Blockchain Primer: Mining, Hashrate, and Bitcoin Price

Computing power plays a vital role in the digital currency ecosystem.

For digital currencies that use the Proof of Work (POW) consensus algorithm, such as Bitcoin, the higher the hashrate, the stronger the ability to resist network threats (such as 51% attacks). Hashrate also affects the mining of digital currencies and is closely related to the price of Bitcoin.

Key Takeaways:

• Bitcoin computing power refers to the speed at which all miners work together to solve difficult mathematical problems in the BTC network.

• Hash per second (H/s) is used to measure computing power. Since the creation of Bitcoin in 2009, it has grown exponentially.

• Bitcoin’s hashrate plays an important role in defending against 51% attacks because the higher the network’s hashrate, the harder it is for hackers to take over the ecosystem.

• The higher the hashrate, the more difficult it is for miners to generate blocks in a PoW network, and vice versa.

• While the Bitcoin halving may cause the hash rate to drop in the short term, in the long run, the hash rate may increase as more miners join the network leading to increased competition.

• According to historical data, there is a high positive correlation between BTC's computing power and price.

• However, during prolonged bear markets, the correlation between the two variables may turn negative.

What is “hash rate” and what does it mean for Bitcoin?

In blockchain networks that use the Proof-of-Work (PoW) consensus algorithm, miners need to use their computing power to solve complex mathematical problems to verify transactions and add new blocks to the decentralized ledger.

Hashrate (also called hash power or hash rate) refers to the speed at which a miner's mining equipment can solve difficult mathematical problems.

The total computing power of a digital currency is the sum of the computing power of all mining devices connected to the digital asset network.

The mathematical problem that miners need to solve to generate a new block in a PoW network is also called a hash. For the same reason, the most basic unit for quantifying computing power is hashes per second (H/s).

While this quantification worked well in the early days of Bitcoin, the BTC network has grown significantly over the past 11 years.

During this period, mining technology developed rapidly, and high-performance application-specific integrated circuit (ASIC) equipment became the mainstream of Bitcoin mining, which also led to the BTC community introducing new units to quantify computing power.

Currently, Terahash per second (TH/s) is the standard unit of computing power. The following computing power units are for reference:

• 1 hash per second (1 H/s)

• 1000 hashes per second (1 kH/s) = 1,000 H/s

• 1 million hashes per second (1 MH/s) = 1 million H/s

• 1 billion hashes per second (1 GH/s) = 1 billion H/s

• 1 trillion hashes per second (1 TH/s) = 1 trillion H/s

• 1 trillion hashes per second (1 PH/s) = 1 quadrillion H/s

• 1 million quintillion hashes per second (1 EH/s) = 1 quintillion H/s

In terms of power, converting from a larger unit to a smaller unit is as easy as multiplying the larger unit's value by 1,000 (e.g. 10 TH/s x 1,000 = 10,000 GH/s).

Computing power and security

The total computing power of the Bitcoin network affects many aspects of the digital currency ecosystem.

To better understand this, let us first explain the main function of computing power in a proof-of-work network: security.

Miners are required to leverage their computational power to solve complex mathematical puzzles in PoW ecosystems to add new blocks to the chain.

If a cybercriminal were to attempt to take over the Bitcoin network, he would have to purchase mining equipment with computing power equal to or greater than 51% of the total computing power in the BTC ecosystem in order to successfully carry out a 51% attack.

Therefore, in order to take over a cryptocurrency network, an attacker must make a large investment. When the hashrate is low, malicious parties are more likely to succeed because only a smaller investment is required.

For mainstream digital currencies like Bitcoin, there are millions of mining devices running continuously to protect network security, and it is almost impossible for hacker groups to have the computing power required to successfully carry out a 51% attack.

Cost of a 51% attack on the Bitcoin network (example)

At the time of writing, the total hashrate of the Bitcoin network stands at 111 EH/s.

Therefore, an attacker must have at least 116 EH/s of computing power to launch a 51% attack to take over the network.

Assuming the hacker uses the same mining rig, the price is $1,636 and the hashrate is 70 TH/s.

The attacker would have to purchase 1,657,143,000,000 pieces of equipment, spending over $2.71 billion.

This requires a large initial investment from the hacker, but that amount is not even enough to cover the electricity costs to run the mining equipment. The cost of running all the equipment per hour is $464,000 (based on a power of 2.8 kilowatts and a cost of $0.1 per kilowatt-hour).

If a malicious party wanted to control the Bitcoin network for a week, the total cost of a 51% attack would increase to $78 million.

Cost of a 51% attack on the Bitcoin network (example)

At the time of writing, the total hashrate of the Bitcoin network stands at 111 EH/s.

Therefore, an attacker must have at least 116 EH/s of computing power to launch a 51% attack to take over the network.

Assuming the hacker uses the same mining rig, the price is $1,636 and the hashrate is 70 TH/s.

The attacker would have to purchase 1,657,143,000,000 pieces of equipment, spending over $2.71 billion.

This requires a large initial investment from the hacker, but that amount is not even enough to cover the electricity costs to run the mining equipment. The cost of running all the equipment per hour is $464,000 (based on a power of 2.8 kilowatts and a cost of $0.1 per kilowatt-hour).

If a malicious party wanted to control the Bitcoin network for a week, the total cost of a 51% attack would increase to $78 million.

What impact does computing power have on Bitcoin mining?

Bitcoin uses the PoW consensus algorithm, which requires miners to compete with each other to generate new blocks and strive to earn block rewards.

On the BTC network, it takes about 10 minutes to generate a new block.

In order to maintain the block generation time at 10 minutes, the Bitcoin network adopts a self-regulating mechanism to adjust the mining difficulty every 2016 blocks, which takes about two weeks.

If the total computing power in the ecosystem increases, the Bitcoin network will increase the difficulty for miners to find new blocks, keeping the time to generate a new block at about 10 minutes.

Therefore, it is safe to say that the total computing power of the network has a great influence on the difficulty of Bitcoin mining.

Is Bitcoin's price correlated with computing power?

The relationship between Bitcoin’s computing power and the price of the digital currency has been a hot topic in the digital asset space for some time.

Relevance 101:

If the correlation coefficient between Bitcoin's price and computing power is 1, it means that they always maintain the same trend.

The higher the correlation coefficient, the closer the relationship between the two variables, and vice versa (for example, a correlation coefficient of 0 means that BTC's computing power and price are completely unrelated).

It is also possible for two variables to have a negative correlation. A correlation coefficient of -1 would indicate that there is a large correlation between Bitcoin price and hashrate, but they are moving in opposite directions.

Data from Cointelegraph shows that there is indeed a high correlation between Bitcoin’s hash rate and price, with a correlation coefficient of 86.2% in 2016 and 91.5% in 2017.

While the digital asset’s price and network hashrate moved in the same direction in 2016 and 2017, the correlation turned negative (-66.2%) during the 2018 bear market.

However, after the end of the "cryptocurrency winter" in 2019, the correlation between BTC's hashrate and price became positive again, with an annual correlation coefficient of 59.5%.

Data shows that there is usually a high positive correlation between Bitcoin's price and network computing power. However, a prolonged bear market could quickly turn the correlation negative.

The impact of Bitcoin halving on BTC computing power

With the halving coming up in May 2020, it is important to talk about the Bitcoin halving and its potential impact on BTC’s hashrate.

The Bitcoin halving, which reduces block rewards by 50% every four years, is a major event in the digital currency ecosystem.

Currently, miners who successfully solve mathematical puzzles and add new blocks to the BTC chain receive a reward of 12.5 BTC. After the halving this year, miners will only receive 6.25 BTC under the same conditions.

This is indeed bad news for miners (halving the income for the same effort). Some miners, especially those with slim profit margins, can only stop operating, which will reduce the computing power of the Bitcoin network in the short term.

But Bitcoin’s halvings have always been a powerful driver of bull runs, and if that happens again, more miners will join the network, trying to profit from the price increase and take advantage of less competition.

Therefore, the Bitcoin halving will have a negative impact on the hash rate in the short term, but in the long run it may lead to an increase in the hash rate.

A brief introduction to Bitcoin’s historical hashrate

After Satoshi Nakamoto created Bitcoin in 2009, only a small number of digital currency enthusiasts served as miners to maintain the network.

At that time, there were no ASIC miners in the digital currency field. Therefore, miners used ordinary computer hardware to maintain the Bitcoin network.

It wasn’t until early 2010 that the total hashrate of the BTC network exceeded 10 MH/s, roughly equivalent to the hashrate of a $150 GPU today.

As people began to embrace Bitcoin and the infamous Mt.Gox digital currency exchange went online, BTC's network computing power grew exponentially in 2010, reaching 117 GH/s by the end of the year, and the computing power of digital currency increased 11,700 times in one year.

Aside from occasional dips, the digital asset’s hashrate continued to grow until the first Bitcoin halving occurred on November 28, 2012.

As some miners were unable to continue operating due to a 50% reduction in block rewards, BTC’s hashrate dropped from 27TH/s to 18TH/s in about three weeks.

Despite the short-term drop in hashrate, the computing power of the Bitcoin network continues to grow. The first crash occurred at the peak of the market in November 2018, when the bear market took hold and the price of the digital asset fell as low as $3,100.

As a result, miners struggled to survive in the bear market, and a large number of miners withdrew from the Bitcoin network. In just 30 days, BTC computing power dropped from 60 EH/s to 34 EH/s.

By March 2019, the hashrate started to stabilize and reached 50 EH/s, gradually increasing to nearly 100 EH/s by the end of the year.

BTC computing power continued to grow in 2020. However, perhaps due to the impact of the new coronavirus pandemic, the computing power stopped its upward trend in early March, falling from 133 EH/s on March 5 to 85 EH/s on March 20.

However, after hitting its lowest point on March 20, BTC’s hash rate has rebounded significantly, rising to 111 EH/s as of today.

Bitcoin mining pool computing power distribution

Successfully generating a block in the Bitcoin network is like winning the lottery, so in order to increase their chances of winning, miners set up mining pools to increase their chances of getting block rewards.

Therefore, the BTC network is basically divided up by large mining pools, with the top four mining pools accounting for 65.6% of the total computing power.

According to BTC.com, independent (or unknown) miners only account for 0.4% of the total hashrate.

Hashrate: An essential component of the Bitcoin ecosystem

For PoW blockchains like Bitcoin, computing power plays a vital role in the ecosystem.

The more hash power there is in the ecosystem, the better it protects the network from 51% attacks.

Historical data shows that there is usually a high positive correlation between Bitcoin's price and computing power.

But the same data suggests that in a prolonged bear market, the correlation between the two variables could turn negative, meaning that BTC’s hashrate and value would move in opposite directions.