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China Appears Unable to Stop Bitcoin Mining

Last week, Cambridge University's Cambridge Centre for Alternative Finance (CCAF) announced an update to its widely recognized (and deservedly so) Cambridge Bitcoin Electricity Consumption Index (CBECI), which seeks to discover and disclose the global location distribution of bitcoin miners.

The previous Cambridge update revealed that China's mining share decreased from 34.3% in June 2021 to 0% in July 2021 as a result of the country's crypto mining ban. China's share of mining increased from 0.0 percent in August 2021 to... 22.3 percent in September 2021, according to data released last week.

Clearly, something is amiss, so let's investigate. While there, we will also discuss two additional bitcoin mining-related topics: 1) the price of bitcoin and 2) the difficulties of mining companies.

China's May 2021 ban on bitcoin mining was reflected in the data. In China, there were hardly no miners left by July. None in August either. Then, in September, nearly all the departing miners returned. Certainly, this is what the data indicate:

(Cambridge Centre for Alternative Finance)

Perhaps it's not evident, so I'll state the obvious: That did not occur. Moving mining operations is difficult. The majority of mining activities are no longer conducted by a handful of amateurs; Bitcoin has long since progressed from that stage. The majority of miners are commercial enterprises, as they pay triple-net leases for warehouse space and rely on complex power purchase agreements for electricity.

This is how Bitcoin mining operations appear (check out this incredible photographic effort by my colleagues):

The appearance of the data is attributable to the manner of data collecting utilized by the CCAF. The CCAF collaborated with bitcoin mining pools to acquire IP-based geolocational mining facility data (pools allow a lot of different miners to contribute to mining, and the reward is then split among them according to their processing contribution to smooth out individual miner income). The CCAF advises that this is where the problem resides, stating:

Sandali Handagama

It is common knowledge in the business that [miners] in particular places utilize virtual private networks (VPNs) or proxy services to conceal their IP addresses and conceal their location. Such conduct may corrupt the sample and lead to an overestimation (or underestimating) of the hashrate in some regions or nations.

So, the true tale of what I believe transpired here is actually rather dull.

1. Chinese miners feared the severity of the government's crackdown, so they lied or manipulated their location data and retreated underground.

2. After a period of time, Chinese miners concluded, "Hey, this isn't so terrifying," thus they felt at ease providing their authentic data.

That is all. As I indicated, actually quite monotonous.

However, this is not the complete truth. At least a portion of the activities of the most visible Bitcoin miners have relocated, and the expansion of non-China, primarily U.S.-based mining is well documented. Hashrate, the processing capacity of the Bitcoin network, has increased by 40 percent since China's prohibition. The CCAF, realizing the peculiarity of the data, produced a blog post with an excellent title regarding their update, leaving us with the following:

Notable is, however, China's apparent resurgence. In July and August 2021, the reported hashrate for the entire nation was virtually zero due to the government prohibition enacted in June 2021. In September 2021, however, reported hashrate jumped back up to 30.47 EH/s, propelling China to second place globally in terms of installed mining capacity (22.29 percent of total market). This strongly shows that major underground mining activity has developed in the country, confirming experimentally what industry insiders have long suspected.

The key term in this instance is "reported." So, it turns out that China can indeed prohibit bitcoin mining once more. Future China FUD (fear, uncertainty, and doubt) is assured. Alternately, perhaps everyone is utilizing VPNs to shift their location to China in order to make my job tough.

Hash-Price and Mining Firm Struggles

Amid dropping bitcoin prices, there is also considerable concern regarding the profitability of bitcoin miners. Hashprice is a measure created by Luxor Technologies that represents the anticipated value of mining. Hashprice is represented as a dollar per terahash per day, where a terahash represents the computational power supplied by mining hardware. Here is the monthly performance of hashprice.

(CoinDesk Research, Hashrate Index, Luxor Technologies)

Hashprice has been trending downward due to 1) the lowering USD price of bitcoin, 2) the emergence of more miners, and 3) the resulting increase in network difficulty (the network adjusts how hard it is to mine roughly every two weeks, based on the amount of active mining power). Although not exactly rosy, it makes sense. And the decline is acting as a compulsion for mining businesses to adapt or cease operations. Numerous industry professionals warn that "only the strong will survive" at this time.

Theoretically, miners shut down their devices anytime bitcoin values drop significantly and it is no longer profitable to keep them working. This time, even though the hashrate has reduced, we have not seen a dip of this magnitude, as evidenced by the public filings of mining companies. All public miners have made statements similar to, "We are mining bitcoin, we want to mine more bitcoin, we will hold as much of the bitcoin we mine as possible, and we will use other sources of capital to fund our operations and expansion."

This may be OK, but when these miners experience increased pressure, they may have duties to capital sources. Moreover, if the market deteriorates, these corporations may need to take action, such as selling their bitcoin. These companies do not have the balance sheets of Apple or Google; rather, they resemble startups that trade on the public markets.

Overall, there is no specific cause for concern regarding the mining business. As long as the capital markets are accessible, Bitcoin mining will be successful, but the cast of characters may change. Bitcoin will benefit, but there may be negative effects at the company level.

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