Bitcoin Hash Rate and Why It Matters | SoFi
Recently, bitcoin has been at or near a record hash rate. in April 2021, hash power reached over 198 quintillion hashes per second (h/s), a record.
what is the bitcoin hash rate? And why is this important to investors? read on for a full explanation.
Reading: What is hash rate bitcoin
what is the bitcoin hash rate?
Bitcoin hash rate refers to the amount of computing and processing power that is contributed to the network through mining. Bitcoin mining is a vital process that keeps the digital currency network healthy. this happens through a gigantic global network of mining machines (powerful computers built for this task). these machines mine bitcoins by solving complex mathematical calculations that verify bitcoin transactions.
To solve these problems, each machine has to make millions of guesses per second. this requires a lot of electricity. Bitcoin miners consume about 129 terawatt-hours of energy, which is about 0.6% of the world total, according to the Cambridge University Bitcoin Electricity Consumption Index.
And this energy-intensive mining network continues to grow. a lot of electricity is needed to keep the blockchain network up to date.
bitcoin hash rate: 2018-2022
how hash rate works
Bitcoin and many other cryptocurrencies are built using blockchain technology. Blocks are similar to files that contain data about the most recent transactions made on the network, and in a blockchain they form a chain, each dependent on the others.
The bitcoin network is designed to ensure that a constant number of bitcoins are released to the market over time.
Every time someone buys bitcoin or uses it as payment, the transaction is recorded on the blockchain. all transactions are publicly viewable (albeit anonymously) and cannot be changed. The bitcoin blockchain is a decentralized digital ledger that contains a record of all past transactions. the network confirms those transactions, and since the network is decentralized, the ledger record is secure.
but since blocks are like data files, larger blocks require more power to check. that’s where hashing comes into the picture. “Hashing” a block is the process of ensuring the validity of network transactions. As a reward for hashing, miners receive bitcoins.
To successfully mine a block and receive bitcoins, a machine has to encode the block header, which is a summary of the information contained within a given block (similar to metadata).
It is a complex process, but the important thing is to know that the bitcoin network is designed to ensure that a constant number of bitcoins are released to the market over time. to keep this consistent, bitcoin mining gets harder over time.
miners find the target by trying different combinations of possible numbers and letters in the block header. this mixed-value field in the block header is called a “nonce”.
miners always start with a nonce of zero and increase it each time they guess, until the target is reached. important: the chances of landing on the correct hash are very low, hence the difficulty of mining bitcoins.
the bitcoin hash rate is a measure of how many times the bitcoin network tries to complete those calculations every second. it is the approximate average of all the hash rates of each individual miner in the network.
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a higher hash rate is better, because it increases the miner’s chance of finding the next block and receiving a bitcoin reward.
how bitcoin hash rate is measured
Bitcoin hash rate is expressed as hashes per second (h/s). The bitcoin network is large and powerful, and as a result, it can compute quintillions of hashes every second. for reference, a quintillion is a million million million, or 1,000,000,000,000,000,000.
Fluctuations in daily bitcoin mining power can be significant. increases or decreases of 10% or more each day are common. but these fluctuations do not necessarily mean that thousands of miners join or leave the network every day.
The average bitcoin hash rate calculation is not accurate. With so many machines running around the world, analysts can only look at recent market activity to create an estimate of the current hash rate.
so looking up the current hash rate may return different results. To get a better idea of the hash rate, it may be more useful to look at longer-term trends (weekly versus daily hash rates, for example).
why hash rates matter to miners
For individual miners, calculating a hash rate can help them predict their profitability.
There are many types of mining machines and new ones are constantly appearing. each cryptocurrency is mined with different machines and not all of them have the same hash rate as mining requires different amounts of power, memory and processing bandwidth.
Individual miners can calculate their personal hash rate using a hash rate calculator. By entering information about your mining equipment, power and electricity consumption, mining fees, and other relevant information, the hash rate calculator can return an estimate of earnings.
When mining rigs are upgraded with more powerful machines, the network hash rate can increase as a result. however, a more powerful network does not necessarily result in faster bitcoin mining, as the network is designed to release a certain amount at a time.
Changes in hash power are also related to the difficulty of mining, the number of miners in the network, and ultimately how profitable the miners are.
if new miners join the network, the mining difficulty increases because miners now need to guess more every second to solve the calculation and earn the block reward.
if the difficulty of the bitcoin network increases, the hash rate also increases.
prices and profitability of electricity
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 machines running at an optimized rate.
As bitcoin mining becomes more difficult, the process consumes more electricity.
therefore, the cost of electricity affects the profitability of miners. A miner in Seattle could be much more profitable than one in New Jersey, due to the difference in electricity costs.
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And as bitcoin mining becomes more difficult, the process consumes more electricity. this increases costs for miners.
This is important to keep in mind when looking at hash rate, because hash power is not the only factor that goes into calculating miner profitability.
what does hash rate mean for bitcoin
A good hash rate could indicate that miners are investing money in newer and more powerful mining equipment, which in turn could mean that they have confidence in the network.
bitcoin hash rate is generally considered an indicator of health for the network: a high hash rate means there is high processing power within the network, which also creates higher security.
The security of the bitcoin blockchain depends on miners working together to build the same chain or ledger. As miners validate new blocks, the blocks are added to the bitcoin block chain. the longest blockchain is always accepted as the valid version.
It is important to have only one ledger, otherwise in theory bitcoin could be doubled or spent twice. Double spending can be thought of this way: If a bank kept two different transaction ledgers, each could have different information and the same money could be spent multiple times.
how hash rate can affect investors
a high hash rate indicates a healthy network, which, in turn, can lead to higher bitcoin values.
Hash rates are currently significantly higher than in previous years and should continue to rise. that may mean bitcoin values follow, though given the volatility of the cryptocurrency, there’s no guarantee. Furthermore, simple supply and demand could become the dominant factor determining the price of bitcoin in the future.
Past trends are not predictions for the future, and you should do your research and consider your risk tolerance before making any move.
The bitcoin hash rate is the number of times per second that computers on the bitcoin network process data to verify transactions and perform the encryption that protects the network. Hash rate is an indicator of how healthy the bitcoin network is at any given time, and is primarily driven by mining difficulty and the number of miners. In general, a high hash rate is considered a good thing.
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