Just weeks into a stunningly effective purge of large Bitcoin miners from China, reduced competition for Bitcoin block rewards has dramatically improved the profitability outlook for mining operations elsewhere.
“As the [mining] hashrate falls down, the difficulty [of mining] readjusts,” explains Kevin Zhang, VP of business development at mining firm Foundry Digital. Bitcoin’s hashrate is the measure of how much computing power is securing the network – and competing for Bitcoin rewards. (Disclosure: Foundry, like CoinDesk, is a subsidiary of Digital Currency Group).
“[The hashrate] has fallen so much that it has actually kept on par with the bitcoin price,” Zhang says. “A miner that plugs in now has basically the same economics as when bitcoin was $50,000.”
David Z. Morris is CoinDesk's Chief Insights Columnist.
“We are now mining more bitcoin on a daily basis than we were before, without doing anything, without adding any machines,” confirms Geoff Morphy, president of Bitfarms, which mines primarily in Quebec, but has plans to expand. Its stock was listed on the Nasdaq on June 21.
Declining Bitcoin hashpower benefits current miners because unlike real mining, bitcoin mining is essentially a zero-sum game. The same amount of bitcoin rewards are issued every ten minutes regardless of how many miners are contributing hashpower to the network. Since mid-April, Bitcoin’s hashpower has plummeted by nearly half, meaning competition for those rewards is also almost half what it was.
A lot of that decline is thanks to the dropping price of Bitcoin, which makes mining less appealing for operations with higher power costs or less efficient machinery. But it’s clear that miners are leaving China in droves – and leaving magical internet money on the table when they do.
You don’t have to go home, but you can’t stay here
Many exiled Chinese miners appear to be moving machines to nearby countries such as Kazakhstan or Russia. Others are reaching out to operators like Bitfarms in hopes of sharing facilities.
A third group of miners, according to Zhang, is mothballing equipment in hopes that Chinese policy will eventually reverse. Shentu Quingchun, CEO of China-based blockchain firm BankLedger, has estimated that 90% of China’s miners could be shut down in the current purge. Quingchun pegs China’s pre-ban share of global mining at one-third, but consensus estimates are closer to half.
Those hoping to relocate to North America are facing an uphill battle that has only gotten steeper.
“About three weeks ago, I got some emails and phone calls to see if we would be open to hosting miners previously located in China,” says Bitfarms’ Morphy. “Two weeks ago, the number of emails coming into me tripled. This week, they doubled again. Every day, I am getting eight to 10 emails from people who are either looking for us to buy their miners, or to set up a joint venture.”
Zhang says Foundry’s phone has been “ringing off the hook” with similar requests.
This would normally be a good expansion opportunity, but the recent runup in the bitcoin price means firms outside of China have been pursuing expansion plans for months. That means building out power, cooling and space to fit a pre-planned number of machines, so many won’t have capacity to integrate a sudden flood of former Chinese rigs.
“We don’t have any excess capacity until some time next year,” says Morphy. “And some of these Chinese miners are willing to talk to us even if their miners aren’t plugged in for another nine months.”
Those hoping to set up entirely new mining operations outside of China will face other obstacles. Zhang says that there’s now a “huge shortage” of electrical transformers, thanks to manufacturing disruptions caused by the coronavirus pandemic. For industrial-scale bitcoin mining, transformers are needed to convert energy from a substation before it can be used by mining rigs.
The result, according to Zhang, is an insoluble bottleneck.
“Moving all of this is going to be nearly impossible. That infrastructure takes 6 to 9 months to build up.”
That means established miners around the world will be benefiting from the drop in Chinese competition for a long time.
Repression’s long, heavy tail
China’s crackdown on bitcoin mining is part of a broader cycle of crackdowns on cryptocurrency as a whole. Statements from Chinese leaders and regulators have often focused on the risk of investment scams or financial fraud, and massive frauds like PlusToken have certainly thrived in the country.
“This is a widespread effort to tone down the fervor and interest” in speculative crypto-assets, says Zhang. He believes miners have essentially been caught in the crossfire of an effort that’s not truly focused on them.
Zhang also notes that the 100th anniversary of the Chinese Communist Party is coming on July 1. It will be celebrated as a nationwide commemoration, and Zhang believes the mining ban may in part have been a somewhat theatrical demonstration of CCP power ahead of the date.
So once the crypto-hype and communist anniversaries pass, there may be room to reverse or loosen China’s mining ban. Some miners, according to Zhang, haven’t moved operations yet in hopes of that reversal.
But even if things change, the nature of China’s current crackdown will almost certainly keep a portion of miners away permanently. As I’ve discussed elsewhere, Chinese policymaking is not just undemocratic, but opaque and sometimes impulsive. That can be immensely destructive for business, and the mining case makes that crystal clear.
How much have China’s miners lost?
Let’s do some rough math. Currently, 900 bitcoins are issued daily to miners as block rewards. If we assume Chinese miners started packing their bags about three weeks ago, 18,900 bitcoin have been issued since, worth $680 million at current prices. China had half of global mining power before the crackdown. Let’s further assume, conservatively, that about half of Chinese miners were offline, on average, during those three weeks; some would have shut down late, some may have already set up again, and some smaller miners will remain in operation.
At current prices, that means China’s mining ban cost operators $170 million in revenue over three weeks. Meanwhile, many certainly still have expenses, from the salaries of the workers unplugging machines, to rent for warehouses to store unplugged machines. And the situation won’t get markedly better anytime soon for most of them.
After getting a $170 million wedgie from an authoritarian government with little tolerance for pushback or even dialogue, many miners certainly won’t return to China, even if there’s a policy reversal.
Chinese mining pools, which can coordinate hashpower located elsewhere and have been dominant for years, could also see long-term harm as the crackdown highlights their riskiness. “Many [mining pool’s] servers are on, for example AliBaba,” says Zhang. “That could be cut off very quickly … any given day, if the government wants to shut it down, they can, and they will.”
As a knock-on effect of this crypto-washout, China could lose a huge amount of present and future blockchain talent – or worse, see that talent marshaled toward the invasive surveillance technology that is the digital yuan.
The mining ban makes a nice bookend to the downfall of Jack Ma – twinned case studies of the inherent difficulty of China’s attempt to create a dynamic market economy without political democracy. Capitalism is a system that fosters and rewards risks, innovation and daring. But in the span of less than nine months, two of China’s biggest forces for innovation have been publicly rebuked by the country’s leaders.
For the Chinese people, that’s a tragedy. For everyone else, it’s money in the bank.