In this article, I will explain what hashrate is, why it is important, what it means for a cryptocurrency like Bitcoin, and how it influences investments.
What Is Hashrate?
Hashrate is a term used for describing the combined computational power of a specific cryptocurrency network or the power of one individual mining rig on said network.
The operation of any mineable cryptocurrency is done by a number of miners, people who use the computational power of their mining rigs to process transactions and create new coins. This is done by calculating cryptographic hashes – pseudorandom data strings utilized to prevent double-spending and to make sure that coins aren’t created out of thin air.
The hash rate of a mining rig represents the number of hashes that can be calculated per second. The combined hash power of a crypto network is made out of the sum of the hash rates of all mining rigs that are operating at any moment.
Why Is Hashrate Important?
The hashrate represents a key metric for assessing the strength of a blockchain network, aka its security. The higher the number of machines dedicated by honest miners in order to discover the next block, the higher the hashrate rises and the harder it gets for bad actors to attack the network.
For example, a 51% attack refers to when a bad actor has enough mining equipment to control more than 50% of the hashrate of the blockchain. If one entity manages to control the majority of the hashrate, they could block or reorganize transactions, or even reverse the payments they’ve made themselves.
This would create double-spending issues which, in the end, would totally undermine the integrity of the blockchain.
If the hashrate falls, it is much easier and cheaper to organize a 51% attack because the network is more vulnerable.
What Does the Hashrate Mean for Bitcoin?
A good hash rate is an indication of the fact that miners are investing their resources into equipment that is newer and more powerful – which also means that they have faith in the network.
The Bitcoin hash rate is seen as being a health signifier for the network. If the hashrate is higher, it means that the processing power is also high, which, in turn, also means a higher level of security.
The security of the Bitcoin blockchain depends on miners working together in order to create the same chain. As new blocks are validated by miners, the blocks get added to the Bitcoin blockchain. In the end, the longest chain of blocks is the one that will be accepted as the valid version.
How Does It Influence Investors?
A high hash rate means that the network is healthy. When investors see this, they may be more interested in investing in crypto, which means that the value of said crypto would also increase.
For example, in May 2021, the Bitcoin Hashrate reached its ATH, which is also when Bitcoin was at its peak, price-wise. Due to different reasons, the value of Bitcoin began to fall, as the hashrate also fell.
There are 2 competing theories when analysing the Bitcoin Blockchain. One of them says that Hashrate follows price, and the other one claims the opposite. There is still no definitive answer, as many analysts say that we will have to wait another 10 years before there is enough data to help us find the right correlation.
Conclusions
Hashrate represents not only a method of calculating the combined computational power of a specific cryptocurrency network, but it can also be used to tell how popular and healthy a blockchain is. A high hashrate represents success and is associated with a high value for the cryptocurrency it represents.