China can’t seem to make up its mind on Bitcoin. In 2013, the People’s Bank of China prohibited financial institutions from using Bitcoin and other cryptocurrencies for transactions, yet Bitcoin itself was not made illegal. In April 2019, Bitcoin mining was on the list of “wasteful” industries which were to be eliminated, yet disappeared from the list in November. That was possibly because a month before, Chinese President Xi Jinping announced that the country would go all-in on blockchain technology, in order to be a world leader in the space — yet cryptocurrencies, which feature blockchain technology at its core, weren’t mentioned.
But despite the pendulum swings on policy around Bitcoin, China continues to be the global leader in Bitcoin mining. With over 65% of market share, China is also poised to become not only a leader, but a controller of Bitcoin mining as well.
Before the pandemic, we’d conducted a survey about the State of Crypto Mining to get a sense of how much Bitcoin owners knew about Bitcoin mining, how they felt about the future of Bitcoin pricing, and how much they knew about China’s place in the Bitcoin market. Read on to learn more about Chinese mining and what it means for the future of Bitcoin.
What is Bitcoin mining?
The process for mining Bitcoin is fundamentally mathematical. Bitcoin miners solve complex calculations in order to “win” the right to add a block of transactions to the blockchain. In return, the miner receives newly minted Bitcoin as their reward, and any transaction fees that may be present as well. Anyone with the right hardware can be a miner, and individual miners can set up rigs in their home. Other individual miners can pool their resources, which gives them a higher hash rate and better chance at mining a block. Bigger, commercial-grade companies are getting involved as well, with hundreds or thousands of rigs, and massive computing power. Bitcoin works because of its decentralization, with miners spread across the world.
How much of the Bitcoin network do Chinese companies control?
The Bitcoin ecosystem itself uses 73.12 terawatt hours (TWh) annually. China produces about 65% of global hash rate, or the energy used to mine Bitcoin blocks. Mining operations are spread across individual miners and large-scale commercial operations. China also has a number of mining pools, where individual miners can pool their resources with bigger mining companies in order to increase their hash rate.
Why are there so many miners in China?
The biggest reason there are so many miners in China is because of the low lead times and cheaper materials and labor available. Because hashing requires a massive amount of electrical power, it makes sense to locate mining companies in areas with low-cost resources. But while regions of the country like Sichuan use abundant hydroelectricity, much of the energy comes from coal. Over three-quarters of electricity in China is produced by coal-burning plants, which is more expensive than hydro or wind power. Unfortunately, this means that new Bitcoin are being mined at the expense of unsustainable energy solutions. Philip Salter, Head of Operations at Genesis Mining, covers this topic in more detail in his short videos: check this one out!
What are the risks of Chinese companies contributing the majority of the computing power to Bitcoin’s network?
Bitcoin was built on the idea of decentralization, in that it would be a peer-to-peer currency without the intermediation of a third party (like a bank). Bitcoin mining is also available to anyone with the right hardware, and transaction verification is based on network consensus. By having mining power in the hands of one country, there’s a risk of undercutting the currency entirely by centralizing it to a majority controller. The Bitcoin community talks about a 51% Attack, where anyone with a majority control of the hash rate could change transactions, or affect the blockchain. Having China produce more than the majority of the world’s mining may prove that threat. Especially after the pandemic the world is now actively considering the role of China in all areas of life.
What’s the Chinese government’s view on Bitcoin and Bitcoin mining?
As mentioned above, the Chinese government has taken a firm stance on Bitcoin usage, yet hasn’t on Bitcoin mining. Financial institutions were prohibited from using Bitcoin in 2013, and in 2017 cryptocurrency exchanges and initial coin offerings were banned. While Bitcoin mining was allowed to continue, pressure began in 2018 to shut down the mining industry, with mining included on a list of 450 “wasteful” industries slated for elimination. But in October 2019, China’s president announced a massive investment in blockchain technology, the core of Bitcoin and other cryptocurrencies. By November, crypto mining was removed from the list of wasteful industries. China is known for developing their own digital currency “Yuan”, which is currently tested in Shenzhen, Chengdu, Suzhou and Xiongan. As of June 2020, laws could have already been drafted to outline the future of a new form of the Chinese Yuan.
China certainly has the corner on the Bitcoin mining market, and while it seems that China’s new commitment to blockchain technology will allow the industry to flourish, it’s yet to be seen what the future of mining in China will look like. Still, the fact that China produces over half of the world’s hashing power may, in the long run, be a threat to Bitcoin’s foundation of decentralization.
What’s interesting is that the Corona crisis had a very mild impact on the mining industry. Production of mining equipment was delayed due to the virus, but general mining activities continued as usual. Still, for many countries COVID was a reminder that some of their industries are too dependent on China. Some countries already took steps towards relocation, and perhaps miners will take note too.
At Genesis Mining, we were focusing on expanding in several countries outside of China already before the pandemic hit. Because regardless of any virus, the only sustainable strategy for miners is to prefer locations with cheap, green energy, and crypto-friendly leaders.