key takeaways
- Bitcoin hash rate is the amount of computing power contributed to mining.
- It continues to take new all-time highs
- This squeezes the profitability of miners, at a time when the cost of electricity has soared and the price of bitcoin has fallen.
- Overall, a higher hash rate means a healthier and more secure bitcoin network.
“All-time high” is a phrase I haven’t used in a while when covering the crypto space. But if you see, there is something that keeps on touching higher altitudes, and that is Bitcoin hash rate.
Bitcoin’s hash rate refers to the amount of computing power that is being contributed through the network. digging, And as the chart below shows, its ruthless growth doesn’t seem to be slowing down during the pandemic. But what does this mean and why is it on the rise?
What is bitcoin hash rate?
Gone are the days when anyone could mine on their personal computer. Today, mining is dominated by large mining pools, using specialized computers specially designed for this purpose.
The practice of mining actually involves these computers solving complex mathematical puzzles. Once this puzzle is solved, the latest block of transactions can be verified and added to the blockchain, before the process repeats regarding the next block and the next mathematical puzzle. Once a puzzle is solved and a block is validated, the miner responsible for this work is paid in newly created bitcoins.
This is all very complicated, but it is important to understand that bitcoin is programmed to release a specific number of bitcoins over time, with the blockchain coded such that a new block is added (validated) every ten minutes. .
But as more computers join the network and the hash rate increases, these puzzles must be solved quickly, which means faster block times and more bitcoin can be issued. right? OK, here’s the thing. a difficulty adjustment Bitcoin is coded into – this means that the more computing power that is added to the network, the harder it is to solve those puzzles.
Don’t ask me how it works, because I don’t even come close to understanding what lies under the hood of the mythical beast that is the bitcoin blockchain, but the main point is that as more miners join, the difficulty increases. She goes.
And as bitcoin has become more popular (and increased in price), that’s exactly what happened. More miners have joined the network, and today it is a highly advanced process. Ten years ago, when only a few miners existed, you and I could pull out our laptops and do a fair amount of mining.
Why is it at an all time high?
There are many reasons why the hash rate continues to reach new highs. But the bottom line is that as the number of miners increases, the hash rate goes up.
Thus the question really begs why are miners getting involved when the price of bitcoin is falling. Here are some possible answers.
The first is that during the pandemic bull run, mining equipment was scarce and prices for commodities like chips skyrocketed. Many miners ordered new mining rigs during the bull run, but only recently received equipment (or some, not yet).
Additionally, as the price of bitcoin fell, so did the profitability of mining, reflecting miners’ revenue in bitcoin. New mining equipment has been developed and is selling at a lower price than before, helping to increase the number of miners.
Another theory is the Ethereum merge. This happened in September, when Ethereum transitioned from proof-of-work to proof-of-stake, meaning mining on the network stopped. Therefore, some of these out-of-work Ethereum miners converted to Bitcoin mining.
What does high hash rate mean?
The first consequence of the increasing hash rate is obviously more pressure on the miners. More competition and a higher required hash rate reduce their profitability, especially at a time when electricity costs have risen and revenue (Bitcoin) has fallen.
The best way to see this is by taking a look at the share price action of some public mining companies over the course of 2022.
On the positive side, the bitcoin hash rate is considered a security metric for the network. The higher the hash rate, the more secure the network, so in that context, the all-time high represents a good thing.
This is why a higher hash rate is generally viewed favorably, as it implies a healthier network. The only problem is that miners are feeling the pressure.