What is Bitcoin hash rate? And how does it relate to the Bitcoin price and the Bitcoin mining difficulty?
Bitcoin hash rate (also hashrate) is the computer power of the Bitcoin network. It is the measurable and quantifiable speed at which the Bitcoin network processes data when adding new transactions to the shared ledger.
Each mining node on the Bitcoin network has its hash rate, and it uses it in competition with others in the mining process. If you need to, read the previous post to understand what Bitcoin mining achieves.
The only context in which mining nodes combine their hash rates to mine is when they form a mining pool. This increases their chances of winning in the mining competition and receiving the mining reward, which they split according to the hash rate contributed.
However, the combined hash rate of all the mining computers on the Bitcoin network has been used as a handy metric for telling how big or powerful the network is. In particular, it indicates the amount of computing power that is dedicated to processing and recording transactions on the Bitcoin ledger.
Looking at the Bitcoin network as a single computing unit has led to the conclusion that it is the world’s most powerful supercomputer. Less than five years after its launch, the Bitcoin network had more processing power than the world’s top 500 supercomputers combined.
If you’ve read my other posts on this site, you probably know that it is not my position that computing power is what gives Bitcoin its value. In the post ‘How Does Bitcoin have Value?’ I make the case that the primary source of the Bitcoin value is its usefulness as a solution to pressing human and societal problems.
With that said, the computer power (in this case hash rate) facilitates Bitcoin’s usefulness, and, therefore, it is a critical contributor to its value.
What is a bitcoin hash?
To understand how a bitcoin hash rate works or how it is measured, it is important you first understand the concept of a hash. And that means we have to go through some basics of how transactions are recorded on the Bitcoin shared ledger.
Bitcoin transactions are recorded on the shared ledger in blocks. Each of these blocks accommodates transactions that are sent within periods of about ten minutes. Before a new block of transactions joins the blockchain (shared ledger), it has to get a unique ID.
The unique block ID is critical in making the ledger immutable, in particular, because it links blocks in a chain. The ID is derived from the combined data of all transactions in the block, the ID of the previous block and automatically generated value known as a nonce.
Attempting to change details in one block, though almost impossible to do, affects not only its own ID but also those of the other blocks on the chain.
The process of turning the transaction data, the ID of the previous node and a nonce into a unique ID for a new block is what is known as hashing.
The data is put through a hashing function, a protocol that turns it into a specific predefined structure. The Bitcoin network uses a hash function of SHA-256, which turns, maps and reduces any amount of data into a string of 256 bits long.
However, it turns out that many times when the data of a new block, the ID of the previous block and a nonce are hashed, the result does not meet requirements outlined in the Bitcoin protocol.
Every time a hashing process fails to produce a value that is acceptable according to the protocol, the system generates a new nonce, which is added to the rest of the data and the hashing is done again. This process can be repeated several times before the valid hash value is gotten.
A Bitcoin hash is an attempt to find that acceptable value from the block data, the ID of the previous block and a nonce according to the requirements outlined in the Bitcoin protocol.
Bitcoin hashrate units
Given that the process needs to be repeated many times to get the correct value, the faster a computer on the Bitcoin network can hash data of a new block, the better. The unit used to measure the number of hashes per second is similar to what is used to measure data.
Thus Kilohash (KH/s) means a computer is doing a 1000 hashes per second. Meanwhile, 1 million hashes per second is a Megahash (MH/s), 1 billion hashes per second is a Gigahash (GH/s) and 1 trillion per second is Terahash (TH/s). The largest hash rates unit is Petahash (PH/s), which is 1 quadrillion hashes per second.
The combined hashing power of the entire Bitcoin network has grown to over 50 million TH/s. The capacity has had a gradual upward growth in part due to the evolution of hardware mining technology.
In the early days, CPU computers were commonly used. A hash rate of a normal computer is a few Kilohashes (KH/s). However, CPU could not do as many calculations or computations of hashes as the more powerful GPUs that took over from them. The ASIC miners that are currently widely used do even more hashing per second. A single ASIC miner can have a processing capacity of up to 15 GH/s.
Bitcoin hashrate vs price
There is a Bitcoin hashrate price correlation that can also be established. With higher Bitcoin price, the hashrate on the network tends to surge. When the Bitcoin market is bearish, the hash rate tends to reduce in size.
Here is the Bitcoin price chart covering between July 2018 and June 2019:
The reason for this is that given miners get paid in bitcoins, when its price goes down the revenues shrink and that often forces some miners to disconnect their machines, denying the network some computing power.
Meanwhile, when the price goes up, more players are incentivized to come into mining and those already doing so, to increase the capacity of their machines.
Here is a Bitcoin hashrate chart for between July 2018 and June 2019:
hashrate vs difficulty
Another variable that changes proportionally to the change of the Bitcoin network hashrate is the mining difficulty. Satoshi Nakamoto wanted to make sure that the rate at which new blocks of transactions are added to the shared ledger remains about regular.
The change in network hash rate is a threat to this regularity. If the network can do more computation, the mining mathematical problem can be solved in a shorter time resulting in quicker addition of transaction blocks to the shared ledger.
Meanwhile, if the hash rate is low, it could take even days to find the correct hash value so that the next block is added on the shared ledger.
To ensure this is not the case, the mining difficulty is adjusted according to the amount of hashrate that is available to the network. That means when the hashrate is high, the mining difficulty is increased so that it doesn’t take shorter to find the next block. When the hash rate drops, the protocol lowers the mining difficulty so that it doesn’t take long to find the next block.
Here is a chart for mining difficulty between July 2018 and June 2019:
Bitcoin hashrate distribution by country
It turns out the Bitcoin hash rate distribution is not even around the globe. Some countries are producing more Bitcoin hash rate than others, and several factors drive that, but the primary one is the cost of electricity.
Countries with cheaper sources of electricity such as China tend to have more Bitcoin hash rate than those with high costs such as the US. A report by researchers from Princeton University and Florida International University indicates that over 70% of the Bitcoin network hashrate is based or managed from China.
Other countries that contribute a significant hashrate include the Czech Republic (about 10%, Iceland (about 2%) and Japan (about 2%).
In conclusion, a Bitcoin hash rate, price and mining difficulty correlation exists. When the price of Bitcoin is down, some miners are disconnected as mining cease being profitable for them. This reduces the hash rate and, in return, the protocol adjusts the mining difficulty.