Opinion Chinese Pressure on the Bitcoin Miners is a Double-Edged Sword

Chinese Pressure on the Bitcoin Miners is a Double-Edged Sword

June 19, 2021

China is and remains the strongest producer of hash power in the entire world, which applies not just to the bitcoin network, but also to all other digital currencies that employ the proof-of-work principle. That currently includes ethereum as the second-biggest network, but all other top-rated digital currencies, apart from ripple, which functions on a different principle and is not truly decentralized. Because of that, the influence that Chinese miners wield over the crypto markets is substantial, even though not direct, again thanks to the decentralized systems these networks utilize. 

Presently, in the same country, a large-scale campaign of pressure is underway to put a squeeze on the mining infrastructure of a range of provinces. The pressure includes the closure of mining facilities and a lot of regulatory attention first and foremost about the energy consumption of these ventures. The same is negatively reflecting itself on the international crypto markets, but also opening up some interesting possibilities for the rest of the world, especially those who are active inside of the cryptocurrency industry as a whole.

Crypto Mining going Industrial

It has been more than a decade since the cryptocurrency phenomenon began. For many, that precise moment is the publication of the bitcoin whitepaper on the same network. The cryptic and still unknown Satoshi Nakamoto published the same piece and thus set the roadmap for the development of the digital currency that would redefine the world of international finance and so much more in the years to come. However, while this is the moment when the network saw its basic principles enter the real world and the internet, for practical reasons, the birth of the same network occurred when the first bitcoin block was mined. That famous Genesis Block came into existence in 2009 and since then, the network has kept functioning perfectly without any hiccups or loss of digital, shared ledger. 

In the very early days of the network, it was possible to support bitcoin through practically any PC that can access the internet, including low-budget rigs and laptop configuration. That, however, did not last long with the entire concept of rising difficulty for mining each block. So, the network had to be supported with better and better rigs, which soon enough overcame anything an ordinary PC user had at their disposal, including top-of-the-line gaming setups. That was the moment when it also became clear that there is a waste of financial potential in digital currency. It was at that time that the mining pools came into being and these began cropping up mostly in a country not famous for its openness to mass users of a new global online venture – China.

Hard History

Ever since 2013, there have been reports about Chinese organizations taking cryptocurrency mining to an industrial scale. That meant not only a presence of so-called mining rigs, which are specialized computers made from graphic processing units that do nothing more than support networks like bitcoin. These could be networked together into powerful outfits that included hundreds if not thousands of such computers with a specialized purpose. Yet, those ventures also came with incredibly steep costs of operations. The first reason is the fact that they draw a lot of power for each of those mining rigs. Combined, these sites tend to spend as much electricity as any other industrial facility that operates heavy machinery. Also, these mining rigs heat up quickly because of the GPU processing and need to be cooled down. The same cooling also consumes a lot of electrical power. 

With that double expenditure of electricity, mining pools were often the target of the Chinese government. The regulators from Beijing also regularly warned about the unstable nature of these ventures, which by network rules consume more and more power each year with the rising hash difficulty of mining each block. That is why the constant tension in China regarding crypto mining resulted in a lot of hard history for these mining ventures. Yet, all of them kept going nonetheless, mainly because of the abundance of cheap energy that could be found in regions like Inner Mongolia. But that too was clearly a party that will not last forever and 2021 seems to be the year when the start of that ending begins. 

Closure of Mines

Across China, cryptocurrency mining operations are shutting down. These facilities usually get notices from the local – in this case, province-level – regulators regarding their energy consumption. When that happens, the mining facility has to shut down its rigs and stop all operations. For now, the same is occurring on the provincial level, although the central government has often warned of that possibility. 

Now, it seems that it is in play and that the government is trying to either better regulate (that means here to better control) mining operations or to snuff them out completely. Either option is bad news for the crypto scene, which like all things digital, including esports and social media, is quick to reach for knee-jerk reactions. Here, that reaction was panic and insecurity about the future, especially in terms of bitcoin and its network.

Benefits of the Crackdown

While there is nothing beneficial about the de-facto crackdown on crypto mining in China, it does provide some long-term openings for the entire industry that are not only welcomed but also in many ways, necessary. One is the switch towards a more evenly distributed network landscape that does not have China as its key element and biggest single provider of global hash power. 

That is something that was seen as a necessity for years now and the present crisis could only speed up that next phase of maturity of the crypto domain. Also, this is a good opportunity to migrate to more sustainable energy sources and not the coal-based energy industry of China. The same environmental issue has been a big part of the crypto conversation recently and even though it was overblown in social media, the problem of energy consumption is more than real. With both of these on the table, bitcoin and other proof-of-work cryptocurrencies could actually benefit from the Chinese mining crackdown.