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Bitcoin hashrate: What is it, why is it important, where is it expected to head in 2022?

Bitcoin hashrate: What is it, why is it important, where is it expected to head in 2022?

Bitcoin hashrate: What is it, why is it important, where is it expected to head in 2022?
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By CNBCTV18.com Jan 11, 2022 8:09:28 AM IST (Published)

Bitcoin hashrates or global computer power dropped significantly when China banned mining activity—the biggest mining centre in the world until then. However, this gap was filled by other countries. Last year, bitcoin mining started to boom in the US, with mining companies there seeing an influx of cash from venture capital investments. But why is hashrate so important, and how will it impact the bitcoin economy? Here are answers to some frequently asked questions.  

Crypto hashrate, the computing power of Bitcoin’s network, has dropped sharply in recent days following a deadly uprising in Kazakhstan that saw an internet shutdown impacting the country’s fast-growing crypto industry. After China clamped down on crypto mining, Kazakh became the second-largest Bitcoin mining country after the United States, per a Cambridge Centre for Alternative Finance report. 

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According to a Reuters report, Kazakhstan accounts for 18 percent of the world’s hashrate. And after the internet shutdown, the hashrate has seen a 14 percent drop in the major crypto mining pools—a group of minders that team to create bitcoin. 
However, it is not new. The hashrate has seen a lot of volatility in 2021.  
There was a substantial impact on the ‘hashrate’ or global computer power of the bitcoin network due to China's ban on mining activity—the biggest mining center in the world until then. The ban led to an over 50 percent drop in hashrates in July 2021 to about 85 exa hash per second (EH/s) on a seven-day average.
Since then, however, hashrates have recovered. In December, the rate touched a new record high of 182 EH/s as mining operations shifted to North America (Canada and America) and Kazakhstan. All signs point to the hashrate will only increase from here. 
But why is hashrate so important, and how will it impact the bitcoin economy? Here are answers to some frequently asked questions.  
What is hashrate? 
Hashrate is the measure of computational power used to verify transactions and add blocks in a Proof-of-work (PoW) blockchain. The two biggest blockchains networks globally, Ethereum and bitcoin, are PoW blockchains that utilize mining to mint new coins and verify transactions.
Hashrate can represent the number of individuals or entities in the world participating in the process of mining. Therefore, the more people mining bitcoin, the higher is the hashrate.
Why is hashrate important in mining?
The mining process, which involves miners solving complex computational puzzles to add blocks in the blockchain, leads to a more secure network. In addition, miners have an incentive to mine; they are rewarded a predetermined number of free coins each time a new block is mined. This system of reward for the miners ensures that there will always be new coins added to the economy of bitcoin while keeping the integrity of the blockchain network.
The relation between the hashrate and bitcoin’s price is directly proportional too. As more people buy and sell bitcoins in the network, there needs to be more asset liquidity (bitcoin). Mining introduces more coins, and the activity increases when more people buy and sell bitcoin.
People usually tend to buy/sell assets when the price of an asset increases, so a high bitcoin price tends to result in higher hashrates.
For miners, a high bitcoin price means higher rewards from transaction fees on the network. So, when the bitcoin prices increase, it usually invites more miners on the network.
What will be key bitcoin mining and hashrate trends in 2022? 
Bitcoin mining can be an activity with diminishing returns. As the hashrate increases in the bitcoin network, the computational power necessary to mine new blocks increases for miners, resulting in shrinking profit margins. This could be especially crushing to new entrants in the mining sector, as they will require extensive mining hardware to compete with the established mining companies.
The initial investment for the computational hardware, GPUs (graphics processing units), can be substantial as they can be costly these days. Therefore, this will be a barrier to entry for many potential miners worldwide.
Experts predict that as the margins squeeze, it will lead to more prominent entities’ consolidation of smaller mining operations.
Speaking to Yahoo Finance, Fred Thiel, CEO of Marathon Digital, one of the largest publicly traded bitcoin miners, predicted, “I think there’s going to come a time, in the not-too-distant future, where there are companies that have raised money, have machines on order and have not deployed them yet that are in a cash crunch.”
While experts expected China’s ban on bitcoin mining to hit the global hashrate substantially, and it did too for a while, the gap left behind by China opened up opportunities for other countries to enter the mining space.
Last year, bitcoin mining started to boom in the US, with mining companies there seeing an influx of cash from venture capital investments.
Now bitcoin hashrate is in a good position again with a current hashrate of 181 EH/S, with experts believing that it will double by the end of 2022.
The sentiment towards bitcoin mining is changing. Initially seen as an isolated hobby, it is now becoming a professionalised and institutional industry. Currently, multiple mining companies are publicly traded with support from swaths of investors backing them.
Charlie Schumacher, director of corporate communications at Nasdaq-listed bitcoin mining company Marathon Digital Holdings MARA, in an interview with MarketWatch’s newsletter Distributed Ledger said, “If you look back at what bitcoin mining looked like a year ago, there were only a handful of companies that were publicly traded involved in the space, and if you look at everyone’s market cap at that time, they’re far below what they are today.”
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