Bitcoin mining bounces back from Beijing ban

By Elles Houweling

The bitcoin mining industry has made a full recovery following China’s recent clampdown. Hashrates on the blockchain have bounced back up to the same levels seen in May when China imposed a blanket ban on cryptocurrency trading, mining and related activities.

Hashrate is the computational power required per second to mine the digital coins observed to be appearing on the distributed ledger in question. In other words, it is the speed at which the mining of new coin is happening. In the case of the most popular cryptocurrency, bitcoin, the more mining is going on, the higher the hash rate.

China was previously the epicentre of the cryptocurrency mining industry, with estimates indicating that approximately 65% to 75% of the world’s bitcoin mining was occurring there. However, after the Chinese government introduced a ban on all mining practices in May, there was a 50% drop in hash rates.

The phenomenon was short lived, as recent data from Blockchain.com show that the network has fully recovered from China’s ban on digital coins, with the network’s hashrate up approximately 110% in the last five months.

Due to the high energy demand for cryptocurrency mining, miners prefer to operate in countries where electricity prices are low. This formerly made China an attractive hub for bitcoin mining.

“Cryptocurrency mining is a low margin industry and, as such, cheap electricity is the most important factor for a profitable mining operation and the ultimate decider for where miners will set up shop,” says GlobalData thematic analyst Nicklas Nilsson.

Earlier this year, however, Beijing told local governments to stop cryptocurrency mining and said it would raise electricity prices for any institution found to be abusing its access to subsidised power to participate in crypto mining.

As a result, miners were forced to set up shop elsewhere. Notably, many of them moved their practices to the US.

A report from the Cambridge Centre for Alternative Finance showed in October that one-third of bitcoin’s hashrate takes place in the US. That marks a 428% increase from September 2020. A year ago, China was the clear market frontrunner, capturing about 67% of the hashrate.

The US is a particularly attractive destination for miners, as certain states rank among the world’s lowest regions for electricity prices. There are also a lot of renewable energy trading options that can mitigate negative sentiment around bitcoin mining’s sustainability.

“States like Texas with a deregulated power grid and a rising share of renewables are promising for the long-term viability of crypto mining,” Nilsson, author of the GlobalData thematic research report on blockchain, recently told Verdict.

And unlike in China, cryptocurrency has some political support in certain states, including Texas.

The global cryptocurrency crackdown

In May, Chinese regulators effectively banned cryptocurrency trading, mining and related activities in China, arguing that virtual coins disrupt economic order and facilitate illegal asset transfers and money laundering.

A statement posted by the Chinese central bank said that “virtual currency is a specific virtual commodity that is not issued by monetary authorities and has no monetary properties. It is not a real currency and should not and cannot be used as legal tender on the market”.

Following Beijing’s announcement, the global cryptocurrency market dropped 2.5%, losing roughly US$50bn in a day.

China is, however, not the only country that is coming down hard on virtual currencies. Although its approach is arguably the most aggressive, other nations are also looking to regulate cryptocurrency.

Japan and South Korea, for instance, have legalised bitcoin but implemented taxation and compliance guidelines.

Meanwhile, the Reserve Bank of Australia previously indicated that trading cryptocurrencies was legal. Then, in 2018, the Australian government announced that all crypto exchanges operating in the country must register with the Australian Transaction Reports and Analysis Centre and implement customer identification policies to comply with new anti-money laundering legislation.

The EU is also trying to regulate the digital asset industry. There are several bloc-wide initiatives underway, the most comprehensive being the 168-page “Markets in Crypto-Assets” (MiCA) that would create an EU-level licensing framework for crypto issuers and service providers.

Meanwhile, in the US, cryptocurrencies have attracted the attention of both the Federal government and state legislators. Agencies including the Securities and Exchange Commission (SEC), the Federal Trade Commission (FTC), the Department of the Treasury and the Internal Revenue Service (IRS) are working together to build a comprehensive regulatory policy for cryptocurrencies.

While Federal Reserve Chair Jerome Powell said earlier this year that the US had no intention to enforce a China-like ban on cryptocurrencies, several state governments have already passed laws covering cryptocurrencies and blockchain technology.

Recently, Congress accepted a proposal that requires brokers to report trader information on transactions of more than $10,000 to the IRS.

“Despite constituting a relatively small portion of business income today, cryptocurrency transactions are likely to rise in importance in the next decade, especially in the presence of a broad-based financial account reporting regime,” the US Treasury wrote in the report outlining the proposals.