In today's Finshots, we talk about why China decided to ban bitcoin mining in the country
China has a peculiar way of dealing with problems. They’ve already banned bitcoin in the past imposing restrictions on trading and transacting with the cryptocurrency. But they have been lax about fully enforcing these laws. In fact, some experts contest this is typical Chinese behaviour. You rarely ever see them fiddling and changing new rules. Instead, they write laws and enforce them as they see fit. Sometimes they go full throttle. Other times not so much.
So you can’t glean any meaningful information by looking at Chinese laws. Instead, you ought to pay attention to what they do. And if their actions are any indication, it seems they are going full throttle with banning all mining operations in the country.
But before we get there, a brief introduction on Bitcoins, crypto mining, and how China came to dominate this industry.
Bitcoin is a decentralized currency. It allows people to transact without banks, borders, and governments by relying on a network of individuals (miners) who authenticate transactions and produce new currency. But these individuals aren’t real people. Instead, they are specialized computers that run round the clock without a moment’s respite.
And while being a part of this elusive network can be a profitable endeavour, new miners constantly enter the fray making it a more competitive enterprise. So you have to have an edge — Either build better computers (which isn’t exactly easy) or power them using a cheap energy source. And it’s the second half of the equation that has made China such an attractive destination for crypto miners.
Some regions in China offer round-the-clock electricity at competitive rates while simultaneously boasting low temperatures, ideal for running these specialized computers. During the rainy season i.e. between June and October, provincial areas in Southwester China produce excess electricity from hydropower plants making it accessible at ridiculously cheap prices. And as the rainy season concludes, miners move to Northern territories, flush with coal plants that also extend stable electricity at very affordable rates. As a consequence close to 70% of all crypto-mining happens in China.
But now, that premise no longer seems tenable.
In April 2021, an internal investigation revealed that 21 coal miners trapped in Xinjiang had only entered the facility after it was restarted without official permission to help meet demand from crypto miners in the area. There were also reports alluding to the disproportionate use of electricity to operate these massive mining rigs. Coal plants were thriving once again thanks to new demand from a burgeoning industry and Chinese ambitions to “go green” were in direct conflict with these new developments.
And in May, the Chinese Communist Party had had enough. The Chinese Vice Premier officially called for a ban on crypto mining and trading in a bid to stem financial risks emerging from cryptocurrencies. Soon, multiple regions in China began shutting mining operations. Authorities were asked to be more vigilant. Citizens were asked to report suspicious mining activity. Power companies were asked to cease supply to those suspected of running mining rigs. It all happened so quickly. And now it seems there is discernible drop in hash rates — a term that’s often used to approximate the total computing power of all miners in the decentralized network. There’s no denying it anymore — Chinese crypto miners are shutting down their rigs for good.
But not everybody is leaving the scene entirely. Some are moving to more greener pastures. Those who can afford to move their expensive rigs to America and Canada are already doing so, hoping to set up shop in the next 6–12 months. Even others are biding their time, waiting in the shadows, hoping the communist party eases on enforcement.
Will all of this have an impact on the price of Bitcoin?
Experts believe that there may be a short-term impact. But most people are of the opinion that this sequence of events should have no bearing on the price in the long run.
Anyway, that’s it from us today. We will see you again tomorrow.