Disclaimer: This is for informational purposes and is not meant to serve as financial or investing advice.
What Is Hash Rate?
Hash rate (sometimes known as hash power) measures the computing power of a proof of work blockchain network. It usually refers to the Bitcoin network. (Ethereum recently switched from proof of work to proof of stake.)
Advocates and traders of cryptocurrency often bring up the Bitcoin hash rate or Bitcoin hash power. But what does hash rate mean, and is hash rate important?
Hash rate is the speed at which miners can complete a hash (computational problem) when mining a new block. Each Bitcoin block has a unique hash created by all the previous block's data. The data is compressed into one hash using a secure hashing algorithm called SHA-256. The next block is created when miners find that unique hash.
Hash functions to process transactions and lies at the heart of the crypto economy. The short answer is: yes, hash rates are very important.
Why Does Hash Rate Matter?
A higher hash rate means higher network security. Security is increased in two ways.
First, more computational resources are used to mine higher hashes, increasing the cryptocurrency network's decentralization. More miners mean more decentralization.
Critics of Bitcoin would argue that increasing the hash rate might lead to more centralization over time. Those with the resources and ability to successfully mine higher hash rates may only spend more money growing their mining pool share.
As the hash rate increases, it becomes more difficult for the average miner to compete for block rewards.
Secondly, more electricity is being consumed to secure the network, making it more expensive for bad actors or hackers to take over the network.
The idea is that after a specific hash rate is achieved, no one actor will be able to accumulate enough electricity to compromise the network.
What Factors Affect Hash Rate?
Hash rate can be measured by various numerical values, from megahashes (mh/s) to exahashes (eh/s), and the methodology of reporting a current hash rate varies depending on the site and the occasion.
However, regardless of how it's measured, here are a few factors that can affect the hash rate.
Difficulty
Mining difficulty is the computing power, or the number of computations miners require to solve the hash and earn the block reward. The current Bitcoin difficulty is about 35.3, about 45% more computing power than a year ago.
This means that the Bitcoin network has had to make it 45% more challenging to mine to maintain 10-minute block times in one year.
This increase is likely due to the rise in miners and cheaper electricity.
Miners
As miners join the network, the difficulty increases, increasing the hash rate. For the same reason, the number of miners directly affects the hash rate.
Bitcoin mining operations have grown in scale quite a bit since Bitcoin’s inception. BTC was originally mineable on your personal computer. Fast forward almost a decade, and entire companies are built on Bitcoin mining profits.
As more sophisticated miners join the mining pool, the difficulty could increase even faster. Some mining companies have relocated to regions with cheap or nearly free electricity to maximize profits.
In some areas, Bitcoin miners can do the important job of taking excess power from the grid. Cryptocurrency mining can make power grids more efficient and reliable.
Other Factors
Mining hardware costs and electricity prices can also affect the hash rate. These economic factors encourage and restrict miners from joining the network and mining.
As cryptocurrency mining has increased in popularity, the price of mining equipment has also increased. This is because top-of-the-line computer graphics require lots of processing power, something proof of work miners need. Manufacturers have had to increase their prices to keep up with the demand.
Other popular mining rigs are called ASIC miners, explicitly designed for cryptocurrency mining. ASICs are what you think of when you see a giant air-conditioned server room full of Bitcoin miners.
There is an argument that opportunity cost also affects the hash rate. If there is another more profitable blockchain that hardware and electricity can be used to mine, it might reduce the number of BTC miners.
But if other blockchains switch from proof of stake or become defunct, those miners would be incentivized to come to the Bitcoin network.
What Is Mining Profitability?
Mining profitability refers to the profitability of running miners to earn block rewards from network consensus.
For Bitcoin mining, profitability is relatively straightforward to calculate. You need to calculate your personal hash rate (the hash rate of your mining rigs), compare it to the network hash rate, and calculate expected rewards. Then you factor in fixed costs like hardware and variable expenses like electricity and repairs.
Electricity price is a significant component in whether mining will be profitable. Mining speed is usually measured in how many thousands of hashes can be mined in a second or kh/s.
On top of all that, the market price of Bitcoin affects your profitability calculation. And since Bitcoin price changes 24/7 and can swing rapidly, cryptocurrency miners are doing a lot of math.
It’s probably best to use a tool like NiceHash to estimate your earnings before you run to the store and buy computer graphics cards.
As you play with the input variables on mining profitability, you start to think about how miners might respond to price changes and how the market might respond to hash rate changes.
If a high hash rate increases miners and security, do speculative investors care about these factors? Do price decreases discourage miners? At what price will the network lose x miners?
There are infinite models and scenarios for hash rate and profitability.
Halving
Another consideration is Bitcoin halving. Bitcoin’s block rewards halve about every four years. Bitcoin miners may not be incentivized to continue mining after a halving if the market price isn’t high enough.
But the price has increased after every halving as new supply contracts and demand increase.
So, is halving good for Bitcoin miners? It depends. Miners aren’t happy about receiving lower block rewards, but when less supply is introduced, demand increases the price to make up for it. (There’s a lot of disagreement and what some would call FUD surrounding halving and whether it’s a suitable mechanism.)
The Bottom Line
Hash rate measures the computing power of a proof-of-work blockchain network, usually referring to the Bitcoin network. It is the speed at which miners can complete a hash (computational problem) when mining a new block.
A higher hash rate means higher network security, as more computational resources are used, and more electricity is consumed to secure the network.
The difficulty of the mining process, the number of miners, the cost and efficiency of mining hardware, and electricity prices can all affect a network's hash rate.
Want to learn more about blockchains? Check out our guide to blockchain protocols and how they work.
Sources:
What Is Proof of Work (PoW) in Crypto? | Motley Fool
What is Bitcoin hash rate and why does it matter? | Coin Telegraph
ASIC mining: Computers built specifically for mining cryptocurrency | Business Insider
