Man, where is my hash?The recurring “China Bans Bitcoin”… | Via Kenetic Trading | The Capital | June 2021
The recurring “China Bans Bitcoin” story that we have all been familiar with over the years seems to have become more important recently.
Cryptocurrency of the week
China’s mining ban has come into effect.
The key reason for the long-standing bearish narrative of Bitcoin skeptics and the reluctance of many conservative investors to access cryptocurrencies is the dominance of the People’s Republic of China in the cryptocurrency market, especially the proof-of-work mining industry. In the first decade of Bitcoin’s existence, this concern was justified because most of the hash rate was concentrated in China’s two main provinces. The energy structure used for power generation is Xinjiang, which is dominated by coal, and Sichuan, which is dominated by hydropower. Over the years, Chinese miners have moved between the two provinces in the summer rainy season, constantly seeking the cheapest electricity costs. Even with the encouragement of the Chinese government, a demonstration zone for hydropower consumption industry was established in Sichuan in 2019. These special “demonstration zones” provide cheap surplus power to many energy-intensive industries at preferential prices, and solve the problem of oversupply of power production in the rainy season in summer in Sichuan. The CCP estimates that a staggering 14.2 billion kilowatt-hours will be wasted in 2016, enough to power about 1.3 million American homes. At first glance, these positive measures seem to be a positive step towards China’s acceptance of Bitcoin mining, and at the same time solve the problem of energy waste when the dam is full. The incentive plan has also significantly strengthened the global renewable energy portfolio of the Bitcoin network, which has been the focus of mainstream media, politicians and institutional investors in recent months.
In addition to recent ESG concerns, a major concern for investors and China is that since the mining industry is concentrated in one country, the risk is that Chinese miners may coordinate 51% attacks on the network under the direction of the CCP. This is a long-standing risk and attack vector, although over time, as the network matures and decentralizes, the probability of success is low.
Although China is in the leading position in the global hash rate, with the instructions issued by the most senior CCP official and the Vice Premier of the State Council so far, the recurring “China bans Bitcoin” story that we have been familiar with for many years seems to have become More important. Liu He of the Communist Party of China.
The second is to resolutely prevent and control financial risks… Strengthen the supervision of the financial activities of platform companies, severely crack down on Bitcoin mining and trading activities, and resolutely prevent the transmission of personal risks to the social field — Vice Premier of the Communist Party of China Liu He
It is always challenging to explain how these signals will affect the market in China, but now about a month later, it is clear that China’s Bitcoin mining industry is being permanently eliminated. ASIC miners are shutting down and seeking to move out of China, which is reflected in the steady decline in the hash rate of the entire network since Liu He issued a statement in May. Furthermore, after He Jiankui’s statement, last Friday, the Sichuan Provincial Energy Bureau and the Sichuan Provincial Development and Reform Commission ordered the complete closure of all mining facilities previously encouraged to enter the demonstration zone. This was a painful U-turn by the Chinese government. The Chinese authorities have dealt a permanent blow to any remaining confidence in Bitcoin mining investors’ deployment of capital in China.
The order also targets the gray market for Bitcoin miners, where many unofficial mines operate outside of the so-called demonstration zone controlled by the government, instead signing bilateral agreements with private energy producers. The state has ordered an inspection of this part of the market, and if found, the miners found to be operating will be shut down.
The news of last month has caused huge selling pressure on speculators and Chinese miners, and according to on-chain indicators, they appear to be liquidating their holdings in Chinese exchanges. Most of the content of this news story should already be priced, but, like many complex developments in China, as miners shut down and migrate to more reliable and beneficial jurisdictions, it may trigger in the coming months Some unexpected consequences. Follow this space.
This is a pivotal moment in the history of Bitcoin mining. In the next 6 months or more, new mining locations will be found globally, and potential crypto-advanced jurisdictions will compete with Bitcoin. Related technologies, jobs and peripheral industries. An industry of 1.5-20 billion US dollars (revenue) per year.
Bitmain is the largest manufacturer of mining hardware. It quickly took a proactive approach to shape this new reality for Chinese miners. It held a meeting last week to discuss in part that many of Bitmain’s Chinese customers can now use their manufactured products. The choice of ASIC.
What’s impressive is that Bitmain has found and secured potential locations for the company to relocate, and protect their customers and Bitmain’s bottom line in the process. The sample slides from the conference above show energy prices in multiple states in the United States, where miners can theoretically rebuild themselves and secure Bitmain’s order book. They even arranged a video link with well-known investor and commentator Kevin O’Leary and Texas Governor Gregg Abbot. They both promoted the United States, especially in Abbot’s case, Texas is reliable and safe. And friendly location, can be far away from China.
This huge change in global hash rate distribution may ease the concentration problem in the mining industry and is expected to eventually form a more decentralized, powerful and secure network. Perhaps regulators’ concerns about market manipulation will ease, thus increasing the likelihood that the long-awaited ETF listed in the United States will be approved. In all respects, in the medium and long term, China’s actual ban on mining is positive for the entire industry, not just Bitcoin.
In addition to China’s centralization, there is still a long way to go to alleviate all the problems related to proof-of-work mining. It will be interesting to track how Ethereum migrated to proof-of-stake and how the market explained the transformation of the second largest cryptocurrency from capital assets to yielding productive assets. Bitcoin is unlikely to follow Ethereum to migrate to a much less energy-intensive proof-of-stake consensus mechanism, but it is worth noting that although the proof-of-stake Eth2 Beacon Chain has not yet merged with the Ethereum mainnet, nearly 5.5 million ETH has been bet . Impressively, this is worth about $11.5 billion or about 4.5% of the total supply. Obviously, for cryptocurrency holders, the demand for income is very attractive, which can be proved by the increase in the total value of DeFi lock and the percentage increase in the amount of ETH pledged. The term “productive assets” is strong. As this year progresses, the competition and differences between proof of work/bitcoin and proof of equity/ethereum will become more and more tense. More next week.