More On: China
In 2021, the United States controlled the mining industry.
Every year, China bans bitcoin, which has become a running joke. It's easy to see why China's famously centralized state would be wary of a fundamentally decentralized and unmanageable tool for monetary sovereignty, especially at a time when the CCP is deploying its much-touted "digital yuan" to its citizenry. However, most reports of "Chinese bitcoin restrictions" turned out to be overstated (and an opportunity to scoop up some cheap coins).
The joke was more accurate than usual in 2021. The Chinese authorities did, in fact, begin a major crackdown on bitcoin, with a specific focus on bitcoin mining.
The network is powered by bitcoin mining. In return for the possibility to earn fresh bitcoins, miners provide processing power. It's similar to a lottery. You have a better chance of "winning" if you buy more tickets (or give more processing power).
Consider what it would be like if a lottery player had a means to get tickets at a lower price than everyone else. For a long period, this was the case in China, and it was one of the reasons why the country had attracted over 70% of the worldwide hashrate (or total processing power) by 2020. Better mining climates (hot-running mining equipment works better in the cold air of Xinjiang) and laxer environmental laws effectively subsidized miners, who were actually sponsored by the Chinese government.
Bitcoin skeptics have long complained about the concentration of mining in China. There was a chance that the not-quite-libertarian administration would have a negative impact on mining. Would it necessitate network changes? Where would mining go if it was stopped down in China? Would the network be thrown into disarray as a result? Would other cryptocurrencies win out if they used alternative, allegedly less energy-intensive mining techniques? (There is a happy ending to this story.)
The bans began in Inner Mongolia, which at the time had 8% of bitcoin's hashrate. Bitcoin mining was outlawed by the regional Development and Reform Commission, which ordered operators two months to leave. A hotline was established to gather "tips" on any lingering fugitives.
Other hotbeds of mining activity, including Xinjiang, Qinghai, Yunnan, and Sichuan's holy hydroelectric grail, have issued similar prohibitions and limitations.
By May, it was apparent what was going on: the State Council's main financial regulator, the Financial Stability and Development Committee, published a statement pledging to "resolutely avoid and manage financial hazards," including a "crackdown on bitcoin mining." Although some regions have shut down mining operations under the guise of energy concerns, the CCP sees bitcoin mining as a danger to the party's control of the Chinese economy.
All of this was obviously terrible news for bitcoin miners and consumers in China. The bitcoin network was also momentarily disrupted.
Every 10 minutes, the network assesses the overall hashrate and changes the "difficulty" (or possibility that you have a winning lottery ticket) accordingly, depending on whether there is more or less computing power available. It becomes a little simpler to win fresh bitcoins when there is less computer power (fewer people buying lottery tickets). It becomes more difficult as the number of people increases. This is a good way to calibrate the network in the face of transitory variations.
It also works effectively to calibrate the network in the face of massive shocks, such as the one we witnessed in China. Humans, on the other hand, are a different matter. People who conduct bitcoin transactions on the network do not automatically modify their behavior in response to hashrate outages every 10 minutes. As if nothing occurred, they're continuing trading and transferring money around. As a result, the network becomes overloaded, forcing users to wait longer for transactions to settle or pay higher transaction fees. Bitcoin needed to get new mining infrastructure up and running as soon as possible.
The network did not crash, another cryptocurrency did not take off, and the Chinese government did not seize control of the bitcoin project, contrary to some of the chicken littles out there. The miners dispersed to other areas.
The bitcoin network has a high level of resiliency. Chinese mining businesses began packing up their ASICs and looking for more favorable climes almost immediately. Bitcoin miners value their time above anything else. Every hour their pricey gear is unavailable, they are foregoing bitcoins in order to recoup capital expenditures and profit.
Bitcoin miners required a new, non-hostile location as soon as possible. In the state of Texas, they enjoyed a warm welcome. Not only does Texas have a thriving cryptocurrency sector in Austin, but electricity is also cheap and plentiful, something miners like. Furthermore, the state has made moves to enact pro-Bitcoin legislation that will help the business grow in the state.
The United States now leads the world in bitcoin mining, accounting for 35% of worldwide hashrate. Russia (11%) and China's neighbor Kazakhstan (18%) are the runner-ups, with the latter absorbing many of the fleeing Chinese miners in the aftermath of the CCP ban. Kazakhstan is already experiencing its own social instability, so miners may be forced to flee to Russia or perhaps further afield, such as the United States.
This is not to imply that China is devoid of mining. In Sichuan, a brave underground of illicit bitcoin miners continues to operate, attempting to generate money while avoiding detection. Although there are no official estimates, some speculate that bitcoin bootleggers account for a dozen or so percent of the hashrate. The long-term viability of this clandestine activity remains to be determined.
The Chinese restriction on bitcoin mining was beneficial to both bitcoin and the US. The network was able to withstand a 50% hashrate drop with minimal downtime. Mining infrastructure was immediately re-calibrated and transferred to more hospitable environments. Experienced bitcoin users don't have to worry about the network being interrupted now that a similar situation is playing out in Kazakhstan (even though weak hands may see this as a reason to sell). Bitcoin continues to perform in terms of uptime.
For the United States, the Great Mining Migration of 2021 is a terrific chance.
The claim that bitcoin is "terrible for the environment" is a prevalent one. This was China's justification for banning bitcoin. Let's set aside the fact that putting energy into good things (like stable sovereign money) is a good thing, and that we "waste" more energy on Netflix alone without blinking. Bitcoin, in fact, supports energy conservation since miners have an economic interest to keep costs as low as possible.
Bitcoin miners may be the most environmentally friendly technology ever devised. They aim to create money as inexpensively as possible with energy. Natural gas flare harvesting is one interesting invention. When demand is low, the natural gas business is forced to burn extra gas into the atmosphere since there is nothing else they can do with it. Bitcoin miners have begun creating relationships with natural gas utilities in order to convert the unused energy into bitcoins. It's an excellent example of how bitcoin mining may promote more efficient energy usage and environmental policies.
We have a chance to build a thriving mining business in the United States if we can get past the myths about bitcoin and energy. This would not only generate a growing sector at a time when there are few, but it would also assist us in developing better energy habits.
It is ours to squander this manna. If the United States makes the same mistakes as China, mining will just move to a more advantageous place. The overall takeaway is that the bitcoin network is durable and reliable when it comes to mining—exactly what you want in a decentralized global store of value.