China’s mining community is confused, on edge, and preparing for the worst after a weekend of chilling regulatory news from the Asian superpower. Some miners have scaled back their China-based operations, other miners abruptly migrated their machines out of the country, and the entire cryptocurrency market has been generally spooked for the last several days.
Despite the undesirable short-term market effect, the potential for a sudden change in the geographic dispersion of Bitcoin mining can, in the long term, radically alter the industry for the better.
Here’s what happened.
China’s Financial Stability and Development Committee held a meeting Friday where, during a wide-ranging discussion on general financial planning and reform, Vice Premier Liu He called for a “crackdown on Bitcoin mining and trading behavior,” according to a translation of a report on the meeting. The motivation for this policy seems to come from a desire to prevent financial risk.
Seasoned bitcoin investors understand that China-related Fear, Uncertainty and Doubt (FUD) is commonplace, and almost every bull market cycle includes a novel twist of some age-old China FUD. Here’s an overview of the history of unfavorable bitcoin news from China over the years—there’s a lot of it.
The combination of an overleveraged market and potent regulatory FUD caused bitcoin’s price to plummet to $30,000, a level it hadn’t seen since late January. Bitcoin’s hashrate also continued its ongoing decline, which started earlier this month as the annual miner migration for “wet season” began. But if bad news from China is a fixture of Bitcoin bull cycles, why did the market react so negatively?
This time is probably different.
Unlike previous FUD, this news caused uniquely potent bearish sentiment change among the Chinese mining community as pools adjusted their services, miners moved machines across borders, and the bitcoin market fell.
Uncertainty is one big reason for the current bearishness as many miners aren’t clear on precisely when or how the Chinese government plans to enforce its crackdown. China’s “crackdown” could simply include more stringent measures for regulating mining farms, hashrate tokens, and other mining-related products. Or it could involve forcibly shuttering mining farms en masse.
“No one knows the level of enforcement action that will be taken,” said Mustafa Yilham, business development lead for bitcoin mining company Bixin Group.
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Some reactions by miners to the “crackdown” news include:
- Huobi scaled back its exchange’s offerings in China and limited some of its turnkey mining services to Chinese customers, per CoinDesk’s reporting.
- BTC.TOP also scaled back some of its China-based business operations, citing regulatory risks, per Reuters’ reporting.
- HashCow, a mining company with sites in Xinjian and Sichuan regions of China, suspended buys for new rigs presumably until it receives more clarity on the enforcement plans from the Chinese government.
What happens next?
Bitcoin’s hashrate drops.
As China-based miners continue the process of either selling their machines or migrating them to other facilities outside of China, Bitcoin’s hashrate will most likely continue to decline. In fact the network could experience a sustained phase of lower-than-normal hashrate if a significant portion of the hashrate leaving China stays offline for an extended period of time during this mining shuffle.
By design, lower hashrate causes a decrease in mining difficulty, and Bitcoin block times will also slow as the network adjusts to fewer miners competing for block rewards. During the two-week periods where difficulty adjustments lag behind hashrate changes, miners may temporarily enjoy marginally easier mining.
Bitcoin’s hashrate relocates.
The ASICs that are leaving China won’t simply go offline and stay offline indefinitely. That hashrate will end up somewhere else. The mining market’s appetite for ASICs is still very large, which practically guarantees buyers for any machines Chinese miners put up for sale.
After the migration is over, where all this hashrate ends up will likely be one of two places / scenarios.
One possible scenario is the mirroring of China’s long-standing hashrate dominance by another region. For example, large-scale mining operations could simply ship their ASICs to US-based facilities and give North American a level of global hashrate dominance similar to what China has historically enjoyed. This outcome seems unlikely for reasons explained in the next few paragraphs. But it’s not impossible.
- The US has one of the largest cryptocurrency demographics after China.
- A growing subset of American politicians views hashrate as an increasingly important field of competition with China.
The alternate (and probably more likely) outcome is that everyone gets a bit of the hashrate leaving China, leading to a rapid increase in the decentralization of bitcoin mining. For the past 18 months, bitcoin mining has grown at a breakneck speed, and almost every part of the world has an appetite for more hashrate. In fact, hashrate has been steadily leaving China for months. Last week’s regulatory news is merely accelerating an existing trend.
Mining machines hit the market.
Many panicking miners in China could put large quantities of ASICs up for sale. Plenty of machines are already being sold, as miners have noted on Twitter here, and here, and elsewhere. Companies like Compass, who have been gobbling up every available machine for over a year, will buy up these ASICs too.
Beyond a bevy of new machines hitting the market, miners will likely also enjoy some sizable discounts on many of these machines. As hashrate leaves China, it becomes a buyer’s market for ASICs.