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China’s crackdown on Bitcoin (BTC) mining operations has resulted in a significant drop in network hash rate, but industry participants believe this represents an incredible opportunity for the wider mining ecosystem.
China has long been a major contributor to the Bitcoin mining space, at times accounting for over 70% of the global hash rate of the world’s preeminent cryptocurrency. That was until June 2021, when the Chinese government decided to shut down a number of the world’s largest mining centers.
China’s southwestern Sichuan Province has an abundance of hydroelectric power, which is fed by Asia’s largest river, the Yangtze. The advent of ASIC mining has seen the province house some of the largest mining operations in the world in recent years due to its favorable electricity rates. But it’s now coming to an abrupt end, driven by the country’s hardening stance on cryptocurrency mining and the ecosystem in general.
Local media reported that 26 major Bitcoin mining centers were forced to close in Sichuan, which had a dramatic effect on the global hash rate. The Bitcoin hash rate peaked in mid-May at 171 terahashes per second (TH / s), but fell to a low of 83 TH / s on June 23, marking a 50% drop in just over a month.
Industry analysts estimate that more than 70% of total mining capacity in China has been taken offline in the past week, and that could increase to over 90% in the coming weeks.
Kevin Zhang, vice president of Foundry Services, a mining infrastructure company, gave an overview of the situation in China in a Twitter thread. The main takeaways were that operators had minimal time to pack their bags, while much of their electrical infrastructure is not compatible with systems in other countries.
Bitmain, one of the world’s largest manufacturers of ASIC mining equipment, has temporarily postponed sales of new mining equipment in a bid to support miners looking to sell used equipment.
The initial impact
At first glance, the situation looks troubling, but some believe the resilience of the Bitcoin mining ecosystem will prevail. Regulatory crackdown in China presents a unique opportunity for miners in other countries to accumulate holdings of BTC.
Daniel Frumkin, mining researcher at Braiins and Slush Pool, revealed the initial impact of this latest hash rate drop in his correspondence with Cointelegraph:
The difficulty has decreased in three of the last four adjustments, and the next adjustment could be the biggest downward adjustment in Bitcoin history. For miners outside of China who are focused on maximizing their BTC accumulation, this is an incredible opportunity as the hash value (BTC / TH / day) is increasing rapidly at a time when everyone is expected the contrary.
The researcher also pointed out that the security of the Bitcoin network has not been affected despite the extent of hashing power that has been taken offline in recent weeks, adding: Chinese miners are relocating machines all over the world , so the geographic spread of the hash rate will likely be much better in 612 months than at any earlier period of the ASIC era.
Nonetheless, the effects of the Chinese mining squeeze have been felt in the cryptocurrency markets, as Annabelle Huang, head of GlobalX at Amber Group, pointed to a recent sell-off and drop in prices of various cryptocurrencies:
Following Inner Mongolia and Xinjiang, Sichuan Province officially shut down BTC mining earlier this week, although hydropower is a greener option than coal-based mining. Coupled with the Fed’s hawkish sentiments, we have seen a sell off in the crypto markets. The Sichuan shutdown was a bit of a surprise and will likely lead to medium-term selling pressure from miners who stepped up their operations during the bull run earlier this year.
There have been some interesting ripple effects when miners based in China go offline. These miners are above all looking for new premises to resume their activities, while some have started selling their equipment.
Frumkin noted that the ASIC hardware market would become saturated with a large amount of second-hand hardware for sale, while third-party hosting service providers may very well find their excess space quickly filled with miners looking to put in storage. ASIC Online: Existing Mining Facilities That Hosting offerings to third parties fill up quickly and planning and construction of new mining infrastructure is time consuming. He added that all companies and countries that can quickly build an infrastructure to host thousands of ASICs can be the biggest winners in this situation.
The advent of ASIC mining severely disrupted the efficiency of enthusiastic small-scale Bitcoin miners who simply could not compete with the scale of economies of industrial-size mining operations. For the first time in many years, small-scale miners may be given the opportunity to expand their operations, but some hurdles remain, as Frumkin explained in more detail:
Many small-scale miners use third-party hosting services that offer better electricity rates than those typically found on regular power grids. Since this hosting capacity is in high demand, it is probably not very easy for these miners to scale at this time. However, any miners with off-grid facilities (e.g. next to gas wells) or who otherwise have direct access to a surplus energy source are in a better position to start mining or expand. than at any other time during the past year. because the hardware is cheaper and more accessible, and the hash value (BTC / TH / day) is surprisingly high. The great migration?
The reality of this latest regulatory move in China is that the landscape and distribution of the Bitcoin mining ecosystem is changing drastically and rapidly. Some Chinese companies have proactively sought new locations to set up mining centers over the past two years as rumors of a wider crackdown boiled beneath the surface.
Companies like Canaan, which have shifted from hardware manufacturing to mining, have established a base of operations in Kazakhstan, using their own Avalon mining units. BTC.com, the world’s fifth largest mining pool, has also relocated its first batch of miners to the country.
A move to neighboring Asian countries will undoubtedly be the easiest export option for Chinese miners, but space and electricity will be valuable, and more distant options are already being explored.
As Foundrys Chang summarized on Twitter, the so-called Great ASIC Exodus will certainly not be as transparent, as companies grapple with logistical considerations, hosting terms and negotiations. Frumkin believes this has tipped the scales in favor of hosting companies: This is a huge opportunity for mining infrastructure companies to capitalize on the growing demand for hosting capacity.
Related: The End of Chinese Crypto Miners? Platforms on the move after government crackdown
Indeed, it may be that the death knell has sounded for mining in China, and that the great migration of mining equipment has begun. Frumkin believes that all of these factors indicate that North America will become the next hub for Bitcoin mining in the years to come. He says proximity to material suppliers has an advantage for Chinese miners, adding: Meanwhile, many large miners in North America have found less than four and even less than three cents per kWh of electricity, which is equal to or better than the prices. Chinese miners have paid in recent years. He concluded :
Now that they no longer face a competitive disadvantage in the supply of materials, the stage is set for these North American mining companies to become dominant players in the coming years.
As Darin Feinstein, founder of Core Scientific, summed it up on Twitter, the resilience of the Bitcoin mining network was evident in the fact that, despite much of the forced network hash rate offline, companies quickly sought to move in an uncoordinated way. mode while the end user was largely unaffected.
As he said: China has forced the shutdown of over 60% of the Bitcoin network infrastructure. There was no lawsuit, no bankruptcy, no bailouts, no downtime. The network infrastructure has just shrugged its shoulders and moved to countries with increased freedoms.
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