Loading player Due to the increasing crackdown by the Chinese government, many bitcoin miners have stopped their operations in the country in recent weeks. According to what was written by various media in the sector, most of them are moving abroad, to places where electricity is cheap and the law is more favorable to them, such as Texas, in the United States, and the Kazakhstan.
The current dimensions of the phenomenon – which has taken the name of “great mining migration” – are not yet clear but according to the Global Times, an English-language tabloid owned by the Chinese Communist Party, 90 percent of the capacity industry in the country would already have been stopped. This figure could be exaggerated, but at the moment it seems likely that most Chinese operators wishing to continue their activities will have to relocate them abroad.
All of this has already had major short-term effects on the Bitcoin platform, and could also have some in the long-term, helping to make the cryptocurrency more stable and less subject to single state legislation.
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Miners are individuals or companies that use very powerful dedicated computers to validate the bitcoin transactions of network users by recording them on a new block of the blockchain, the shared public ledger on which they are permanently recorded. In return, they get newly issued bitcoins from the system and a commission from whoever initiated the transaction. To get the right to validate transactions (thereby winning the reward), miners compete with each other by trying to solve a mathematical problem through an algorithm called hash. Whoever solves it first, wins.
To solve it, however, you need a very high number of attempts, the higher the more miners are looking for the solution. Therefore, the more computing power a miner has (i.e. the more attempts per second his computers can make), the higher his chances of winning the right to validate an entire block of transactions, which currently contains an average of 2,000. and gives as a reward to whoever wins it 6.25 bitcoins (about 180 thousand euros) plus commissions. Approximately every 10 minutes, a new block is added to the blockchain and the race restarts.
This mechanism has given rise to an industry made up of companies that employ hundreds of computers in parallel to increase their computing capacity (which is measured in the number of attempts per second, a quantity called hash rate) and thus be more competitive. These companies are called mining farms, and over the years they have concentrated in China, particularly in the provinces of Xinjiang, Sichuan, Inner Mongolia and Yunnan, where electricity is very cheap. In fact, the cost of electricity constitutes almost all the current expenses of a miner, whose margins therefore increase as it decreases.
Last April, the last month for which we have the data, 65 percent of the computing power dedicated to verifying bitcoin transactions around the world came from China. In other words, in April, most of the mining activity in the world was still concentrated in the country. However, this percentage was already lower than in September 2020, when more than 75 percent of the total computing power was concentrated in China. Meanwhile, from September to April, the hash rate from the United States rose from 4 to 7 percent of the total, while that from Kazakhstan recorded an even more evident growth, from 1.4 to over 6 percent. percent of the total.
All this indicates that a process of redistribution of mining activity at a geographical level was already underway before May, when the hostility of the Chinese central government towards miners (which has lasted for years) began to materialize. Translated: several miners, given the air that was blowing, began to prepare in time. There had already been several signs: in Inner Mongolia, where about 8 percent of the world hash rate still came in April, the local government had already presented a plan to the public in March to suspend all mining activities by March. the end of April.
Starting from May then, given the series of tightening of the repression by local authorities in the most affected provinces (which followed the line imposed by the central government), it is likely that the percentage of hash rate coming from China has dropped significantly, even if data for this period are not yet available.
However, we have the data on the world hash rate, which has decreased a lot since mid-May, when the price of bitcoin began to drop dramatically, first due to Tesla's decision to suspend the possibility of buying its cars in bitcoin, then for the series of reports confirming the Chinese authorities' intention to crack down on bitcoin mining.
Usually, when the price of bitcoin drops, the hash rate also drops because mining becomes less profitable, which prompts less competitive miners to shut down their machines or go out of business. Therefore we cannot know how much of the drop in total computing power seen in May is due to the decrease in price and how much is due to the fact that Chinese miners are shutting down their computers to move them elsewhere, but we have several evidences that many of them have chosen this path.
For example, CNBC reporter Eunice Yoon wrote that a logistics firm in Guangzhou, Canton province, told its newspaper that it was moving tons of mining equipment from China to Maryland, in the United States.
# China logistics firm in Guangzhou confirms to @CNBC it's airlifting 3,000kg (6,600lbs) #bitcoin mining machines to Maryland, USA. Fenghua International advertises products delivered to door, tax on both ends cleared. Price per kilo: as low as $ 9.37! #cryptocurrencies pic.twitter.com/8yUjZjhpkk
– Eunice Yoon (@onlyyoontv) June 21, 2021
Another proof that the number of miners in China is decreasing is the collapse in the price of graphics cards, components used among other things in mining computers to make them faster: as reported by the South China Morning Post, on the platform of Chinese e-commerce Tmall, the price of an Asus RTX3060 advanced graphics card went from 13,499 yuan (1,755 euros) to 4,699 yuan (611 euros) between May and June. Contributing to this decline is the fact that many Chinese are reselling their used equipment, which has even led China's largest cryptocurrency mining computer manufacturer, Bitmain, to suspend the sale of its machines in order not to lose out due to the low prices.
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Miners are increasingly at risk in various provinces of China. The local government of Inner Mongolia, after having presented the plan to suspend all mining activities by the end of April, had asked all citizens to report any illegal mining operations and proposed a law in May to increase penalties against miner, which provided for the exclusion from the region's energy trading system, the revocation of commercial licenses and the closure of activities.
In Xinjiang (remote province on the border with Kazakhstan), where 36 percent of the global computing power of the Bitcoin network was concentrated in April, on 9 June the local authorities imposed the closure of mining activities in the Zhundong Economic Technological Development Park, a '' area of 15,500 square kilometers that hosts several coal-fired power plants and some of the largest bitcoin mining facilities in the country, which exploit its energy directly on site.
In Sichuan, which in April was home to about 10 percent of the world's computing power, on June 18 the authorities ordered to close all mining operations, while a few days earlier in Yunnan, where about 5 percent of mining comes from. total hash rate, the provincial government has given the order to close the mining activities that bypass the state electricity grid by entering into supply agreements directly with the power plants.
Why doesn't China want miners?
Newspapers have attributed this repression to several factors: China's willingness to reduce its CO2 emissions, that to prevent the risks deriving from speculation on cryptocurrencies for the financial system (as officially stated by Deputy Prime Minister Liu He), and to facilitate the adoption of one's own digital currency, the DCEP or digital yuan.
However, the specialized site CoinDesk has pointed out that these are not plausible reasons. If the goal were to reduce emissions, the measures would only have hit miners in provinces where energy is mainly produced by burning hydrocarbons, such as Inner Mongolia and Xinjiang. As we have said, the authorities are also stopping mining operations in provinces such as Sichuan and Yunnan, where the energy is mainly of hydroelectric origin. As for the risks deriving from trading and the competition that bitcoin would do to the digital yuan, these are problems regardless of where the miners are located.
Some have speculated that the ban is aimed at stopping capital flows out of the country. In fact, mining involves revenues in bitcoins, which can be easily transferred outside of China, as opposed to the Chinese currency.
More likely, however, according to CoinDesk, is that miners are an obstacle to China's attempt to rebalance its electricity grid. The problem with the Chinese electricity grid is that several remote and sparsely populated provinces, such as Xinjiang, Inner Mongolia, Sichuan and Yunnan, are rich in energy sources and have long produced a lot of cheap electricity, much of which is not it was used simply because there was not enough local demand and it was difficult to transport it, while the regions of the coast, where large cities are located, have long suffered from shortages of electricity. To transport electricity from where there was unused supply to where there was unsatisfied demand, a very high-voltage electricity grid was needed, capable of running electricity for thousands of kilometers. The government started installing it in 2010 and in the last 5 years the balance between supply and demand on the grid has improved a lot.
According to CoinDesk, as long as miners used excess energy produced in remote regions, they weren't a problem. But now that this energy can be used for other purposes, both industrial and commercial, mining competes with these different uses that contribute to the economic recovery of the country, while the proceeds of mining, as we have said, can be easily stolen from the economy. Chinese.
Where the miners flee
Since electricity is the main variable cost of miners, it is evident that they will move to places where electricity is cheap. According to CNBC, two likely destinations are Texas and Kazakhstan. In Texas, electricity prices are among the lowest in the world, thanks to the abundance not only of hydrocarbons (of which it is the largest producer in the United States), but also of wind power plants, of which in 2020 it produced 28 percent nationwide. Furthermore, unlike in China, the electricity grid is liberalized: users can choose their electricity supplier, which helps keep prices down. Finally, state regulation is favorable to the industry, and Texas Governor Greg Abbott is known for his support for cryptocurrencies and seems intent on welcoming miners.
Count me in as a crypto law proposal supporter.
It is increasingly being used for transactions and is beginning to go mainstream as an investment. (Fidelity, etc. trying to get Bitcoin ETF).
Texas should lead on this like we did with a gold depository. https://t.co/1z25mtgnmu
– Greg Abbott (@Greg Abbott_TX) March 29, 2021
As for Kazakhstan, according to CNBC, the advantages for Chinese miners are numerous: first of all there is the geographical proximity with the province of Xinjiang; then the abundance of coal mines, which supply electricity at very low prices. Furthermore, unlike China, Kazakhstan would have more lax laws on building construction, which would allow the factories to be built in which to place the machines in a short time.
What will change after the migration
The migration of miners could have important effects on the Bitcoin network: in the short term, the drop in the hash rate will ensure that the problem to be solved to verify a block becomes simpler, making mining more profitable for the same price of bitcoin (fewer attempts will be needed and therefore less electricity). This is likely to attract new miners, causing hash rates to rise in the medium term as Chinese miners resume their operations in the places they have relocated them.
The most important effect, however, could occur in the medium to long term: if Chinese miners find their place in different countries, the network will be much more decentralized than it has been until now and therefore much less subject to the laws of a single state. This would make the bitcoin price less susceptible to industry regulatory news in a single country (as it has been with China so far), and perhaps therefore less volatile.
