China’s crypto crackdown offers a boon to global bitcoin miners

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International bitcoin “miners” are reaping the rewards of China’s effective ban on this energy-intensive practice, generating ever-higher profits by filling the void left by former Chinese rivals in the creation of digital tokens.

China’s largest bitcoin-producing provinces launched a crackdown on computer-based bitcoin mining in June, as part of a larger attempt to cut carbon emissions and a fight against then-private cryptocurrencies. that the country is working on its own officially supported digital coin.

The country was the world’s largest producer of bitcoin, accounting for half of global production. Miners elsewhere say cooling production there has opened up the market to other competitors.

“Think of the average daily global bitcoin production as the pie. The size of the pie stayed the same and every existing miner was able to use a much bigger chunk, ”said Shane Downey, chief financial officer of Hut 8 Mining, a listed company based in Toronto.

Bitcoin miners create new coins using powerful computers to solve mathematical puzzles. The number of parts that can be produced each day is fixed, so with fewer rivals it is easier and cheaper to manufacture new parts.

The improving economy has meant that entrepreneurs are now launching new mining operations in countries around the world.

The overall computing power dedicated to mining bitcoin globally was initially cut in half following China’s move, but is currently around 30% less than in May, according to the website. Blockchain.com data.

The profitability of bitcoin miners depends on the prevailing price in the coin market, the cost and amount of electricity needed to run the servers, and the speed at which new units can be mined. Bitcoin’s rise on Monday to $ 50,000 from summer lows below $ 30,000 could add an additional incentive for miners.

“It’s like we’ve doubled the number of machines we have,” said Fiorenzo Manganiello, founder of private equity firm Lian Group, which owns one of the largest renewable bitcoin mining farms in Europe.

Hut 8 Mining is one of the beneficiary companies. The company saw a 241% year-on-year mining revenue boom in the second quarter, grossing C $ 31.4 million ($ 25 million). . Mining profits were C $ 19.3 million during the period, compared to C $ 697,000 in the same period last year.

“Following the ban imposed by China on national minors, [production] dropped about 40-50%, and at Hut 8 we started mining about 40-50% more bitcoin, with no directly attributable cost increases, ”said Downey of Hut 8.

UK mining company Argo Blockchain also reported a 180% increase in revenue in the first half of 2021, citing a change in global mining conditions that has allowed it to produce more digital coins without increasing the number of machines it uses. Pre-tax profit climbed to £ 10.7million from £ 523,074 in the first half of 2020.

Hut 8 crypto mines. The company saw a 241% boom in mining revenues in the second quarter. © Hutte 8 mining

Sam Doctor, chief strategy officer at US digital asset specialist BitOoda, estimated that it would take around 18 months for capacity to return to pre-ban levels. Replacing the lost capacity will take time as it involves upgrading the electrical infrastructure and building new facilities.

Miners from China have attempted to migrate to neighboring countries such as Mongolia and Kazakhstan, but many are unable to transport the equipment across borders. There are also concerns about the stance authorities will take regarding bitcoin mining at these new hubs.

Bitcoin mining has a severe environmental impact. It accounts for 0.4% of global energy consumption and uses more electricity each year than Finland or Belgium, according to the Cambridge Bitcoin Electricity Consumption Index. Miners in China have had a particularly strong effect due to their reliance on coal-fired energy.

“As it stands, we believe cryptocurrencies have a long way to go to meet ESG criteria,” analysts at French asset manager Candriam said in a recent report, referring to standards for investment relating to environmental, social and governance issues.

Mining activity outside of China gravitates to places rich in renewable energy sources, such as Norway and Canada. But faced with the explosion in demand, operators of specialized sites have found it difficult to build new facilities quickly enough.

“It will take about a year or more for mining capacity to recover. A lot of new mining equipment is sent to the United States and Canada instead of China, but the capacity of the data center is a bottleneck, ”said Kjetil Hove Pettersen, general manager of the Norwegian miner and center operator. of KryptoVault data.

Server racks in a data center operated by the Norwegian company KryptoVault. As demand skyrockets, site operators are struggling to build new facilities fast enough © Norwegian Kryptovault

In the United States, Texas has been one of the main beneficiaries of the new landscape, while specialist sites in Norway and other European countries are creaking in demand.

“We have people calling us and begging us to accept their machines. Some have offered 50% of their future profits if we give them space in our data centers, ”Manganiello added.

The price and quality of the computers needed to operate new units have also fallen. Before the Chinese crackdown, miners had to pay increasingly higher prices for their computers as they searched for more efficient ways to acquire bitcoin. Due to the glut of servers now collecting dust in China, the price of computers has plummeted and barriers to money have become lower.

“Right now, the profitability of mining bitcoin is so high that even the oldest and least efficient machine can be profitable,” said Hove Pettersen of KryptoVault.

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