Introduction to Hash Rates

Market Meditations | September 28, 2021

⛏ What is a hash rate?

The total mining hash rate of Bitcoin corresponds to the blockchain’s resistance to attack. The higher the hash rate, the more difficult it is for attacks to succeed. This rate is a calculated numerical estimation which corresponds to how many hashes are being generated by miners attempting to solve the current BTC block.

  • Bitcoin’s hash rate is represented in Hashes per second (H/s). It has no correlation with how quickly or slowly each block is solved. This is due to the dynamic nature of how it regulates difficulty.
  • Hashing difficulty is adjusted roughly every two weeks by assessing the speed at which blocks were mined during the previous two weeks. Based on that moving average, the difficulty is adjusted to make the next two weeks appropriately difficult, so the time required remains relatively stable. 
  • As more miners join the network, the difficulty rises to match increased hashing power. Therefore, when the network expands, difficulty goes up, but transaction time remains reasonably constant.

The same is true in converse. If miners drop off the network, as we saw earlier this year when China banned mining, the difficulty is lowered so fewer miners can complete the work in similar time.

? Why is it worth knowing?

Over the years, the link between Bitcoin’s price and hashrate has been compelling. The hash rate itself has been lauded as a lagging indicator by some influencers and traders.

In August of this year Yahoo looked at hash ribbons with impressive implications. Some interpret hash ribbons as a long-term signal to find confluence in macro scale bottoms during market cycles. 

Charles Edwards, the creator of the indicator, described how it works in 2019 and displayed some impressive retrospection regarding its insight relative to buying Bitcoin dips.

?Concluding Remarks

It might be tempting to buy into such a seemingly accurate track record. However, trusting anything with only a handful of data points can prove reckless.

While hash rate and difficulty are potentially valuable tools, they should never be followed blindly or exclusively. Remember – forming a strategy involves selecting multiple tools to establish confluence.

Strategies are one of the most important parts of successfully trading or investing. We’ve published a comprehensive guide to responsibly prepare for building wealth.