If you have been a part of the crypto world for some time, you must have come across the term ‘hash rate’. Well, hash rate is a term that becomes evident when it comes to cryptocurrency mining.
Mining means creating a cryptocurrency through coding using computers and especially developed software. The people who perform this procedure are called cryptocurrency miners. They do mining using powerful equipment which aids in solving complex mathematical problems that cannot be solved manually.
Once the mathematical puzzles are successfully solved, the miners are rewarded with new crypto coins while making the whole crypto network safe and reliable by verifying the transactional information. Though this might sound quite simple, it actually requires a lot of effort to generate new coins in a crypto network, and this is where the hash rate gets involved.
Let’s learn each and every detail about hash rate.
What is Hash Rate?
Technically, hash rate is the overall computational power that is used to process transactions and mine coins on a blockchain network, like Bitcoin and Ethereum.
Hash refers to an alphanumeric code that represents words, messages, or data of different lengths. Crypto projects use a wide variety of hashing algorithms to develop various types of hash codes.
The hash rate is a metric that represents the number of calculations performed in a second.
How does Hash Rate work?
While mining, the strength of the high-performing computers that generate Bitcoin and other digital coins is calculated in terms of hash rate. The hash rate is actually the total computational power that is being used to mine and process transactions in a blockchain. Hash rate is necessary as it highlights the efficiency and productivity of the mining machines that are employed.
A hash consists of a block header located at the top of a transaction. It includes 64 characters that are a compilation of letters and numbers. It summarizes the entire block that includes information like the previous block hash, the block’s version, and the block transactions that are hashed together as well as the time of the mining process.
A hash also consists of the smaller versions of the target hash, which can be described as the ‘specific number’ in which a hashed block header needs to be less than or equal to the reward of a new block.
It also consists of ‘nonce’, which is the mining field that miners have to modify to reach the hash of the block header. A nonce is a random number that is used just once.
In order to get a valid block hash, a miner is required to hash the block’s header and obtain a hash that is not above the target. This allows miners to generate a new identifier for each block.
Note: The target changes with the change in the difficulty level, which requires miners to modify the nonce till the hash of the block headers is hit by them.
The main function of a target is to make sure that the same number of bitcoins are launched in the market over a period of time. To maintain this consistency, the target makes cryptocurrency mining tougher, as well as the target number, keeps changing once every 2 weeks.
If a miner reaches the hash and forwards it to the network, anyone can add it to their blockchains. This creates a reward for the miner who finds proper nonce.
Hash Rate Measurement & Units
Hashes per second (h/s) unit is used to define the hash rate. The hast rate comes in handy for calculating the speed of the machine that is used in the mining process. Hash rate is counted in Kilos, Giga, Mega, Tera, Exa, and Peta. Below are few examples of hash rates:
- 1 Kilo hash per second (1 Kh/s) = one thousand hashes per second (1,000 h/s)
- 1 Mega hash per second (1 Mh/s) = one million hashes per second (1,000,000 h/s)
- 1 Giga hash per second (1 Gh/s) = one billion hashes per second (1,000,000,000 h/s)
You must also know that the hash rate differs as per the cryptocurrency and the machines or equipment that are used in its mining process. All cryptocurrencies have different amounts of hash power.
How is Hash Rate Calculated?
There can be drastic fluctuations in Bitcoin’s mining power on a regular basis. Rise or fall by 10% each day is quite common. However, these fluctuations do not necessarily mean that hundreds of machines are turned on or off daily.
There’s no exact method to determine the exact hash rate of a cryptocurrency. With a lot of machines running across the world, hash rate is traditionally calculated with the help of public data like current market activity about a particular cryptocurrency.
However, this traditional method has been criticized as it doesn’t provide accurate results as different websites and statistics give out different hash rates. And since daily fluctuations are so irregular, it’s not at all useful to look at the hash rate on a daily basis.
There are a variety of mining machines available in the market, with new ones being launched regularly. Different cryptocurrencies employ different mining equipment and even their hash rates differ as the mining process requires varying amounts of computing resources.
Miners measure the hash rate of their mining equipment with a hash rate calculator. This is done by entering the details about the equipment, the amount of power it uses, the cost of electricity, mining fees, as well as other necessary information.
Sometimes miners perform these calculations before buying the equipment or choosing a particular location to set up their machinery. They can also enter the predicted figures; for example, if they forecast that a price of a particular crypto coin is going to rise in the future, they can predict how well it would affect the profitability.
The network hash rate increases as the new equipment is released as these are more powerful. However, a stronger network doesn’t necessarily lead to quicker mining of crypto coins.
Impacts of Hash Rate & its Difficulty for Miners
The hash rate directly affects the process of cryptocurrency mining, no matter whether the miners perform it through mining pools or on their own. So, if you wonder what is the perfect hash rate for mining cryptos? The answer is quite straightforward – the higher the hash rate, the higher the probability of mining a block. This means if the hash rate of your mining rig or device is high; you can earn more rewards by successfully mining blocks.
The difficulty of crypto mining is directly related to the difficulty faced by miners in producing a hash that’s a level lower than the target hash.
In bitcoin mining, a limited number of blocks are released over a period of time, and a fresh block is mined every 10 minutes. If miners find bitcoins every 10 minutes, the mining difficulty rises. Whereas, if they find bitcoins in less than every 10 minutes, the difficulty rate falls.
So, the difficulty of the mining process increases over time to maintain a constant time for extracting crypto coins even if the hash rate increases.
Since the difficulty of mining cryptocurrencies has greatly increased over the past 10 years, more advanced machinery with high computation power is required to mine cryptos, which increases the overall expenses for miners. Also, it has become tougher for miners to take part in the network and mine cryptos.
Effects of Hash Rate on Profitability & Energy Consumption
As we are aware that the hash power hugely depends on the performance of the machines or computers that are used for the mining process, most of the miners are now investing in powerful mining machinery offering high hash rates. These machines are costly and consume a significant amount of electricity.
A lot of miners also have to bear the cost of maintaining a proper temperature and humidity level to allow the mining machines to perform at their best. The cost incurred in electricity directly affects the profitability of a miner. A particular machine may prove to be more profitable in one part of the world than in another due to the differences in the cost of electricity. This evaluation can be termed as the ‘efficiency of the miner’.
Also, when the mining difficulty increases, the cost of electricity also goes up as it takes more time for mining each block. This results in low efficiency and reduced profits.
The growing popularity of bitcoin and other crypto coins has attracted more miners to join the competition and make use of the latest mining machines, such as the application-specific integrated circuit (ASIC) miners.
The Impact of Hash Rate on Investors
A high hash rate signifies a healthy and profitable crypto network. This further translates to an increase in the overall cost of mining cryptos.
Currently, the hash rate is much higher than it was around 3 years back when Bitcoin was at its highest value – $20,000. It’s also considerably higher than what it was around a year ago. In 2019, the average hash rate was reported to be 36 quintillion h/s.
Every once in 4 years, the bitcoin rewards become half. Also, the reward miners get for doing the verification of the transactions is reduced by 50%.
Since few halving events have taken place in the past, there’s been an increase in the price of bitcoin. The halving event, when combined with the increased hash rate, leads to a rise in the value of bitcoin. Presently, the mining process of bitcoin has become more difficult than ever.
It’s quite important to take note of the hash rate, mining difficulty, and other associated factors whenever you are planning to invest in buying or mining a cryptocurrency, like bitcoin. However, the trends of the past are not an indication of the future. It’s recommended for investors to take necessary precautions and thorough research before investing while contemplating how much risk they are putting themselves into. Always remember, a high hash rate may lead to a rise in the price of cryptos.
Frequently Asked Questions
Question: What is the current hash rate of Bitcoin?
Answer: As of February 2021, the average hash rate of bitcoin is estimated to be 171 million EH/s, i.e. exa hashes per second. 1 exa hash = 1 quintillion hashes.
Question: Why is hash rate important?
Answer: A high hash rate signifies that more resources are used to carry out transactions on a blockchain. This leads to a more resilient network for any attacks as a malicious anonymous would have to spend huge amounts of money and time to stand against other mining facilities for gaining a 51% majority control while stopping other’s transactions.
Also, the higher the hash rate, the tougher it gets for attackers to reach the hashing power. Thereby making it extremely difficult to attack the crypto network.