Bitcoin on a bumpy ride as China crackdown shakes things up

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Bitcoin. Internet magic money is often ridiculed as “worthless” and “invented” by those who forget that all currencies have value only because we believe in them. Perhaps the world’s strongest currency unsupported by weapons and ammunition, Bitcoin nonetheless remains a controversial invention, as do the many cryptocurrencies that have followed in its wake.

Recently, the Chinese government cracked down on operations in the country. With China hosting the world’s largest fraction of Bitcoin’s mining capacity, this sent shockwaves through the network and had a huge effect in multiple ways. Here is what is going on.

A graph showing the wild fluctuations in Bitcoin mining in various provinces of China. Source: CBECI

Chinese authorities have ordered miners in the Sichuan region and elsewhere to shut down, while ordering local authorities to shut off power to mining operations. Banks have also been instructed to close accounts or halt transactions suspected of being linked to cryptocurrency operations. With the ability to strike and make decisions in a way that is generally not possible in most democracies, the move has been swift and decisive.

Whispers from the changing political winds around Bitcoin have slowed investment in additional capacity for Chinese miners for some time. Before the move, Chinese mining operations accounted for between 60 and 75.5% of Bitcoin’s global hashrate. According to the Cambridge Bitcoin Energy Consumption Index (CBECI), however, the number quickly dropped to just 46%.

With many huge offline mining operations, the power consumption of the Bitcoin network has dropped significantly. Earlier this year, there was a lot of noise surrounding Bitcoin now using more energy than the Argentine state. We calculated the numbers and found it to be a solid analysis, and of particular concern from an environmental perspective. At the time, Bitcoin was using around 15 GW 24 hours a day, for an estimated annual consumption of around 129 TWh over a full year. However, as it stands, the CBECI now measures Bitcoin as using only 11.92 GW for an estimated annual consumption of 87.3 TWh, which rebounded from a low of nearly 10 GW earlier. this month.

Graph showing Bitcoin mining spread across countries around the world. Source: CBECI

This is a huge drop and indicates how much the extraction capacity has been disconnected. This also has effects on the functioning of the Bitcoin network. With less hash of miners, it takes more time for miners to find solutions to resolve Bitcoin blocks. The mining difficulty is automatically modified by the Bitcoin algorithm every 2,016 blocks, based on the current hashrates, in order to maintain a block resolution time of approximately 10 minutes. Under normal conditions, this happens about every two weeks. However, with the sudden huge drop in the loss of Chinese miners, block resolution times dropped to 14-19 minutes until the algorithm made a correction on July 3. The difficulty of mining has become 28% easier, a historically significant drop for the cryptocurrency.

This is good news for current miners, who will share the spoils of their efforts with a much smaller group of participants. This should last at least until Chinese operations are operational in other jurisdictions (which may help explain August’s rise). You have probably never been to Kazakhstan, as the country does not prioritize tourism and therefore has poor infrastructure to allow it. However, it is next door to China and has cheap electricity, so many miners have moved their operations there. The United States is also a popular choice for its lack of organized political opposition to Bitcoin, cheap energy, and ease of doing business.

Mining operations are selling equipment online or relocating operations overseas due to the crackdown in China. Source: @ASIC_CHINE

The decrease in energy consumption from 15 GW to 10 GW was significant, marking a decrease of 33%. At its recent low point, instantaneous consumption had fallen even lower, around 50% of peak. If we take the current number, we can do some calculations on the effect on emissions. The US Energy Information Administration cites a figure of about 0.92 lbs of CO2 emissions per kWh of energy produced in the United States in 2019. Using that rough figure, China’s decision eliminated 18 million metric tons of CO2 emissions in just a few weeks. That’s roughly the equivalent of taking 3.9 million cars off the road, according to an EPA calculator.

Obviously, disabling Bitcoin entirely would save a huge amount of money in the environment. It would also theoretically be much easier than other efforts such as installing renewable energy sources, switching to cleaner transport or reducing pollution from large industries. Arguments that mining operations could run on renewable energy ignore the fact that the very energy used to power their mining operations is energy that cannot be used by other users.

Of course, outside of China, it’s not as straightforward as sending a tough letter from the government, so it’s likely that Bitcoin will continue to pollute significantly in the future. After all, established and wealthy players will fight tooth and nail against any force that could hurt their investments. Perhaps the greatest danger to Bitcoin’s value and profile, however, is the mere suggestion of government regulation or an outright ban. Prices have fallen around 30% from this year’s all-time highs, but have recovered sharply as hashrates recover and mining operations recover overseas. We suspect that Bitcoin will reach much greater heights and notoriety before all is said and done.

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