When it comes to bitcoin mining, a good hash rate is a higher hash rate. The more computing power going towards maintaining a network, the more secure it will be and the more transactions it will be able to handle. Investor confidence in the coin is also likely to be higher.
The bitcoin hash rate is one of the most important concepts to understand, especially for anyone considering investing in cryptocurrency.
What is a Hash Rate?
To understand what is meant by the term “hash rate,” we must first briefly explain the process of bitcoin mining.
Mining is the method by which crypto transactions are processed. As a reward for processing transactions, miners are rewarded with new Bitcoins.
A group of transactions is called a block. Every ten minutes or so, a new block is mined, and the reward goes to the miner who can prove they did the most work toward creating the block, in a process called proof-of-work.
The amount of new coins created with each block gets cut in half every four years in a process known as “the halving.” This process is set in stone through computer code known as the bitcoin protocol.
When bitcoin was conceived in 2009, the block reward was 50 coins. In 2012, this was reduced to 25, then to 12.5 in 2016, and to 6.25 in 2020. In this way, Bitcoin is a “deflationary” currency, as opposed to fiat currencies created by central banks which are inflationary and can be created in infinite amounts at will.
Why Does Hash Rate Matter?
Hash rate refers to the amount of computing power being contributed to the network at any given time. The more mining going on, the higher the hash rate.
A hashing algorithm takes a unit of data and turns it into a random string of numbers and letters. This process is called encryption, and it ensures that data will be secured.
A hash is just a computer performing this action. Bitcoin’s proof-of-work (PoW) algorithm is based on an encryption algorithm called SHA-256. The bitcoin hash rate boils down to how many times per second this algorithm is hashing calculations.
Bitcoin miners perform as much of this work as possible in an effort to obtain the next block reward of 6.25 bitcoins. The bitcoin protocol distributes these rewards on a lottery basis, with miners who contributed the most work having the best odds.
Today, however, most mining occurs in “pools,” where a group of miners pool their hashing power together and then split the block rewards up amongst themselves according to how much hash rate each contributed.
How Hash Rate Impacts Mining Difficulty
One of the ingenious aspects of the bitcoin protocol is something called the difficulty adjustment.
Every two weeks or so, the protocol automatically changes how difficult it will be to mine bitcoin based on the current hash rate. When the hash rate rises, so does mining difficulty. When hash rate falls, mining difficulty also falls.
This helps to ensure that the supply of bitcoin remains scarce while also keeping mining competitive. In 2020, the bitcoin hash rate hit several new all-time highs, signaling confidence in the largest cryptocurrency by market cap.
Bitcoin has a lot more hashing power behind it than all the other cryptocurrencies combined. Perhaps that’s why so many people have invested in bitcoin since it began.
Altcoins and Hash Rate
Other cryptocurrencies also need hashing power to run their networks, but the exact way they accomplish this varies.
While Bitcoin and many others use the PoW consensus algorithm, some coins use different algorithms, like proof-of-stake (PoS).
Rather than using powerful computers to contribute hashing power toward proof-of-work, proof-of-stake block rewards are distributed according to whoever has the most tokens “staked” on the network. Staking tokens involves locking them up for a period of time, sort of like a long-term savings account.
This method of consensus is considered to be less energy-intensive, although some also argue it’s less fair and less secure.
Some cryptocurrency exchanges now allow for automatic staking of tokens that utilize PoS. Users can hold the tokens in their wallet and automatically receive rewards.
There are many different ways coins secure their networks, but the important thing to know is that the total hash rate of all other coins combined pales in comparison to the bitcoin hash rate.
How to Calculate Hash Rate
Unless they’re mining or speculating, calculating a cryptocurrency’s hash rate isn’t something most people will ever have to do. Luckily the information has been collected and displayed in publicly available charts and graphs .
For users interested in mining cryptocurrency, it could be useful to calculate the expected hash rate of a mining rig. The two primary factors that determine the profitability of mining bitcoin are the hash rate and electricity costs involved.
Miners can insert the appropriate variables into a hash rate calculator and receive a result right away.
Investors considering speculating in altcoins could think about looking at the hash rates of different cryptos, as this may be one of the few fundamental factors available for analysis.
Benefits of a High Hash rate
The more computing power contributing to a network, the harder it becomes for potential bad actors to do bad things, because doing so requires more power. To take control of a network and do things like reverse or double-spend transactions, an individual needs to own 51% of the hash rate. And at this point, having enough power to control 51% of the bitcoin hash rate seems very unlikely.
That’s the main benefit of a high hash rate—increased security. This can also lead to increased confidence in a coin, higher user volume, and potentially higher currency prices. For investors looking to build their crypto portfolio, security can be extremely important.
Bitcoin’s excellent hash rate has a lot to do with its continued success and increasing value. Many people argue that BTC is the only reliable store of value for investment purposes for this very reason.
Bitcoin Hash Rate vs Price
There tends to be a correlation between the bitcoin hash rate and the bitcoin price. When a hash rate moves higher, prices tend to rise, although it’s not clear which causes which. It’s somewhat of a chicken-or-the-egg kind of scenario, and the topic has been much debated.
When prices go up, the hash rate is likely to follow, as mining coins becomes more profitable. A higher hash rate indicates that miners have a degree of confidence in the price, as they’re willing to make investments in computing hardware to mine more coins. When the hash rate goes up, prices could also follow, as investors see this as a signal of confidence.
When a hash rate is rising, it could be a good time to buy cryptocurrency, although the trend has not been proven.
What is a bitcoin hash rate? It’s simply the amount of times per second that computers on the bitcoin network are hashing data to perform the encryption that secures the network. This is how transactions are processed.
A good hash rate is one that keeps a cryptocurrency network secure. Higher hash rates mean more computing power would be needed to take control of a network. Therefore, a good hash rate is a high hash rate.
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