Bitcoin fell below $30,000 for the first time since January this week. It’s worth half of what it was three months ago, and it comes amid suspicions that China, the world’s largest Bitcoin mining country, is attempting to outright outlaw cryptocurrencies. Is that correct? Here’s what we know right now.
While we haven’t heard of China outright banning cryptocurrencies, the authorities began issuing alerts about trading and processing cryptocurrencies in May and advised the country’s financial behemoths that they would have to stop dealing in digital currency. Since then, the country’s top three mining regions have begun to take action against miners, and the government recently convened with key banks to reaffirm that banks cannot be involved in bitcoin transactions.
The reports point to the possibility of a significant reduction in global crypto mining potential: in April 2020, the University of Cambridge calculated that China generated 65 percent of Bitcoin’s hash rate, with three key provinces accounting for the majority of that processing power. According to The Block, Xinjiang, the province with the highest mining on average according to Cambridge’s provincial split, has shut down a major mining hub, and Inner Mongolia has apparently begun the process of establishing a comprehensive mining ban.
The province of Sichuan imposed a mining ban last week, instructing electricity firms to turn off power to any mining activities uncovered. According to reports, the Yunnan province government has directed its electricity providers to stop negotiating side deals with miners.
When a single coal factory in Xinjiang flooded and shut down for a weekend in April 2021, it reportedly reduced global Bitcoin mining capacity by roughly 35 percent.
What percentage of China’s crypto output will be lost if all of these regions fall offline? According to The Global Times, one Chinese blockchain business CEO projected that “more than 90% of Bitcoin mining capacity, or one-third of the global crypto network’s processing power, will be suspended in the immediate term.”
The market and miners have both responded to the tightening regulations. CNBC reported last week that a “great mining migration” is underway, with some Chinese miners packing up and relocating to other nations such as the United States or Kazakhstan. Others, as shown below, are selling their mining equipment to overseas customers.
According to the South China Morning Post, graphics card prices in the country have declined considerably since the government’s proclamations in May, as demand for mining GPUs has fallen. According to Coinbase’s tracker, the price of key cryptocurrencies like Bitcoin and Ethereum has declined drastically since China announced such actions – since early May, Bitcoin prices have plunged from approximately $55,000 to roughly $32,000, and Ethereum’s value has halved.
Although it’s difficult to link that to China’s actions, given other reasons like Elon Musk and NFTs, publications like The Wall Street Journal have discussed it as a factor. According to Reuters, the Chinese government is acting now due to concerns about cryptocurrency’s unpredictable pricing and its use for money laundering and criminal dealings.
There’s also talk that the Chinese government is worried about the optics: China’s aim to be recognised as a leader in green energy, with its leader pledging that the country will be carbon-neutral by 2060, does not fit with crypto mining’s reputation as an environmental disaster. It’s worth noting that China is working on a centralised digital currency of its own.
As Chinese miners sell off their devices or seek asylum abroad–often in countries with less renewable energy–industry insiders believe that bitcoin production will speed up elsewhere. “Will likely boost emissions connected to bitcoin mining in the near and medium term,” said Alex de Vries, founder of research platform Digiconomist, which provides estimates of bitcoin’s climate impact.
“It appears unlikely that miners will have many options to go green without China, which is the world’s largest market for renewable energy in absolute terms,” he added. Shota Siradze, who owns a cryptocurrency company in Tbilisi that assists would-be miners set up shop in the former Soviet republic, said his phone started buzzing again last week after months of silence, as China’s statement spurred a flurry of requests from overseas investors.
“People are emailing and contacting me, asking for room to put massive amounts of CPUs,” he said, adding that he suspected the majority of potential clients had recently purchased servers from China. Earlier cryptocurrency booms in Georgia, which relies primarily on hydroelectric power, resulted in an increase in energy consumption and rolling power outages in Abkhazia, a separatist province where mining was just banned.
While some Chinese miners are selling up, others are fleeing to Kazakhstan, which relies largely on fossil fuels for electricity, or Texas, where they could raise utility costs and exacerbate the state’s already-existing power problems, according to researchers. “The state is in horrible situation to welcome bitcoiners,” Northumbria University’s Howson remarked.
“We had disruptions there a few months ago that left millions of people without power. Hundreds of people were killed. They died of frostbite. Bitcoin will exacerbate the problem.”
Cryptocurrency supporters argue that a decentralised digital currency is worth the relatively low energy cost compared to other vital areas of the economy.
According to a Cambridge University index, bitcoin mining accounts for roughly 0.3 percent of global electricity usage — more than Austria on an annual basis, but about a third of that used by idle household gadgets in the United States each year. Nonetheless, critics of the sector are hoping that China’s action will lead to a global crackdown.
“It’s critical that nations take steps now to prohibit the import of bitcoin mining machines,” Howson added. “Bitcoin mining, like the global trade in Chinese tiger parts, should be treated as an environmental crime.”
For years, the Chinese government has tightened the screws on Bitcoin, banning banks from handling the cryptocurrency in 2013 and banning initial coin offerings in 2017. However, mining has apparently exploded in the country due to cheap electricity from hydro and coal, as well as certain legal ambiguities.
Now it appears that some miners have had their fill. According to CNBC, the president of a Hong Kong mining pool does not “want to face every single year, some sort of new ban coming from China.”
According to Eswar Prasad, a trade policy professor at Cornell University in New York, more governments may follow China’s approach because concerns about cryptocurrencies are not confined to the environment. Cryptocurrencies, according to Chinese officials, disturb economic order by facilitating unlawful asset transfers and money laundering.
Beijing, according to analysts, is also concerned about possible competition for the digital yuan. The Bank for International Settlements, dubbed “the central bank of central banks,” claimed last week that cryptocurrencies were being exploited for ransomware attacks and financial crimes, and that bitcoin, in particular, had “few redeeming public interest qualities.”
There are still powerful supporters for the coin: El Salvador’s President, Nayib Bukele, announced last week that a bill will take effect in September that will make the country the first to accept bitcoin as legal cash. But, more broadly, China’s moves are likely to be viewed as a setback for the legitimization of decentralised cryptocurrencies like bitcoin, which might jeopardise the digital currencies’ survival, according to Prasad.
“The key difficulty that decentralised cryptocurrencies face is that they have shown to be inefficient and expensive instruments of exchange, instead becoming speculative assets,” says the report.
“Because of their lack of intrinsic worth, they will be subject to huge price fluctuation, making it even more difficult for them to fulfil their ostensible responsibilities as more efficient vehicles of exchange than existing payment technologies.”
China isn’t the first country to change its stance on cryptocurrencies: Iran imposed a temporary ban on mining during the summer, and India is considering making cryptocurrency possession illegal.