US beats China – at bitcoin mining

By Robert Scammell

The US has overtaken China as the most popular location for bitcoin mining following a prolonged cryptocurrency crackdown by Beijing, according to academic research.

The percentage of bitcoin mining conducted in China “effectively dropped to zero” by the end of August 2021, according to figures compiled by the Cambridge Centre for Alternative Finance (CCAF).

Bitcoin mining is the process in which new virtual coins are created on the distributed ledger. This is done using powerful computers solving complex mathematical problems. Miners’ systems are also essential to maintaining the ledger.

In return for maintaining the bitcoin network, miners receive a small amount of cryptocurrency as payment. China’s cheap supply of electricity formerly made it a hub for bitcoin miners because the lower cost of computer processing meant they kept more in profits.

“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.

Today, one-third of bitcoin’s hashrate – a metric for mining capacity – takes place in the US, the CCAF report shows. That marks a 428% increase from September 2020. A year ago, China was the clear market frontrunner, capturing about 67% of the hashrate.

What has caused this drastic reversal?

In short, the government of the People’s Republic of China. Cryptocurrency trading has officially been banned in China since 2019. However, this did not deter people in China trading cryptocurrencies via foreign exchanges.

But in 2021 China’s crackdown escalated. It began in May with three major Chinese financial institutions issuing a statement reiterating the government’s existing regulations and warning against the “hype and dangers of cryptocurrency”.

In June, the People’s Bank of China (PBOC) ordered four state-owned banks and mobile payment app Alipay to cut off all transactions linked to bitcoin and other cryptocurrencies.

China’s cryptocurrency offensive culminated in an outright ban on all cryptocurrency transactions and mining in September. The People’s Bank of China claimed that virtual currency-related business activities “seriously endangers the safety of people’s assets”.

This hostile environment has forced China-based cryptocurrency miners to either relocate or halt operations. There have also been problems with Chinese electricity supply.

Why the US has taken bitcoin mining lead

Previous analysis by the CCAF showed that China’s share of global bitcoin mining was on the decline before Beijing began its cryptocurrency offensive. CCAF figures show that by April 2021, its share of the global hashrate was down to 46%.

But the crackdown of the last five months appears to have exacerbated the exodus. The chief destination for departing Chinese miners is the US with a 34.5% share of global bitcoin mining as of August.

Some US states rank among the world’s lowest regions for electricity prices, making it an attractive destination for miners. There are also a lot of renewable power 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,” says Nilsson, author of a recent thematic research report on blockchain.

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

“If you’re looking to relocate hundreds of millions of dollars of miners out of China, you want to make sure you have geographic, political, and jurisdictional stability. You also want to make sure there are private property rights protections for the assets that you are relocating,” Darin Feinstein, co-founder of Core Scientific, told CNBC.

It is for these reasons that Nilsson does not believe that miners will return to China.

Watchdogs around the world are increasingly trying to regulate cryptocurrencies more strictly, as predicted in a recent GlobalData research report.

The contrasting stances on cryptocurrencies in China and the West reflect two political approaches: criticism of cryptocurrencies is rife in the US but there has been little appetite for an outright ban.

While the chair of the Securities and Exchange Commission (SEC) wants tighter regulation of cryptocurrencies, he does not believe they should be banned in the US.

The rebalancing of cryptocurrency mining has put Kazakhstan into second behind the US in the global bitcoin mining market. Analysts say this is thanks to its cheap supply of coal-powered electrcity and geographical proximity to China.

However, new tax rules targeting cryptocurrency miners that come into force in Kazakhstan in 2022 may cause miners to look elsewhere.

Investors back bitcoin despite turbulence

Despite China’s crackdown and regulatory grumblings elsewhere, the prices of bitcoin, Ethereum and other major cryptocurrencies have continued to climb. For eight weeks straight investors have been putting more into cryptocurrency products and funds than they have taken out, attracting $226.2m in investments in the past week.

For Nilsson this is a sign that the cryptocurrency market is “getting more resilient”.

He added that reducing dependency on China for mining is “important for the industry’s long-term health”.

The blockchain and cryptocurrency space is crowded with smaller startups peddling anything from NFTs to decentralised finance solutions.

Despite this market frenzy, more established tech companies such as IBM, Accenture and Infosys are the market forerunners, according to GlobalData’s recent thematic scorecard on the world’s blockchain and IT service leaders.

For a network that remains far from mainstream adoption, bitcoin uses a large amount of electricity. However, comparing bitcoin’s energy consumption with the world’s total energy usage shows it is currently responsible for an insignificant amount. Ordinary consumers use many more watt-hours of gas, heating oil and motor fuel than of electricity. Nations and economies use much more heat energy from coal, oil, gas and so on than electricity from any source.