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China BTC mining ban — a chance to decentralize and decarbonize Bitcoin?
An in-depth analysis of China's renewed hostility toward the BTC mining industry and its implications going forward
In May 2021, the People's Republic of China stepped up its greatest offensive on Bitcoin to date. As part of a wider clampdown on cryptocurrency activities within the nation, the government announced policy changes, effectively banning BTC mining inside its borders.
Previously representing the largest share by far of the Bitcoin network's hash rate, the move has significant implications. With the total global hash rate plummeting over recent weeks, some have raised security concerns. Meanwhile, others highlight the development as an opportunity to address two of Bitcoin critics' favorite talking points.
Firstly, the electricity used in some locations associated with heavy concentrations of Bitcoin miners is largely sourced from fossil fuels. There are numerous reasons why the energy mix of Inner Mongolia, for example, represents spurious grounds on which to attack BTC. Yet, there is little room for nuance within the headlines parroted by mainstream media. The message that BTC is powered predominately by Chinese coal has stuck and has been raised by some as a reason not to support Bitcoin.
Secondly, there are fears that such a large concentration of hash rate within the borders of a single nation has always presented a security risk. If, for example, the government of that nation had designs on commanding a majority share of BTC's hashing power, seizing mining hardware en masse from domestic operators would surely be the easiest way to go about it.
In this OKEx Insights article, we consider these issues to assess the Chinese Bitcoin mining ban's short- and long-term impact. With commentary from mining industry experts, we question whether Beijing's latest offensive is a big blow or is ultimately bullish for Bitcoin.
China gets tough on Bitcoin mining
The renewed offensive against digital currency use in China stepped up a gear on May 18 when the nation's Internet Finance Association, Banking Association and Clearing Association issued a joint public warning about cryptocurrency investment risks. Citing digital asset speculation as a threat to citizens' financial security, the document prohibited institutions from doing business related to cryptocurrency.
Just days later, the Chinese State Council's Financial Stability and Development Committee resolved to crack down on BTC mining in the nation. Unlike previous examples of China posturing to ban BTC mining, the response from provincial authorities was swift this time. Over subsequent weeks, stories hit the news detailing efforts in Inner Mongolia, Qinghai, Sichuan, Xinjiang and Yunnan to ban mining outright, prohibit those attempting to source power off-grid or investigate local mining activities.
As provinces went public with their enforcement of Beijing's latest crackdown, the Bitcoin hash rate — a metric used to measure the total computing power of miners supporting the network — dropped significantly as operators shut down facilities. While the total network hash rate estimates vary due to differences in calculation methodology, the industry's most cited figures show a peak to trough plunge of more than 50%. At its recent low, the total hash rate was comparable to 2019 levels.
Decreased hash rate, decreased security?
Some have speculated that the sudden hash rate decline may represent a threat to the Bitcoin network's security. Indeed, the cost of obtaining enough computing power to perform the much-publicized "51% attack" is proportionate to the network's overall hash rate.
A 51% attack can occur if a single entity or group of cooperating entities commands more than half of the total hash rate. However, despite the popular misconception, in such an event, the attacker cannot change the network's rules. Doing so would cause all honest nodes to reject their transactions, resulting in a chain split.
There are two main attacks possible when controlling 51% or more of the network. The first is to reorganize the chain, allowing the malicious entity to spend the same funds twice. Such attacks have been performed on much smaller proof-of-work blockchains, such as Ethereum Classic.
The second is to deny service to specific users by excluding their transactions from blocks. Long-time Bitcoin evangelist Andreas Antonopoulos claims the most destructive outcome of a 51% attack is an extension of this. The malicious entity could perform a blanket denial of service attack by mining completely empty blocks.
While these attacks could be fairly damaging in terms of a loss of confidence in the network, it is worth pointing out they are incredibly expensive to perform — even with Bitcoin's currently reduced hash rate.
To put it in perspective, 51% of BTC's recent hash rate low of around 61 EH/s, reported by on-chain data provider Glassnode, is 31.11 EH/s. A highly competitive mining unit like the Antminer S19 is capable of producing 95 TH/s, meaning you'd need more than 327,473 of these machines to command the required share of BTC's hash rate. Each Antminer S19 costs around $8,500, putting hardware expenses alone at over $2.78 billion. This also assumes that the units were available to begin with and that attempting to suddenly buy them all would have absolutely no impact on their price.
In terms of electricity, each unit consumes 3,250W per hour. We'll assume our attacker has access to some of the planet's cheapest power and pays just $0.005 per kilowatt-hour — incidentally much cheaper than the average household electricity price reported in China. At 3,250W per unit, the total power cost per day to run all 327,473 machines would be around $127,000 — excluding any cooling, land rental or other administrative costs. This total is almost certainly prohibitively expensive for all but the most resourceful entities. Even if money were no object, a lack of freely available hardware poses a practically insurmountable obstacle.
Another concern is that China could seize the equipment of the many miners its latest policy change is displacing. The nation has confiscated mining equipment previously. However, this time, evidence points to the contrary. In most provinces, enforcement actions have not yet started, allowing Chinese miners to relocate to more friendly jurisdictions. This is hardly the optimum approach if the motive was to command a majority share of the network's total hash rate.
For Nic Carter, a partner at Castle Island Ventures, the network is still "overwhelmingly secure" and would remain so even if the hash rate were to drop by 80% from its peak.
OKEx Insights asked Marshall Long, a veteran Bitcoin miner and CTO of FinalHash, how much risk to network security China's offensive on the mining industry posed. His response was a single word:
The great Bitcoin mining migration
Clear relocation efforts of many of the largest miners support the notion that China's motives are simply to remove the mining industry from its borders rather than subvert the network's security. Immediately following the announced policy change, many of the nation's largest mining companies began to explore their options outside of China.
Long told OKEx Insights that he had experienced first-hand the urgency of Chinese miners to set up their operations elsewhere:
"I have personally been visited by many of my Chinese friends and colleagues in my Texas facility. Almost all hyper-scale miners are actively trying to relocate."
He went on to speculate on the likely destinations of migrating BTC miners:
"Kazakhstan, Texas, Canada, and Sweden to a lesser extent will more than likely soak up a large portion of the displaced Chinese miners."
Bordering China, Kazakhstan initially appeared to be an ideal destination for displaced miners. In June, BIT Mining delivered 320 mining rigs to the nation from Sichuan with plans to later install a further 2,600 units. Similarly, Kazakhstani mining firm Enegix is in discussions with Chinese companies looking for a more accepting location to mine BTC.
Other companies are looking toward the United States as a potentially more regulatory-friendly jurisdiction. With its abundant wind and solar energy as well as welcoming lawmakers, Texas is a popular destination. For example, Alejandro De La Torre, the vice president of major mining firm Poolin, has documented an apparent move via Twitter. Tweets containing pictures of the initial shutdown in Sichuan, Poolin executives arriving in Texas and preparing hardware for shipment demonstrate the scale of the upheaval currently underway.
Maryland is also seeing an influx of miners. According to a CoinDesk report, a Chinese logistics firm airlifted three metric tons of mining hardware to the state in June. Similarly, Bitcoin-friendly Miami Mayor Francis Suarez is attempting to lure displaced miners to Florida with cheap and abundant nuclear energy. Outside of the U.S., Russian and Canadian hydropower, Iceland's geothermal reserves and new opportunities close to the volcanoes of Latin America also appear alluring.
A boon for non-Chinese miners
While Beijing's latest crackdown is hugely disruptive to the Chinese mining sector, it appears to be offering opportunities for miners already operating in other parts of the world. Several North American mining firms have announced significant expansion plans in the wake of China's offensive.
Speaking to Decrypt, Michael Stoltzner, the CEO of Blockware, stated:
"While some may interpret this as a material decrease in network security, we view this as a unique window of opportunity for American mining companies to further decentralize hash rate away from China."
A report by fintech financial services firm BitOoda speculates that the sudden expansion of such companies results directly from Beijing's clampdown and the flood of cheap second-hand hardware hitting the market. It states:
"North American miners will benefit from this new reality. They could acquire additional rigs at much lower prices, with far shorter lead times. Recently, rig prices have exceeded $100 / TH/s with 6–9 month lead times, compared to $25–35 / TH/s last summer. Prices could fall much further should the Chinese miners be allowed to relocate or sell their installed base overseas."
With such a huge drop in hash rate, the network underwent its largest single difficulty adjustment ever on July 2. Mining for those remaining online just got around 28% easier. With significantly less competition and the threshold to add a new block to the chain reduced, those continuing to mine can expect greater profits. Brandon Arvanaghi, a BTC mining engineer, told CNBC:
"This will be a revenue party for miners. [...] They suddenly own a meaningfully larger piece of the pie, meaning they earn more bitcoin every day."
Addressing two major BTC criticisms
Despite the colossal upheaval resulting from the policy change, some commentators are incredibly optimistic about the Chinese mining ban's long-term impact. Many observers have highlighted the development as an opportunity to address two of the network's biggest criticisms: its apparent reliance on fossil fuels and concerns over a nation-state-level attack on Bitcoin.
Leaving China for greener pastures?
As addressed in a previous OKEx Insights in-depth report, many Bitcoin critics have cited China's continued coal-powered electricity generation as grounds to attack the network. While not an entirely fair criticism, the mainstream media's obsession with the issue has dissuaded some significant potential players from fully supporting the network. Elon Musk, for example, famously backpedaled on plans to accept BTC for Tesla purchases, claiming its environmental impact is at odds with the electric vehicle manufacturer's core values.
Naturally, the true environmental impact of the Chinese mining shutdown will depend on the end location of displaced miners and which parts of the world step up their own mining operations. Kazakhstan, for example, continues to rely heavily on nonrenewable resources to generate electricity. In 2018, it was the planet's ninth-largest producer of all fossil fuels.
At face value, the sudden influx of Chinese miners into Kazakhstan should concern those hoping the development provides an opportunity to clean up BTC's image. However, sensing an opportunity to profit from the situation and its geographical proximity to China, the government of Kazakhstan recently introduced a tax on electricity supplied to miners that will come into force in 2022.
In a highly competitive industry, the $0.0023 per kWh surcharge may be enough to encourage miners to set up closer to greener power sources. Indeed, the National Association of Blockchain and Data Centers Industry of Kazakhstan commented to Forklog that the tax imposition would have "a very negative impact on the investment attractiveness of the industry." It is, therefore, likely that those quickly moving to Kazakhstan will relocate a second time in response to the surcharge.
Given the wider global push to rein in fossil fuel use in favor of renewable energy, the regulatory stance toward Bitcoin miners in nations continuing to produce nonrenewable electricity may be less friendly than elsewhere. As Castle Island Ventures' Carter opined in a recent CoinDesk op-ed, many miners are now considering more than just cheap power in their long-term planning:
"Raw electricity cost is no longer the sole consideration. Today, political stability, regulatory clarity and a respect for private property rights are paramount in miner decision-making."
Decentralizing the network
Another popular Bitcoin criticism potentially addressed by the Chinese mining ban is network centralization. With such great concentrations of mining equipment within Chinese borders, there was a non-zero risk of the government attempting to attack the network, as researchers highlighted in a 2018 study titled "The Looming Threat of China: An Analysis of Chinese Influence on Bitcoin."
In a video posted to Twitter in May, Carter acknowledged that the real risk of such an outcome was always low. He went on to comment:
"There was an outside chance that at some point they [the government] would use China-domiciled hash rate to launch an attack on Bitcoin. This wasn't something that I thought was very likely but now by continuing to ban mining in China, they're not going to have any leverage or ability to do that."
When OKEx Insights asked FinalHash's Long if he thought the development was long-term positive or negative for BTC, he added:
"It's a net positive for sure. It's forced decentralization."
The slow road to recovery
Although mining firms outside China are in the process of expanding and major Chinese miners are relocating as quickly as possible, it is unlikely that the BTC hash rate will recover any time soon. Miners worldwide face significant logistical challenges that will take time to overcome.
Carter highlighted the regulatory hurdles facing those hoping to relocate to the U.S., claiming that the permits required to set up an operation could take as long as six months. Meanwhile, data centers outside of China are seeing unprecedented demand for their own limited resources.
Commenting to India's Economic Times, Dave Perrill, the CEO of U.S.-based data center operator Compute North, pointed out the difficulties faced in expanding capacity to meet the influx of inquiries from displaced Chinese miners:
"We're going to see a lot of computers sitting in warehouses for the next six, nine, 12 months as the infrastructure catches up, [...] We are targeting the first and second quarter of 2022 for large scale deployments. [...] It's not a simple switch, it takes a lot of complex engineering, procurement and construction."
Long agrees that a hash rate recovery will take time. He commented to OKEx Insights:
"I don't think the hash rate will return to above 150 EH/s until early next year. However, once miners finish their new buildouts, etc., I fully anticipate the hash rate to eclipse 200 EH/s within the next 18 months."
Despite the enormity of the mining industry shakeup, there seems to be little threat to the network itself. Satoshi Nakamoto designed Bitcoin with an incredibly perceptive feature precisely to deal with such hash rate volatility. The fortnightly difficulty adjustment ensures that any disruption to the network's operation is short-lived. When a hash rate increase results in the shortening of intervals between blocks from the expected 10 minutes, the network automatically adjusts to make finding a block more difficult again.
Similarly, when the hash rate declines and blocks take longer to mine, the network decreases the difficulty, effectively increasing the number of potential valid hashes and speeding block production up again. This self-regulatory mechanism ensures that the Bitcoin network will continue to function during this interim period.
As various experts on Bitcoin miners have stated, any suggestions of decreased network security or increased risk of attack seem largely unfounded. Indeed, the cost of such an attack is still well into the billions of dollars for an extended denial of service attack, and any hostile entity would face similar logistical issues as those miners attempting to set up in the U.S. and elsewhere.
With the network regulating itself to quickly return to business-as-usual, Chinese miners relocating and infrastructure providers scaling up enable additional miners to come online outside China, the real question is the extent to which China's latest offensive will improve the global perception of BTC. After all, with each of the thousands of ASIC units currently being taken out of the country, the outside risk of a nation-state effort to disrupt Bitcoin falls.
Similarly, if displaced miners flock to areas rich in renewable energy, another favorite critique will cease to carry weight. Therefore, it appears that, yet again, Bitcoin will emerge stronger from the fallout of China's latest offensive against it. After disarming two of the network's major criticisms, it will be interesting to see which of the rapidly disappearing straws BTC naysayers grasp for next.
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