May 6, 2020
What the Hash?
Bitcoin Hash Rate and relationship with price
With the Bitcoin halving getting closer every day and the lack of other exciting events to look forward to (let’s be honest, this is one of the biggest in crypto) one topic has made it into nearly all crypto publications: the hash rate.
While most of us are familiar with hashtags (#lockdownboredom, anyone? )and hash browns, the hash rate of bitcoin is something that not even everyone in crypto can explain. Yet, it’s an interesting indicator for the security of the network and according to some analysts for the price.
But first things first, what is the hash rate?
To understand the hash rate, we need to understand how new blocks are added to the blockchain and how the process of mining works.
To prevent anyone from confirming transactions that are invalid, Bitcoin relies on an algorithm called proof of work. The work is computational work and is done by miners all around the world who keep the network secure and ensure the validity of transactions. Whenever a new block is to be added to the blockchain, miners race to solve a mathematical puzzle.
What they’re trying to find is a certain number that in combination with the SHA 256 functions gives a certain output such as a number beginning with 6 zeros. The SHA-256 is a hash function which means that their output is a hash. Another important point is that the SHA-256 cannot be reverse-engineered, hence the only way to actually find the right number to input, is by trying.
This is exactly what all this fancy mining equipment is doing: running through a combination of numbers to find the right one to solve the puzzle. And whoever is first to solve the puzzle receives the block reward.
The hash rate in this whole process describes, how many times the hash function is executed within 1 second. The hash rate for Bitcoin is consequently the computing power of the whole network. The hash rate for Bitcoin is currently at 120 EH/s, so 120 quintillion hashes are processed per second. One quintillion that is a one with 74 zeros.
A high hash rate is a good indicator for the health of the bitcoin network, because the higher the processing power, the harder it is for any malicious actor to attack the network. However, a higher hash rate also makes it more difficult for small miners to compete. In the early days of Bitcoin, it was possible to mine Bitcoin with a simple GPU. Nowadays, you won’t get far without specialized mining equipment.
Hash rate and price
The relationship between hash rate and the price has often been discussed, and in recent years the correlation between the two has mostly been positive — so when the hash rate increased price followed and vice versa.
In anticipation of the upcoming halving, the hash rate of Bitcoin has reached new highs. Yet, what exactly happens for the hash rate to increase?
It either means that new miners are entering the mining game or that existing miners are stepping up their equipment or a combination of both. From an economic standpoint, this only makes sense if they expect to make a return on their investment. When the hash rate increases, miners have to use more hash power to mine a bitcoin, which increases their cost — leading to decreased profitability. What’s the rational thing to do in this case?
If you’re a miner and spent on average $3000 to mine one Bitcoin, you will try to sell at a price that is above $3000. Therefore, if the current market price is below your target price, it makes sense to hold or in crypto-terms HODL your coins until you can sell for a profit. And if you’re bullish on Bitcoin in the long-term, that’s what you’ll do.
On the other hand, if you’re unsure about the future of Bitcoin and your own mining operations you might just sell at the best price you can get and dedicate your computing power to other more profitable ventures.
Is this increase in hash rate a final push from miners to mine as long as it’s still profitable before the halving or are they long-term bullish on the outlook of their earnings? Only time will tell — and we all know that humans don’t necessarily act rationally so any assumption based on the homo economicus is weak, to begin with.
Nevertheless, quite some analysts believe that price will follow the hash rate and that the halving will support the long-term price appreciation of Bitcoin. One thing is sure, the whole crypto-market would love to see another bull-run, especially now, in a time where the world economy is in crisis mode.
