What does China’s crypto ban mean for the industry?

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Despite visible gains for some investors, it may be time to assess whether crypto without China is viable.

China, the former crypto capital, banned mining last June after banning crypto trading five years ago. There are two good reasons why China has banned mining on its borders. There is also a bad reason.

First of all, the good reasons: arbitrage between the costs of electricity and greenhouse gas emissions, which are linked. If you think about it, crypto mining is really just embezzlement. Miners take advantage of the very low energy prices, convert that energy into coins and sell the coins internationally for a big profit.

TOPSHOT – This photo taken on March 31, 2021 shows workers transferring cryptocurrency mining rigs … [+] at a cryptocurrency farm that includes more than 3,000 mining rigs in Dujiangyan, southwest China’s Sichuan Province. – China OUT (Photo by STR / AFP) / China OUT (Photo by STR / AFP via Getty Images)

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Electricity costs can represent more than half the value of the parts produced. Chinas Bitmain, the great-grandfather of the miners, who supplies around 65% of the world’s mining rigs and also runs his own farms, like other Chinese miners, has long received subsidized tariffs for electricity .23 / kwh or less for electricity, compared to standard rates as high as 0.88 / kwh. So a quarter of the price. In May, the University of Cambridge estimated that international cryptocurrency mining uses as much electricity as Sweden. It is between Jordan and Sri Lanka estimated by researchers writing in the journal Joule in 2019. It is clear that crypto is much more resource hungry per transaction than the banking sector (including its network of ATMs, so researchers say).

Some of the low cost realized by miners is reasonable. You can’t store electrical energy, so if a waterfall gushes out, you might as well turn on the generator even if no one wants the electricity. Hence very low prices in remote areas. And there are crypto miners, like the recently listed Argo Blockchain, who claim to be green miners who more offset their emissions by trading carbon credits.

But this argument is fundamentally wrong. This is because adding computing power to the bitcoin network actually reduces the efficiency of that power. All the mining machines that participate in the network compete with each other to generate bitcoin rewards. The number of bitcoins available for mining automatically adjusts every 2,000 blocks or so. Mining is getting more difficult. Therefore, adding new, faster machines to the network does not increase the total amount of coins mined, but changes the distribution. The people who own the fastest machines are the most likely to win the rewards. This is why the machines released in 2018 and 2019 are already obsolete. This is also why the amount of electricity consumed per bitcoin transaction is already several times that of Visa, for example, increasing over time.

Two technicians inspect bitcoin mining at Bitfarms in Saint Hyacinthe, Quebec, March 19, 2018. – … [+] Bitcoin is a cryptocurrency and a global payment system. It is the first decentralized digital currency because the system works on the basis of blockchain technology without a central bank or a single administrator. (Photo by Lars Hagberg / AFP) (Photo by LARS HAGBERG / AFP via Getty Images)

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China’s mining has been concentrated in pockets of the country with orphaned energy resources Inner Mongolia, home to more than a third of all of China’s coal reserves, where much of the coal remains unused at the mouth of the mine, in Yunnan and west Sichuan, where the rainy season brings a surplus of living water. These provinces have come under pressure to meet emissions targets, and since they receive very little tax revenue from mining facilities (which can easily hide their mining revenues from regulators), they have been happy enough to announce bans. Inner Mongolia formally issued a ban in May and Sichuan and Yunnan, via the electricity regulator, in June, just in time for a nationwide ban on June 18.

The reason for the bubble why China doesn’t like crypto is concern about capital flight. It is significant that China shut down the stock exchanges and decided to block China’s access to foreign exchanges and wallets in the fall of 2017. It was not long after China suffered a significant capital flight and saw its foreign exchange reserves decline. The financial bureaucracies stepped in that year with their own plans to control the networks.

At the same time, the Chinese government wants to assert its sovereignty over communication and computer networks. Analysts often point to the People’s Bank of China stated intention to issue its own cryptocurrency, saying the Chinese are stifling competition. This is not entirely true: digital and cryptocurrencies have little to do with each other. But data control is certainly an expression of political anxiety.

Harry Wong Hon-kit plans to buy bitcoin mining hardware from Golden Computer Arcade in Sham Shui … [+] Po. 20DEC17 SCMP / Xiaomei Chen (Photo by Chen Xiaomei / South China Morning Post via Getty Images)

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China has collectively worried about cryptocurrency for a decade. In 2013, the government decided that its banks could not use bitcoin. It banned ICOs and domestic exchanges in 2017. A generally hostile environment has caused local governments to hide the mining farms they host by labeling them as data centers and pleading ignorance of crypto activity. Therefore, the most effective way to ban mining activity has been to set a minimum price for electricity.

The miners are on the run. In March, Chinese miners began moving their rigs out of Inner Mongolia following news that the province, responsible for around 8% of the world’s hash power, would shut down all mining operations. of crypto at the end of April. More than a million rigs are moved in Canada. Chinese miners BIT Mining Ltd. (BTCM) and Canaan Inc. (CAN) move platforms to Kazakhstan. Thousands of platforms are moving to Texas, where unregulated electricity markets offer pockets of electricity at very low prices. BTCM, for example, announced in May that it would relaunch Bitmains’ abandoned project to build a mining farm in Rockdale, Texas. Bitmain had planned to take over part of a factory abandoned by Alcoa AA.

ROCKDALE, TX – JUNE 23: David Schatz, vice president of operations for Whinstone, a cryptocurrency … [+] Riot Blockchain recently acquired mining company explains how miners work at a Riot Blockchain facility in Rockdale, TX on June 23, 2021. Riot Blockchain, a Bitcoin mining company that hosts Bitcoin mining equipment for its customers, houses the largest facility Bitcoin mining in the United States in Rockdale, TX.

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Electricity from Texas actually costs about 10 times the price of Iranian electricity, averaging 11 cents per kWh in April compared to one penny for Iran. Qatar costs an average of 3 cents. Iran and Qatar have the cheapest electricity in the world, and Quebec is much cheaper than Texas. But the miners are moving to the United States as fast as they can, because that’s where the investment capital is and, therefore, that’s where the mining companies want to show acres and land. hectares of impressive-looking machinery. This is important, because none of the miners listed are currently profitable; they all attract investments on the promise that they will mine more of the more expensive Bitcoin with their faster platforms. Currently, it takes about seven months to break even on the cost of a mining rig.

With Bitcoin trading at around $ 48,000, right now nobody cares, and initially the crackdown in China made mining easier for online platforms and increased profitability. As China-based miners move around, that changes rapidly.

In the meantime, crypto news is increasingly becoming detached from reality. A game called Axie Infinity which earns players Ethereum coins generated $ 485 million in revenue in two months 20 times its total compared to nearly three years prior. This supposedly super-secure currency has been the subject of epic thefts: Hackers stole $ 600 million from an exchange called Poly Network in early August. In June, the brothers who founded South Africa’s largest crypto exchange disappeared with around $ 3.6 billion in Bitcoin after notifying investors that the exchange had been hacked. In April, the founder of Turkish crypto exchange Thodex reportedly stole $ 2 billion. The 30-year-old founder of Canadian QuadrigaCX is believed to have died of Crohn’s disease shortly after arriving in India for his honeymoon, taking $ 300 million in investor funds with him as no one other had the passwords.

With this degree of volatility and insecurity, why would anyone see cryptocurrency as the currency of the future?

Britain’s Bitcoin trader Kolin Burges holds up a sign protesting against Tokyo-based bitcoin … [+] MtGox changer outside the company’s Tokyo office on February 26, 2014. On February 26, Japanese authorities investigated the MtGox bitcoin exchange after allegations of the theft of millions of dollars from its digital vaults, while the US prosecutors have reportedly served a subpoena on the company. AFP PHOTO / Yoshikazu TSUNO (Photo credit to read YOSHIKAZU TSUNO / AFP via Getty Images)

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