After weeks of regulatory crackdowns and public denouncements, the Chinese government has delivered a crushing blow to bitcoin mining in the country, which until now had led the world in providing the computational power needed to run the decentralized digital currency.
On Sunday, authorities in the province of Sichuan ordered power companies to cut off electricity to mining operations. Regional governments in Inner Mongolia, Yunnan, and Xinjiang have made similar moves in recent weeks, but the order in Sichuan effectively banishes bitcoin from China.
The Chinese Communist Party-backed newspaper Global Times said the ban means more than 90 percent of the country's mining capacity is estimated to now be shut down.
The southwest province was the epicenter of mining in the country due to its abundance of renewable hydropower. During the rainy summer season, dams produced surplus energy that lowered the cost of electricity and gave miners an incentive to set up shop in the province.
During the dry season, these same companies usually relocated to other provinces such as Inner Mongolia and Xingiang, where coal was the primary energy source powering their computer rigs, but spreading restrictions have left miners with few options within China.
Crypto-enthusiasts around the world are now watching closely to understand the fallout.
As of April 2020, the country contained 65 percent of bitcoin's computing power, according to the University of Cambridge Centre for Alternative Finance. So any drop in China means a significant drop in bitcoin's overall computing power or hashrate, to use the industry parlance.
A lower hashrate, at least in theory, means a slightly less secure network, but most experts in the crypto space agree that its current hashrate is more than sufficient to protect bitcoin from attacks. Indeed, it's still well above where it was a few years ago during the last bull market.
As usual with bitcoin's complex back-end technology, this might require some explaining. What is popularly called bitcoin "mining" or sometimes "farming" is actually just computers solving complex randomized mathematical problems that validate transactions in the network.
This "proof-of-work" process is how bitcoin is able to stay decentralized. Miners, for their part, get freshly minted bitcoin as a reward, which is pocketed or sold to fund additional equipment. In that sense, electrictricity is sort of like the raw material underlying bitcoin's value.
This system puts a premium on cheap energy, which is why El Salvador is exploring tapping into the country's volcanos to utilize inexpensive geothermal energy for bitcoin mining. It's also why China, the largest energy market in the world, has dominated the mining industry for years.
Sichuan, by one measure, draws 87 percent of its energy from hydropower, a source that can have high rates of curtailed or wasted energy when demand doesn't keep up with supply.
Nic Carter, founder of Castle Island Ventures and a ubiquitous bitcoin commentator, has emphasized how China's efforts to integrate its national power grid — so there's less wasted energy in one part of the country — is one possible explanation for the crackdown on mining.
"The central and regional government had hitherto tolerated the monetization of excess energy because it simply wasn’t being put to alternative economic use," he wrote in CoinDesk. "But as the grid integration and load balancing has improved in the last five years, bitcoin mines have increasingly begun to compete with other industrial and commercial uses."
In other words, China might have bigger priorities than minting bitcoin.
Bitcoin's New Homes
Now that the country is putting the kibosh on bitcoin, mining companies are migrating to greener pastures and in the process are fundamentally shifting the geography of the cryptocurrency.
"Obviously the most immediate impact is that all those machines that are located in China have to go somewhere else, which has the immediate effect of shutting down about half the network," said Alex de Vries, a financial economist and founder of Digiconomist.
Shenzhen-based BIT Mining Limited, for instance, announced on Monday that it was moving equipment to neighboring Kazakhstan after receiving notice on Saturday that its Sichuan-based subsidiary would have its power supply suspended that evening.
"We have been strategically expanding our operations overseas as part of our growth strategy,"
CEO Xianfeng Yang said in a statement. "Following our investments in cryptocurrency mining data centers in Texas and Kazakhstan, we are accelerating our overseas development for alternative high-quality mining resources."
BIT Mining said the first batch of 320 mining machines has been delivered to the Central Asian country, and a total of 2,600 machines will arrive before July 1. The company also announced last month that it had invested more than $25 million to build a mine in Texas.
De Vries said bitcoin's geographic reshuffling is somewhat dependent on its price, which dipped below $30,000 on Tuesday before bouncing back to around $33,000. The relation between bitcoin's price and local energy costs are crucial to getting the economics right for miners.
Whatever the moving costs for miners, looking at the bigger picture, bitcoin bulls are putting a positive spin on the transition out of China
"When China bans a technology, it tends to bode well for the future of the technology," said Nick Tomaino, founder of 1confirmation, a venture fund that invests heavily in the crypto space. "Google, Facebook, Twitter, there's been many examples, and I think the same will prove true for bitcoin."
Lucas Nuzzi of Coin Metrics echoed this sentiment in a recent thread referring to China's bans as probably "the most positive development for Bitcoin in 2021."
"It's a gigantic opportunity for Bitcoin to address its most frequently overblown criticism: the carbon footprint of its reliance on Chinese miners," he wrote.
Bitcoin's New Energy Mix
How the move out of China will impact bitcoin's carbon footprint is anything but certain. With the loss of Sichuan's cheap hydropower in particular, bitcoin as a whole could become more carbon-intensive.
"One thing that is for certain is that the network will probably be worse off in terms of carbon intensity, because they just lost the province of Sichuan, which is probably one of the biggest renewable energy hubs in the world," said de Vries, a vocal critic of bitcoin's energy consumption. "It's unlikely they'll find the same renewable capacity elsewhere. There's no other place that has such a substantial amount of renewable energy leftover for bitcoin miners."
What the overall energy mix looks like when the dust settles is still a crapshoot, with places like Texas (which has high levels of wind and solar power but also plentiful natural gas) and Kazakhstan (a major coal exporter) all competing for miners.
A 2020 survey from the Centre for Alternative Finance found that around 39 percent of proof-of-work mining came from renewable sources, and hydropower was the leading source. How the loss of China's cheap hydropower affects this calculus is still an open question.
De Vries stressed that bitcoin's price more than anything will determine the future of mining.
"It's likely that in the short run the carbon intensity of the network isn't going to improve," he said. "However, the energy consumption may not be as high as it was before because of the crash in the bitcoin price. Ultimately, the amount of money these miners are earning determines their energy use, and the higher the bitcoin price, the more they can afford to spend on energy."