Last month, as Chinese authorities cracked down on bitcoin mining throughout the country, nearly all of the top 10 largest mining pools saw their computing power decline.
It was a nail-biting moment for the cryptocurrency. In addition to minting new coins, miners are the workhorses that keep bitcoin's decentralized network up and running, and over the last decade the vast majority had flocked to China for its cheap and abundant electricity.
Now the world's second-largest superpower is getting out of the business entirely — and at least one North America-based mining pool is reaping the benefits.
Foundry USA Pool, a wholly-owned subsidiary of the crypto-focused conglomerate Digital Currency Group, was founded with the goal of developing mines in North America. So when China brought down the regulatory hammer in May, it was already in a strong position to start rebuilding.
"You have this perfect confluence where our hashrate is rising and the Chinese pool hashrates are falling," Kevin Zhang, vice president of business development for Foundry Digital, told Cheddar.
(Hashrate is industry parlance for computing power, and it serves as a measure for the mining activity happening at any given time in the network.)
But Foundry is more than a mining pool. It's a one-stop-shop for bitcoin financial services, with businesses spanning from offering financing for mining equipment, advising prospective mining operators, researching innovations in blockchain technology, and running its own mining pool.
This has given the company a distinctly up-close look at how China's exit from the mining industry is impacting the broader bitcoin ecosystem.
"We don't have to reach out to anyone," Zhang said. "Our phones are ringing off the hook because everyone's looking to get their machines turned back on outside China."
He estimated that 90 percent of mining capacity in China has now been shut off. A Chinese Communist Party-backed news source reported a 90 percent drop as well.
In the meantime, Foundry is stepping up to replace financing services for miners offered within China that are no longer applicable. It's also buying up discount mining units (which are essentially just graphic cards that can be plugged in anywhere).
Replacing that lost capacity won't happen overnight, however. Zhang said it could take six months to a year before the network regains its lost computing power, though exactly how much time it takes is likely to vary across the globe.
All About Timing
"The big thing that most people neglect when they talk about bitcoin mining economics is timing," he said.
In North America and Europe, he said it can take upwards of nine to 12 months to go from getting the green light on a project to turning on pluggable rack space.
In the short term, at least, that gives countries with less stringent electrical codes and certification requirements an advantage. A prime example is Kazakhstan, where a number of mining operations have already set up shop.
Nothing is worse for a miner than a perfectly good mining rig that's not plugged in, Zhang added, so speed is key, but it's also not the only factor.
As the situation in China made all too clear, consistent regulations and laws are a major draw for miners looking to set up long-term. That's one reason why Foundry has taken a particular interest in Scandinavia, which offers cold climates, renewable energy sources, and governments with a consistent track record of sticking to the rule of law.
Western governments also offer greater access to capital markets.
"The benefit of the Western Hemisphere is access to capital markets, and you can build at a very large scale and tap into a lot of dormant and stranded energy, but the lead time is kind of what has turned a lot of people from immediately sending their machines over," Zhang said.
For Foundry, cost efficiency is only one selling point. The company also has a larger mission of making sure the bitcoin network stays decentralized. So while it does have a strong interest in developing miners in the U.S. and Canada, it's certainly not playing favorites. The company has interests all over the world and is pushing for sites in countries that were previously underrepresented, such as Australia and hotter, more humid parts of Asia.
"Ultimately the more decentralized the network is, the more secure. The more secure, the more valuable it becomes," Zhang said.
The Role of Price
From Foundry's vantage, the economics of bitcoin itself will also play a major role in driving the transition out of China.
"The mining economics right now are actually terrific," Zhang said. "Not only has the price dropped, so has the difficulty in the hashrate."
Zhang referred to a mechanism within the bitcoin protocol that lowers the difficulty of mining — and thus the likelihood of getting a bitcoin reward — as the hashrate falls. The algorithm's difficulty dropped by nearly 30 percent earlier this month, following the China crackdown.
This provides an incentive for displaced miners to get up and running again as soon as possible, even as bitcoin's price fluctuates and remains well below its 2021 peak. It's also a boon for mines already plugged in, which can make more money off of their rigs.
BitOoda, an index that tracks bitcoin mining revenue per megawatt hour against the cost of electricity, found that profits nearly doubled to $449 from $225 since the difficulty dropped.
Zhang said miners will steadily reconnect in the coming months, and the hashrate will ultimately increase, which he predicts will boost the price of bitcoin as well.
"Short-term, you'll see a lot of miners trying to replug their stuff in, and price will hold steady and, if anything, start growing as sentiment improves with hashrate," he said.