Bitcoin kicked off the new year with a record high hash rate, topping all previous records. On Jan. 1, 2020, hashing power hit 119 quintillion hashes per second (h/s).
What does this mean, what in the world is quintillion h/s, and why is this important for investors?
Here are some of the key terms used when talking about the Bitcoin network and hash rate.
• Block – A block is like a file that contains information about the transactions that have taken place in the network.
• Block hash – A reference number for a block on the blockchain. The block hash is calculated by hashing the block header twice.
• Block header – A summary of the data contained within a block.
• Difficulty – The parameter used in the Bitcoin network to keep the average time between the mining of blocks as consistent as possible, even when the hash power changes.
• Target – The block hash has to be below the target number in order to be added to the blockchain. The target number changes about every two weeks in order to maintain a consistent difficulty level for mining blocks.
• Hash rate or hash power – The speed at which calculations using the function are completed.
• Hashing – The process of calculating the block hash. The algorithmic function that converts inputs of letters and numbers into an encoded output with a fixed length.
• Mining machine – A computer that runs calculations to find the block hash.
• Nonce – This is the number that miners are trying to solve for in their calculations. It is part of the block header. Miners try changing this number over and over again to try to solve for the full block header.
What Is a Bitcoin Hash Rate?
Bitcoin’s hash rate is an indicator of how healthy, powerful, and profitable the Bitcoin network is at any given time.
Put simply, the Bitcoin network hash rate is the speed at which any particular type of mining machine operates.
Although Bitcoin is a digital currency, it must still be “mined,” and its network must be maintained in order to stay running.
Bitcoin is created and kept running through a network of thousands of mining machines (i.e., a network of computers) run by independent operators around the world. These machines mine bitcoin by solving complex mathematical computations.
To solve these problems, each machine has to make millions of guesses per second. This requires a lot of power. How much? A report from June 2019 estimated that the Bitcoin network accounts for 0.2% of all energy use worldwide. And this energy-intensive network is still growing.
The mathematical computations that mining machines complete verify all the past transactions in the network and keep it up to date. For example, if you send your friend $10, the miners will verify that it was you who sent the $10, who you sent it to, and the amount that you sent.
This transactional information is stored in a block, which is like a file. Each block can only hold a certain amount of information.
Hashing a block is the process of solving equations to ensure the validity of the network transactions. As a reward for hashing, or mining for, blocks and keeping the Bitcoin ledger up to date, mining operators receive bitcoins as a reward for each block that they successfully hash. Once a block has been hashed, it becomes permanent in the blockchain “ledger” and cannot be changed.
To successfully mine a block and receive bitcoins, a machine has to hash the block’s header so that it’s equal to or below the target. The block header is a summary of the information contained within that block, similar to metadata. The target is a hexadecimal number that miners have to get below in order to mine a block.
The function of the target is to make sure a consistent number of bitcoins are released into the market over time. To keep this consistency, the target helps make bitcoin mining more difficult over time, and the target number changes about every two weeks.
Miners find the target by trying different combinations of possible numbers and letters in the block header. This varied value field in the block header is called the “nonce.”
The miners always begin with a nonce of 0 and increase it each time they guess until the target is reached. The chances of landing on the correct hash are very low.
The hash rate is a measurement of how many times the Bitcoin network is able to attempt to complete the calculations each second. It’s the approximate average of all the hash rates of each individual mining machine in the network. A higher hash rate is better because it increases the miner’s chances of finding the next block and receiving the bitcoin reward.
Blocks and the Blockchain
Bitcoin and many other cryptocurrencies are built using blockchain technology. Blockchain means just that, a chain of blocks. Blocks are files which hold data about the most recent transactions made throughout the network.
Each time someone buys or sells bitcoin, that transaction gets recorded on the blockchain. All transactions can be viewed publicly, and they cannot be changed. The Bitcoin blockchain is essentially a digital ledger of all past transactions.
The mining network confirms transactions, and since the network is made up of thousands of miners around the world, this helps keep the ledger honest and secure.
Since blocks are like files, larger blocks require more power to verify.
How the Hash Rate Is Measured
The hash rate is computed as the number of hashes per second (h/s). Bitcoin’s network is so big and powerful now that it can calculate quintillions of hashes every second.
• Kilohash (KH/s) is used for 1,000 hashes
• Megahash (MH/s) is used for 1,000 kilohashes
• Terahash (TH/s) is used for 1,000 megahashes
• Petahash (PH/s) is used for 1,000 terahashes
Fluctuations in Bitcoin’s daily mining power can be significant. Increases or decreases of 10% or more each day are common. These wide fluctuations don’t necessarily mean that thousands of machines are being added or turned on or off each day.
The calculation of Bitcoin’s mean hash rate is not precise. With so many machines running all over the world, analysts can only look to recent market activity and create an educated estimate of the current hash rate.
Therefore, different websites and reports tend to release different hash rates. Since daily fluctuations can be so large, looking at the hash rate on a day-to-day basis isn’t that useful. Rather, looking at longer-term trends, weekly vs. daily trends, and other indicators can be a more useful indicators.
There are many types of mining machines, and new ones are always being released to the market. Each cryptocurrency is mined with different machines, and these don’t all have the same hash rate, because mining requires different amounts of power, memory, and computing.
Individual miners can calculate their personal hash rate using a hash rate calculator. By inputting information about their mining equipment, how much power it uses, their electricity costs, mining fees, and other relevant information, the hash rate calculator can then tell the miner their estimated earnings.
Miners might do these calculations before purchasing new equipment or deciding where to set up their machines. They can also input predicted variables, like if they think the price of bitcoin is going to go up in the coming months, they could predict how much that might change their profitability.
When new machines are released, the network hash rate might increase, since the machines are more powerful. However, a more powerful network doesn’t necessarily result in bitcoins being mined more quickly.
The way Bitcoin was designed, only a certain number of blocks are released over time. A new block is mined about every 10 minutes on average, and the rate of difficulty of mining goes up over time to keep this rate the same even if hash rate increases.
Since the difficulty of mining bitcoin has increased over the past decade, and powerful mining equipment has gotten more expensive to invest in, it has become harder for hobbyist miners to participate in the network. Many of the current miners in the network are run on an industrial scale.
Hash Rate’s Relation to Profitability
Changes to hashing power are related to difficulty, the number of miners in the network, and ultimately, the profits miners receive for mining.
If new miners join the Bitcoin network, this increases the difficulty of mining a block, because miners now need to make more guesses each second to solve the calculation and win the block reward. This makes it harder for miners to be profitable.
If the Bitcoin network’s difficulty increases, the hash rate also increases.
Impacts of Electricity on Profitability
Bitcoin miners must invest in mining machines, storage for those machines, and electricity to keep the machines running. Many mining operations also pay for precise temperature and humidity controls to keep the machines running at optimal performance.
The cost of electricity affects the overall profitability of a miner. Although a particular machine might be able to produce a certain number of bitcoins each year, that machine running in one part of the world could be far more profitable than in another part of the world with more expensive electricity costs.
This calculation is called the “efficiency” of the miner.
When the difficulty of mining bitcoin increases, electricity costs also go up because it is harder and can take more time to mine each block. This lowers the efficiency for miners.
This is important to keep in mind when looking at hash rate, because hashing power is not the only factor that goes into calculating miner profitability.
What the Hash Rate Means for Bitcoin
When news comes out about the Bitcoin hash rate, it’s considered to be a measure of the overall health of the network. A high hash rate means high processing power for the network, which also creates greater security.
A high hash rate might indicate that miners are investing money into mining equipment, which could mean they have confidence in the network. It could also be appealing for miners to continue to join the network or buy more equipment, because it means the network is more secure against attacks.
As miners validate new blocks, they get added to the Bitcoin blockchain. The longest chain of blocks is always accepted as the valid version. The security of the Bitcoin blockchain relies upon miners working together to build the same chain, or ledger.
It’s important to have only one ledger, otherwise bitcoin can be spent twice. This is the same as any currency or asset.
If a bank kept two different ledgers of transactions, they could each have different information on them and the same money could be spent multiple times.
A 51% attack can hit the Bitcoin network if one miner or a group of miners acquires enough equipment and mining power to rewrite the Bitcoin blockchain by creating a longer chain of blocks. If they can do this, then they can selectively rewrite the chain, allowing for double spending.
The attackers can choose to omit some past transactions and create new ones. This is the same as if a hacker logged into an online banking system and deleted some of the past transactions, effectively putting money back into their bank account that they had already spent.
Pulling off a 51% attack requires a lot of equipment and hashing power. The more hashing power the main network has, the greater number of miners would have to band together to accomplish a 51% attack.
Although it might seem unlikely, a 51% attack is a legitimate concern, as is ownership over hash power. Other cryptocurrencies have experienced these attacks in recent years.
Research shows that just four mining groups will own 98% of the bitcoin marketshare by the end of 2020. This centralization of power over the network increases the danger of a 51% attack.
However, pulling off a 51% attack on the Bitcoin network would be extremely expensive. The more expensive it is, the less likely it is to happen.
As of June 2019, the cost of a 51% attack would be approximately $1,006,000,000.
How Hash Rate Can Affect Investors
Since a high hash rate could mean the Bitcoin network is healthy and profitable, this can translate to upward price swings. Historically, price has followed hash rate during bull runs.
The current hash rate is significantly higher than it was in 2017, when bitcoin reached its all time high over $20,000. It’s also significantly higher than it was a little less than a year ago. In April 2019 the hash rate was 36 quintillion h/s.
This year, a halving event is scheduled to take place, which will increase the difficulty of mining bitcoins. Every four years, the rate at which new bitcoins are released to the market gets cut in half. More specifically, the reward miners receive for verifying transactions gets reduced by 50%.
Following past halving events, Bitcoin’s price has increased. This event, combined with the increased hash rate, may result in an upward trend for bitcoin, if past events are an indication of future events.
It has never been more difficult to mine bitcoin as it is now, which means supply and demand could come into play and increase the price.
When investing in Bitcoin, it’s important to pay attention to hash rate, difficulty, and other key indicators. However, past trends are not predictions for the future. Investors might want to take caution when investing in any asset, do their own research, and make decisions about how much risk they are willing to take.
A higher hash rate may result in bitcoin’s price increasing, but other factors could also come into play to cause the price to decrease.
Keeping Track of Important Financial Trends
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