Bitcoin Nodes and the Bitcoin Price: Studying the Health of the Bitcoin Blockchain
The price of Bitcoin always draws the headlines and interest. But at the core of the network, underpinning Bitcoin’s entire operation, are Bitcoin nodes.
Bitcoin nodes are responsible for maintaining the integrity and security of the Bitcoin blockchain. They store a record of the Bitcoin blockchain (in the case of a full node – the entire blockchain) with all its transactions and run software that ensures the network is conforming to Bitcoin’s consensus rules. They are an essential part of the Bitcoin network.
Unlike Bitcoin mining nodes, however, there is no bitcoin reward for running just a full node and doing so uses up storage space, computing power and energy. So why do users run nodes?
There are actually quite a few motivations. Running a full node is the only way to personally ensure that the rules are being enforced correctly, as full nodes reject blocks that don’t follow the rules. Moreover, bitcoin investors and believers alike will want to keep tabs on the health of Bitcoin’s blockchain as it is used to facilitate transactions, and so influences the price.
Security and decentralization are also substantial considerations. If you’re relying on a Bitcoin wallet without using a full node, you are placing some trust in the hands of the wallet provider as you are trusting their servers. Moreover, the more full independent full nodes running the network, the greater the degree of decentralisation and security – two of the most important parts of Bitcoin.
Our analysts mapped the number of nodes over time against the bitcoin price below using the DataLight Laboratory.
Why are the number of nodes and the Bitcoin price uncorrelated?
Looking at the data since the crypto bull run in November 2017, we see that the number of bitcoin nodes has, in fact, remained relatively static below the 10,000 mark. While the bitcoin price famously saw an unprecedented surge to nearly $20,000 in December, the number of nodes, while growing a little, by no means grew in tandem.
By April 2018, the number of nodes had settled back down towards the 10,000 mark again and remained reasonably steady throughout the crypto winter.
In 2019, April saw a substantial rally for bitcoin, as it shot up from its depths below $4,000 to shoot past $5,000 and up towards the $6,000 mark. Interestingly, in the same period, the number of nodes dropped by 10%.
Perhaps underlying this lack of correlation or even some negative correlation in 2019, is a fundamental difference in the type of user who runs a node, and those who are interested in price and speculation.
We explained above that even investors and traders should care about running a bitcoin node because they are key to the health and survival of the Bitcoin network. However, in reality most that care about running a node are Bitcoin enthusiasts and true believers. Running a node takes time, resources and some degree of effort, and for many that are involved in running a node, it is driven not solely by financial incentive, but by a concern for security and a belief in the need for a robust and decentralized network.
The bitcoin price, however, (so far at least) has largely been moved by speculation and trader interest. Such market participants likely don’t have an interest in running nodes. It’s very possible that this dynamic explains the lack of correlation between the price of bitcoin and the number of nodes.
Why Should Investors Care?
This kind of insight from our Laboratory is important for traders and longer-term investors trying to build an informed investment strategy for bitcoin and cryptoassets. As has been a concern for the crypto world in the past, if the number of nodes decreases substantially, the Bitcoin network runs the risk of becoming increasingly centralized in the hands of fewer and fewer larger actors. Sufficient decentralization is key to the health of the network – as it is underpins bitcoin’s core value as an asset.
Investors therefore, particularly those HODLing for the long-term, should pay attention to the number of nodes and the health of the bitcoin blockchain.
The DataLight Laboratory
These kinds of insights are just a small fraction of what you can learn using the DataLight Laboratory. Showing everything from social sentiment data to blockchain analytics, it gives you the ability to create custom dashboards to track the indicators that are most important to you in the cryptoasset space. Check out the DataLight Lab and start creating your own dashboards.