1.36%, BitShares BTS 0.77%, PayCoin XPY 0.64%, Stellar XLM 0.5%, Dogecoin DOGE 0.4%, MaidSafe MAID 0.38%, NXT Generation NXT 0.35%, Peercoin PPC 0.2%. Today, some of these coins have already sunk into oblivion, but the remaining ones would be enough for us: the capitalization of Bitcoin has grown by more than 300 times, Ripple — by more than 100, Litecoin — by 250, Stellar — by 500 times, and Doge is an additional bonus with its 3000-fold surge. If we had waited a year, Ethereum would have been included in the index. However, the index could easily be rebalanced as the market situation changed, just as it happens with the S&P 500.
All in all, our hypothetical index has grown over 300 times over 6 years. The S&P 500 index has grown approximately 2.5 times (150%) over the same period. We should, however, remember that almost the entire growth was brought on by bitcoin due to the selected proportions. However, by including more coins in the index and diluting bitcoin’s presence, we would still hold the lead until the component pie chart began to turn into a full color circle: such an approach would be destructive.
Let's try to objectively figure out how this success came about and which primary parameter should be taken as a basis. Five coins out of the top ten showed impressive profitability, but some simply disappeared. We based our choice of proportions on coin capitalization. However, the capitalization of any other real-world asset would not make the slightest sense. Who cares about the cost of all the coconuts, bananas or all the palm oil in the world? Or even the cost of all the oil or gold in the world? These are purely curious facts, nothing more. In addition, capitalization blindly follows the price.
In the cryptocurrency world, bitcoin sets the bar. Altcoin seasons come and go, individual coins shoot up hundreds of percent, but if bitcoin falls — everything else falls, too. It is obvious that altcoin prices depend on the price of bitcoin. Bitcoin has been and still remains the main measure of confidence in the entire cryptocurrency market. What does its price depend on?
The price of bitcoin is a function of difficulty. The difficulty is automatically recalculated by the system every two weeks, so that a block is created every 10 minutes. The difficulty, in turn, is a function of hashrate - the higher the hashrate, the easier it is for miners to mine new blocks and accelerate the emission, which the system resists. A hashrate increase means a decrease in mining profitability, since it requires increasingly greater investments in computing equipment, but halving, in fact, cuts profitability in half. This, however, has never led to significant drops in the exchange rate, just the opposite!
So, could hashrate be the fundamental characteristic that determines market behavior? The point here is not so much bitcoin itself, but miners’ involvement in the industry, their willingness to trust the system and work in it, invest money in equipment, believe in their approach and long-term profitability? If there was no bitcoin, these same people would still enter the market of the asset that replaced it.
So, wouldn't it be fair to direct all attention to hashrate and imagine a certain hashrate index, which, unlike hypothetical cryptocurrency indices, can demonstrate much better growth dynamics?
In early 2015, bitcoin hashrate was about 300 PH/s, and at the May peaks it reached 180 EH/s, showing a 600-fold increase. Hashrate is computing power. Those who own the hashrate own the market and push it up. The dynamics of the last few years clearly indicates that the growth of the entire cryptocurrency market is based on the growth of bitcoin hashrate, and the same applies to significant drops. The speculative waves that keep rolling into the market, like the one in late 2017, may seem to contradict this theory and hashrate appears to follow the price, not vice versa. However, market sentiment is one thing, and fundamentals are another. The 2018 bitcoin slump only provoked hashrate growth, in other words, the crowd was swept off the market for a reason.
To sum up all of the above, what can an ordinary user who would like to own hashrate, but is not ready to buy equipment, do?
CryptoUniverse provides a concise and simple answer to this question. Its core business activity is the construction of modern data centers near efficient sources of renewable electrical power. One example of its approach is the data center in the Nadvoitsy town in the Republic of Karelia in the north of Russia, where a reconstructed hydroelectric power station allows to minimize energy consumption costs. Thus, in order to get hashrate with a several-year horizon, the user needs to choose a suitable contract among those offered by CryptoUniverse. The user-friendly dashboard allows you to instantly assess the payback period and potential income, while keeping the natural market growth in mind.
When a user owns hashrate, they receive a daily reward in bitcoins, earning money in the same way as they would speculating on currency rate spreads. The difference is that there is no speculation going on: owning hashrate eliminates trading, but your funds keep growing on the deposit.
Thus, owning hashrate today looks more than justified, and it is available to any private user, too. As Warren Buffett said, volatility is far from synonymous with risk, so bitcoin’s growth and fall phases are merely circumstances. The same circumstances occurred time and time again with the S&P 500 index. However, any long-term growth, including hashrate growth, is based on people’s willingness to deposit funds in entire sectors of the economy, otherwise, why would all this have been invented by the very same people? Certainly not to play at a loss all their life...