Beijing’s broadening ban on cryptocurrency mining has - for now - crippled the industry and sent bitcoin prices collapsing. But as bitcoin miners move to other regions and countries, China’s recent action could usher a period of greater stability for the cryptocurrency.
More diverse distribution of mining power and higher usage of renewable energy could also be in store.
In late May, China’s State Council issued treatises to crack down on bitcoin trading and mining. The notices came after China’s central bank began implementing its own digital currency.
The Chinese Communist Party (CCP) deems cryptocurrencies such as bitcoin a nuisance, disrupting economic order and facilitating illegal transfers of wealth. In addition, Beijing has decried the massive power consumption of bitcoin miners.
Following the CCP’s call, several provinces and territories including Xinjiang, Inner Mongolia, and Sichuan, have begun enforcement measures to shut down mining operations.
And this has sent bitcoin prices tumbling. Bitcoin prices plunged below $30,000 the week of June 14 after hitting its all-time highs above $60,000 in April.
Why the tumble? The CCP’s ban on mining has disrupted the computing power available to maintain and update the bitcoin blockchain.
China was estimated to hold more than half of bitcoin’s mining capacity, with the majority of bitcoin miners located in the Xinjiang Autonomous region and Sichuan province. Around 65 percent of the world’s bitcoin mining was located in China as of 2020, according to an analysis by the Cambridge Bitcoin Electricity Consumption Index. While that market share has declined somewhat more recently, China still dominates bitcoin processing power.
Unlike mining operations of minerals such as gold and iron, bitcoin mining does not involve hulking equipment. Bitcoin miners utilize warehouses of computers to solve computational problems to verify transaction, update, and maintain the bitcoin blockchain. In effect, the miners keep the bitcoin blockchain updated and in turn, are compensated with new blocks of bitcoin for their work.
Since China’s ban bitcoin’s hash rate—the computational power available to mine the cryptocurrency, which is a reflection of the efficiency of the bitcoin blockchain network—has dropped by nearly 50 percent over the last month, according to data from cryptocurrency firm The Block. Xinjiang and Sichuan provinces alone are thought to have contributed to 30 percent of total mining power.
This is definitely a near-term headwind for the industry. But China’s crackdown could be a long-term net positive development for the cryptocurrency industry.
For one, neither China’s ban nor the subsequent collapse in hash rates should be surprising. In fact, it’s shocking that so much bitcoin mining power was concentrated in China to begin with.
The CCP has been battling cryptocurrencies for almost a decade. Back in 2013, Beijing barred all financial institutions from handling cryptocurrencies. China then banned all initial coin offerings in 2017. By mid-2019, the People’s Bank of China blocked access to all domestic and foreign cryptocurrency exchanges to snuff out trading activity. While the CCP stopped short of declaring ownership of cryptocurrencies illegal, it had in effect banned all forms of trading and exchange, including barring domestic financial institutions from exchanging digital currencies with the yuan. Those actions were mostly centered around limiting wealth transfer but the CCP’s intent has been clear since 2013.
So what does this mean for bitcoin and bitcoin mining? In the near term, with bitcoin mining capacity decreasing due to the CCP’s crack down, bitcoin mining becomes much more lucrative.
“As more hashrate falls off the network, difficulty will adjust downwards, and the hashrate that remains active on the network will receive more for their proportional share of the mining rewards,” Kevin Zhang, vice president of crypto mining equipment company The Foundry, said in a recent CNBC interview. In other words, the incremental “reward” for mining bitcoins is higher when there are fewer miners.
But there are other longer term positives.
Less geographic concentration promises to make the bitcoin blockchain less vulnerable to the whims and regulations of a single country. Many Chinese mining operations have shipped their equipment abroad, with the United States and Kazakhstan as net beneficiaries.
For example, the Shenzhen-based and NYSE-listed BIT Mining has shipped most of its mining equipment outside China, according to statement from the company. Approximately 320 mining machines were delivered to a facility in Kazakhstan and the company said its operations should be back online by June 27.
A large portion of mining is expected to shift to the United States. CNBC’s Eunice Yoon tweeted on June 21 that a Guangzhou-based logistics firm was transporting 6,600 lbs of bitcoin mining computers destined for Maryland.
#China logistics firm in Guangzhou confirms to @CNBC it’s airlifting 3,000kg (6,600lbs) #bitcoin mining machines to Maryland, USA. Fenghua International advertises products delivered to door, tax on both ends cleared. Price per kilo: as low as $9.37! #cryptocurrencies pic.twitter.com/8yUjZjhpkk— Eunice Yoon (@onlyyoontv) June 21, 2021
Another potential beneficiary is the state of Texas, which also happens to have some of the most pro-bitcoin politicians in the United States. Texas has some of the country’s lowest energy prices and a growing share of renewable energy sources.
And energy diversification is key. Relocating bitcoin hash rates from China to the United States—which has a much more diversified energy supply—would improve bitcoin mining’s carbon footprint, a key criticism of the cryptocurrency.
Tesla founder and CEO Elon Musk announced that Tesla would no longer accept bitcoin until its hash rates reached 50 percent from clean energy sources. Democratic Sen. Elizabeth Warren has also criticism bitcoin for its energy usage and resulting impact on the environment.
While longer term viability of cryptocurrencies and bitcoin are still up in the air, moving mining capacity outside of China is at least a tangible first step in addressing those concerns and criticisms.