Last week our theme was “Governments with weak currencies may overcome their fear of Bitcoin and so usher in a new global currency.“ Our theme for this week is “Will Bitcoin go from Crypto Winter to China Crisis?”
TLDR. Bitcoin’s popularity has grown over the last decade and has become an increasingly attractive target for adversaries of all kinds. One of the most powerful potential adversaries is China, which has used its capabilities to influence it. This time around China is considering a ban on Bitcoin mining in response to environmental concerns, about the process of creating cryptocurrencies. It has been suggested that a Bitcoin mining ban in China could have a profound impact on the Bitcoin network, as China is home to the majority of global Bitcoin mining operations. But the result of a ban might be completely different than what you might expect.
Earlier this month, China’s National Development and Reform Commission (NDRC) released a revised list of 450 industrial activities making suggestions to promote, restrict and eliminate various sectors. Bitcoin mining was labeled as one of the industries that needs to be “eliminated”, citing environmental issues as the primary reason.
Most media outlets that covered this story, leaped to the conclusion that China wanted to ban cryptocurrency mining, just like it did in 2017 with ICOs and domestic spot trading. The reality is that there is no set timetable for Bitcoin mining to be eliminated. A public consultation is be open until 7 May, giving the citizens the chance to give their input. Even if the agency’s proposal is finalized in its current form, this would not automatically amount to an outright mining ban. When finalized, and assuming mining remains in the elimination section, some Chinese provinces may choose to avoid prioritizing this motion.
Today, China has 70 percent of the world’s crypto-mining capacity. China’s cheap energy, that’s largely powered by coal fueled power plants, make the cost per kilowatt the one of the cheapest in the world. This makes China a very cost effected and profitable place to mine Bitcoin.
With Bitcoin’s price hovering around $5,000, mining is not a profitable endeavor for many places around the world. According to research by JPMorgan Chase, in the fourth quarter of 2018, the production-weighted cash cost to create one Bitcoin averaged around $4,060 globally. For Bitcoin mining operations, electricity generally accounts for more than 60 percent of the total costs. Cryptocurrency mining requires huge amounts of electricity and costs vary from place to place, depending in the cost per kilowatt. Here is a list of countries and the cost to mine Bitcoin:
- Albania: $3894
- Ireland: $11103
- Australia: $9913
- Brazil: $6741
- China: $3172
- Canada: $3965
- Chile: $9120
- Norway: $7784
- USA: $4758
There are various studies that analyze the power consumption that’s required to run the Bitcoin network. Currently, it is estimated that we need 54 TWh. Cryptocurrency mining consumes around 3 times more than the whole of Ireland, which uses as much as 18.1 TWh/year. These numbers sound shocking, and many journalists use them to scare the public.
The proof-of-work (PoW) consensus mechanism that is used in the Bitcoin network, is very energy-intensive due to the increasing mining difficulty. PoW has many properties, and it is the main innovation behind many cryptocurrencies. In simple terms, PoW makes sure that the network stays online and secure at all times. In order for PoW to work an intense hardware activity is required. PoW is performed by special nodes in the system called miners.
Bitcoin isn’t issued by governments or banks. It’s created by a decentralized network of miners, who mint about 3,500 new coins a day. Miners play a crucial role validating transactions. They allow the network to operate without a coordinating authority, like a central bank. The miners compete for the right to validate transactions to the Bitcoin’s universal ledger.
The best way to imagine how how a Bitcoin mining operation works, is to imagine thousands of computers rushing to solve a difficult math problem. The first computer that actually solves the problem, earns the next coin.
Mining consumes a tremendous amount of electrical power. Companies and organizations in the industry are considering many alternatives to tackle the power consumption issue. One solution is to use cleaner forms of power, such as hydropower stations, burning trash or solar-powered mining. Others include changing PoW with other protocols like Proof of Stake (PoS). The new protocol like PoS would replace the PoW used on both Bitcoin and Ethereum, and reward miners in coins, not for solving cryptographic puzzles, but with transaction fees for helping to maintain the integrity of the network
Today, every time a miner verifies a block they earn 12.5 coins. In 2020, verifying one block of transactions to the blockchain will be worth only 6.25 coins. The next halving will see Bitcoin’s inflation reduced by 50%, and judging from past BTC halvings, Bitcoin is expected to rise in price in because of this.
Many countries around the world are looking favorably towards cryptocurrency mining and many Chinese Bitcoin mining companies are already moving their operations overseas.
Most recently, Bitmain Technologies set up a subsidiary in Switzerland, which will extend its branches, currently in Amsterdam, Hong Kong, Tel Aviv, Qingdao, Chengdu, Shanghai and Shenzhen. Bitcoin miners have also been attracted to the Canadian province of Québec because of its cheap electricity. Belarus is the latest on the list. This year, Georgia sold 45 acres of land to Bifury and established tax-free zones to allow crypto-centric businesses to commence operations. The San Francisco company aided the government to make use of blockchain for their land registry system.
China would prefer to take blockchain without Bitcoin. China may also hope to replace Bitcoin with its own digital currency. China’s crackdown has demonstrated that no one country can stop Bitcoin. That’s the beauty of the decentralized network. If one participant bows out, others pick up the slack. After China clamped down Bitcoin trading, much of it moved to Japan and South Korea.
If China decides to ban cryptocurrency mining, it will probably have a positive impact on prices. Historically, with news of this kind, we’ve seen price surges. When China created seemingly harsh regulations regarding the industry, banning its citizens from investing in ICOs during September 2017, prices were hit hard temporarily, but rebounded to record highs. History has shown that every time you try to whack Bitcoin and it doesn’t die, it becomes stronger.
A potential mining ban in China could be a good thing. It will address the Bitcoin energy consumption problem and its reliance on non-renewable energy to power mining operations. Being forced out of the nation by a ban will likely drive more miners to explore locations where renewable power is cheap and abundant.
Most importantly, it would make Bitcoin mining more decentralized. With China no longer able to dominate Bitcoin mining, the network will become more decentralized and safer. While China may still have motives to destroy Bitcoin, if the NDRC proposal goes through, it will not have the means.
Ilias Louis Hatzis is the Founder & CEO at Mercato Blockchain Corporation AG. He writes the Blockchain Weekly Front Page each Monday.
I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.
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