China will rule the world in our lifetimes and is on track to become the biggest economy on the planet in the coming years. They already dominate the lion’s share of the bitcoin mining industry globally, thanks to particularly cheap electricity in its outlying provinces. So the news that the Chinese government is considering the elimination of crypto mining is a potential cause for concern to bitcoin enthusiasts globally. 

The move could really be a massive blow to the crypto industry, though at present the idea is still only a consideration and nothing more than further China FUD.

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China has already sent ripples across the globe when it banned bitcoin trading in previous years, particularly the major crackdown on ICOs and exchanges in September 2017, just before the peak in the bull. And over a year ago, in February 2018 the government was already urging crypto miners to gradually exit the industry, particularly due to the environmental concerns around the high electricity use in mining. China uses loads of cheap but polluting coal to generate power, which is becoming a health concern for the country.  

And then there are the tax issues around mining of course. 


As a result of this intensifying crackdown, some of the largest mining farms in China have either relocated or changed their business models. The biggest and most famous Chinese mining firm is Bitmain. They were probably the most profitable, also producing rigs and ASIC chips for the rest of the world, until the extended bear market, which severely impacted their profits, forcing them to diversify into other AI products to prop up revenues. Jihan Wu, the CEO, even had a major mining operation planned in Rockdale, Texas with its cheaper electricity, but had to shelve that due to the bear market and massive crash in bitcoin price last year.


Nevertheless, China is still the top bitcoin mining country globally. 

Cambridge University released a study reporting that with their cheap electricity and land in the outer provinces, they were at one point the home of two thirds of all bitcoin mining, mainly by companies Bitmain and Canaan. So whether China is already the world’s top economic superpower or still only number two, they are definitely the bitcoin mining superpower. 

This might be a concern since bitcoin is supposed to be decentralized and nobody wants a 51% attack or takeover of the system, which China is closest to accomplishing at the moment. Maybe it’s a good thing that they are being forced to slow down mining production, although it may have a brief initial impact on bitcoin price as the hash rate works to re-stabilise after any sudden shutdown of mining rigs. 


And this could well happen as China’s central state planning agency, the National Development and Reform Commission (NDRC) mulls over the idea of curbing crypto mining. 


Now this is not directly targeting bitcoin mining exclusively but is more focused on curtailing industries that “lacked safe production conditions, seriously wasted resources (or) polluted the environment,” among other things. This blanket statement just happens to cover bitcoin mining as well. An there is no deadline for eliminating crypto mining, but rather a recommended gradual scaling down at this point. 

Curiously for the one party totalitarian state, the public even has an opportunity to comment on this proposed regulation.


The problem is that this next batch of “China FUD” brings uncertainty to Chinese miners and manufacturers of rigs, like Bitmain, with its 11 mining farms in China and 75% monopoly of the mining rig market globally. And historically any such FUD tends to affect the entire global crypto market, which is run not only on technical analysis or fundamentals but also largely on sentiment. 

For example when Chinese regulators curtailed their local crypto industry in January last year, the bitcoin price fell swiftly to its lowest level in over a month. And that drop brought all the altcoins down with it, like Ethereum which lost 19% and XRP dropping a whopping 29% in price. 


> “There will certainly be many winners and losers in the mining industry, as non-Chinese miners would benefit in the short term from significantly reduced difficulty, and from inexpensive surplus hardware as it filters out of China.” 

Mark D’Aria of Bitpro Consulting LLC


Although there might be some potential short term benefit for the rest of the world’s miners, their might also be other consequences if China were to implement their restrictive policy on crypto. In a worst-case scenario, it may take months for the network to bounce back to normal.


> “If it was decreed that all miners were to shut down immediately, all of that hash rate lost in an instant could significantly disrupt the technical operation of the Bitcoin blockchain, slowing it down significantly until the next difficulty reduction. If this ban was implemented shortly after the last difficulty adjustment, this transitional period could last months.”


Currently the bitcoin mining difficulty is adjusted every 2016 blocks on the blockchain, which takes about two weeks. 

If China were to go offline, taking 80% of the mining power with them, and the hardware wasn’t redeployed elsewhere globally, then this adjustment might take five times as long, or two months, during which time the transaction rate would also be slowed down by 80%. Confirmations that used to take minutes will take hours and fees will likely rise dramatically due to competition for block space. 

Bitcoin is already being criticized for being slow and expensive to transact, and this will surely make matters worse. 


However, that is an unlikely scenario, and it is more probable that Chinese miners will be allowed several weeks to gradually wind down operations and so the difficulty adjustment will be able to smoothly handle the loss of hash rate with little noticeable change to the bitcoin blockchain. And miners will probably just move underground or overseas to other cheap sources of electricity. It will however dethrone China as the world’s bitcoin mining superpower to countries like Canada, Scandinavia and Eastern Europe. 

Chinese authorities will definitely notice if any large amounts of power are still being used so it will be a challenge for local miners to maintain if a ban is announced. 


Fortunately this is all still a rumor or an idea and nothing has been signed into law yet so there is no real need for panic. It is a long-term point of contention though, where bitcoin proof-of-work (PoW) design does require large amounts of electricity, which in some countries is polluting or expensive.


 That being said, there are countries that produce massive amounts of really cheap and clean power, like hydro or even thermal emissions, which would be very easy to channel into mining operations. Iceland immediately becomes an attractive destination.


Proof-of-stake (PoS) is also there as an alternative in the other cryptocurrencies, which is totally green and we may see it come to the fore this year still further, as the alternative to PoW. Cryptocurrency enthusiasts are generally reluctant to be so dependent on the state for power to run bitcoin mining, which is the domain of anarchists and sovereign entities in a decentralized system of self-empowerment. 


Nevertheless, PoW is still the original and preferred system for bitcoin because PoS is a purely computational and societal construct where you don’t have to invest anything to keep the system running or physically anchor its value. As a result it could one day take just one crisis of confidence to send the price crashing in a death spiral, whereas PoW will always require a physical investment of money for the power to run the blockchain and as a result there will be some intrinsic value invested in it, which will help to maintain and justify the price of bitcoin itself.


 Keep an eye on this as it could get interesting if China does decide to implement a restriction on bitcoin, as they’ve done more than once before.