Crypto miners validate virtual coin transactions with more powerful, specially designed computer equipment, or rigs, in a process that generates newly minted cryptocurrencies like Bitcoin. Bitcoin has taken a beating due to China’s new decision and is now down over 50% from its all-time high. It dropped 17% or lowered before recovering some of its losses and trading steadily in Asia in the last two months.
The authorities took action against a company for allegedly providing cryptocurrency-related services. Authorities have revoked the company’s business license, and all banking and payment institutions have been cautioned not to offer virtual currency-related services directly or indirectly.
Despite Bitcoin’s promise of being a decentralized coinage located everywhere, China accounts for roughly 65% of global Bitcoin mining. That’s because many influential Chinese mining hubs have embraced the world’s largest cryptocurrency by competing against other miners to solve the computational challenges that lead to the creation of new bitcoin.
Thanks to Chinese miners, Bitcoin’s value increased by more than 1000% in a year, reaching an all-time high of about $65,000 in April. The value plunged after Chinese miners began shutting down their computers, ending the first half of the year over 50% lower than its previous high.
What is bitcoin mining, and how does it work?
Unlike traditional fiat currencies, which a central bank regulates typically, the blockchain has established rules that govern how long it takes to create a new unit of digital currency. This is accomplished via hashing or solving hash functions, which necessitates a significant amount of computing power.
The hash rate for big, mature blockchains, such as bitcoin and Ethereum, is commonly expressed in tera-hashes per second (TH/s) or trillions of hashes per second. According to blockchain.com, the hash rate peaked on May 14 at more than 180 million TH/s before Beijing’s crackdown. After seven weeks, the rate had dropped by half.
Hash functions are complex math problems that convert variable data into a fixed size. The bitcoin network requires regular solving of these problems to create more digital currency and verify network transactions. This is referred to as “evidence of work.”
The incentive for adding a new block of bitcoin transactions, which is presently 6.25 BTC, halves every four years, with the total supply peaking at 21 million bitcoins in 2140. Until then, the gradual increase in bitcoin supply has been compared to a sort of monetarism advocated by free-market economist Milton Friedman, who advocated for the money supply to be kept constant and only slightly increased each year to account for economic expansion.
Due to the strict supply management, Bitcoin has become an investment vehicle that behaves less like money and more like a commodity, such as gold.
Stability vs. volatility
Bitcoin is the most well-known of many new cryptocurrencies that aren’t backed by gold or government debt. Instead, its price is based only on speculation about its future worth. It is regarded as a risky investment because it is a fledgling currency with a very variable value. Bitcoin has lost at least 50% on four occasions in the last ten years, which other industries rarely see.
While various causes may have triggered China’s crackdown, authorities have frequently stated that Bitcoin’s dramatic price swings threaten the country’s economic and financial stability.
According to the State Council’s Financial Stability and Development Committee, crypto markets disrupt economic order, and the government will “resolutely prevent the transmission of individual risks to the wider society.”
China first banned its banks from utilizing Bitcoin as a form of payment in 2013, claiming fears that Bitcoin’s intrinsically speculative nature would jeopardize the country’s financial stability. The administration has grown increasingly wary over time. Beijing has been working to effectively shut down all cryptocurrency mining activities in the country since May. The central bank also ordered payment companies and banks to close the accounts of anyone involved in crypto transactions in late June.
In China, there is growing anxiety over the country’s financial stability. The crackdown on bitcoin is an attempt to curb a possible cause of instability in this setting.
Cryptocurrency's environmental impact
The rapid crackdown was primarily motivated by cryptocurrencies’ inherent speculative nature and the Chinese Communist Party’s (CCP) severe aversion to risk—or anything outside of its control. But, to make matters worse, crypto mining has a substantial environmental impact, undermining Chinese President Xi Jinping’s lofty goal of making China carbon neutral by 2060.
According to a research work published in the scientific journal Nature Communications, bitcoin mining in China was estimated to generate more than 130 million metric tons of carbon emissions by 2024 before the crackdown. If the worldwide bitcoin mining business were a country, it would be the world’s 29th largest energy consumer, surpassing Argentina’s population of 45 million people.
Because of the high rains in the summer, cryptocurrency mining has been able to employ sustainable power sources. However, China’s winters are desert, forcing miners to seek alternative cheap electricity sources. Because solar and wind farms can not consistently supply power mining operations around the clock, miners frequently turn to coal, which is the only inexpensive option. Thousands of miles across China, mining rigs are driven to the billowing power stations of Inner Mongolia or Xinjiang region. As the seasons change, what some perceive to be the world’s greenest industry—monetizing excess renewable energy—becomes the dirtiest: burning coal to generate currency.
Following the 2008 financial crisis, an unknown individual or group working under the pseudonym “Satoshi Nakamoto” envisioned a decentralized digital alternative independent of any government or institution, alarmed by the dollar’s depreciation due to central bank action and bank bailouts. In an interview with TIME, BTC.TOP’s Jiang argues, “Blockchain and cryptocurrencies can tackle problems of when governments print massive sums of money, which is the underlying basis of much inequity and injustice.”
Bitcoin miners receive payments to act as auditors, ensuring the authenticity of transactions while allowing a steady stream of new currency units to enter the system. In April, the cryptocurrency mining sector brought in $1.7 billion. Although bitcoin mining is digital rather than physical, it has the same properties as gold, which is arguably history’s most successful medium of exchange and remains a highly prized asset after thousands of years.
Problems with concentration
Cryptocurrencies were created to avoid government control, but China’s ethos of top-down regulation has given it significant authority over the industry. Beijing did not support or allow financial institutions to trade cryptocurrencies until recently, but it turned a blind eye to mining, which some local governments supported. When miners earned cryptocurrency, they exchanged it secretly as private individuals, usually outside the country.
There have been crackdowns in the past. On September 15, 2017, a government working group in Beijing ordered all virtual currency platform CEOs to halt all cryptocurrency transactions and stop registering new users immediately.
A high concentration of mining activity in China threatens the entire system that underpins crypto markets. Vulnerabilities arise when so much mining capacity depends on one area. The fact that transactions are transparent and publicly verifiable is one of the core security pillars of blockchain technology responsible for cryptocurrency building blocks. It means that if one personality within the system corrupts a ledger “block,” every peer can see the inconsistency, flag it, and correct the mistake on their corresponding records, maintaining order without the need for a central authority.
Beijing’s recent crackdown on crypto mining makes this scenario less of a concern. However, China’s bitcoin boom has sown discord in other markets. Demand for graphics cards, also popular with computer gamers and required for big data processing, has caused prices of this hardware to spike by 25%, upsetting the gaming and AI industries globally.
In regions where power supplies are unstable, the amount of energy required for mining can also be problematic. In Iran, blackouts and power shortages prompted the government to ban crypto mining on May 26. In April, a blackout in Xinjiang due to a flooded power station led the global hash rate to drop significantly, spurring bitcoin’s value to fall 15%.
Why did China take action against bitcoin mining?
For years, the Chinese government has cracked down on cryptocurrencies, claiming that its efforts are necessary to protect them from financial threats. The government claimed the same justification for the most severe crackdown on bitcoin mining in May.
Beijing has a few long-standing financial difficulties. The first is price volatility, which looks to be the catalyst for the current crackdown. After the bitcoin price rose beyond US$60,000 and then began to fall, Beijing began to crack down on bitcoin mining. It dropped by more than 40% in the two months that followed.
While Beijing has implied support for cryptocurrencies as financial vehicles, irrational excitement may cause ordinary investors to lose money.
Another issue with decentralized cryptocurrencies is that they make it easy to get through China’s capital controls, which prohibit anyone from transferring more than US$50,000 worth of yuan into foreign currencies in a single year. Because bitcoin trading is unrestricted, it is simple to purchase vast amounts of digital currencies and instantly change them into other currencies. Nonetheless, the fees are generally substantially more significant than what customers would pay through bank transactions.
There are also substantial concerns about the environmental implications of cryptocurrencies around the world. Bitcoin has an enormous carbon footprint as a sizeable proof-of-work blockchain. According to the Cambridge Bitcoin Electricity Consumption Index (CBECI), the network is currently consuming about 70 terawatt-hours (TWh) of electricity annually, more than the whole country of Venezuela. This consumption had dropped by more than half since May 10, when it peaked at 141.28 TWh.
Only local governments have expressed worry about bitcoin’s energy use thus far, but they have been entrusted with achieving national emissions targets. The country has dedicated its effort to attain carbon neutrality by 2060 and achieving peak emissions by 2030.
Why were so many bitcoins mined in China?
Bitcoin mining activity exploded in China in the early 2010s, owing to the availability of cheap electricity. Miners flocked to Xinjiang’s western region, Inner Mongolia’s northern region, and Sichuan’s center province, recognized for its renewable hydropower.
Xinjiang and Inner Mongolia were the first to be hit by China’s bitcoin crackdown due to their reliance on coal-fired power facilities. Even ample hydropower couldn’t save Sichuan’s bitcoin miners by the end of June, when the government told them to stop operations on June 18.
According to the CBECI, Xinjiang alone accounted for more than a third of the worldwide bitcoin hash rate in 2020 and more than half of China’s mining activities. On the other hand, Miners traveled across China according to local conditions, with Sichuan accounting for up to 61% of the country’s mining activity during the wet season.
According to the CBECI, China’s proportion of worldwide bitcoin mining has declined for a few years, falling from 75% in September 2019 to 46% in April 2021. However, one of the reasons it grew so high in the first place is that low-cost electricity encouraged corporations to form mining pools. As the name implies, these pool resources from many different users to generate cryptocurrencies.
Today, the world’s largest mining pools are either situated in China or were founded by Chinese people. Chinese founders may be found in F2Pool, BitMain’s AntPool, and Binance Pool. During past crackdowns, some cryptocurrency companies shifted their incorporation locations – Bitmain, for example, is now incorporated in the Cayman Islands – but kept their servers in China.
Joining a pool has the advantage of allowing users with little computer power to partake in the profits of a mining operation. Rewards are proportional, so someone who contributes 1% of a pool’s processing capacity, for example, receives 1% of the payout for each new block added to the blockchain.
Individuals that participate in larger pools will receive less money for every block added to the blockchain, but the pool will be more likely to produce more blocks, bringing in more money. It has contributed to China’s mining pools becoming the most well-known in the world.
However, due to Beijing’s control over operations within its borders, this concentration of mining power has alarmed some. Most of the criticism directed against China’s engagement of hashing power has revolved around the concept of a 51% attack, which states that if a party controls the majority of the network’s hashing power, they can prohibit particular transactions from being confirmed.
It can lead to double-spending or the expenditure of the same currency twice because the party in control of the network can prevent some transactions from being authenticated, allowing them to steal money from other users. This issue has happened on other bitcoin networks before.
The original bitcoin network, on the other hand, has never been attacked. With all of China’s diverse mining enterprises, even Beijing may have found it difficult to marshal the country’s collective hash power for nefarious purposes. Instead, the government’s broad crackdown went oppositely.
What does China's ban on bitcoin mean for the cryptocurrency market?
China’s bitcoin crackdown has the most immediate consequence of making bitcoin far more inexpensive. According to data from Blockchain.com, the worldwide hash rate more than halved over seven weeks from mid-May to early July, causing market prices to drop.
With less CPU power on the network, it’s easy to add additional transaction blocks. According to a July research by blockchain analytics startup Glassnode, while bitcoin mining revenue initially dipped during the crackdown due to dropping prices, profitability rebounded to April levels once enough users left the network.
Some see China’s crackdown on bitcoin mining as beneficial to the network in the long run. Despite the practical challenges of carrying out a 51% attack or otherwise controlling the web, some have continued to voice concerns about Beijing’s power.
According to academics, Beijing may target the bitcoin network for political reasons, such as undermining certain transactions, blocking specific bitcoin addresses, or deanonymizing users and tracking their behavior.
For these reasons, Beijing’s ongoing skepticism of cryptocurrencies is providing some respite to bitcoin devotees.
Despite this, realizing bitcoin’s ambitious ambitions of becoming the currency of the future remains a long way off. Bitcoin is a poor alternative for fiat money, which has its value actively regulated by a central bank responding to demand due to the way the blockchain controls bitcoin’s supply.
The China cracking action on bitcoins was simply because the effect of the use of bitcoin technology is having an adverse impact on the country’s economy. Their efforts were able to draw the value of bitcoin by 50% but do not hinder the interest of the majority players in the mega players. This has led to the recent new highs of $66,000, and there is a high probability of continuing the upward momentum.