China’s Attack on Bitcoin
China’s war against Bitcoin is a long one. The current ban should come as no surprise to anyone as Bitcoin has already been banned and China is working intensively on its own CBDC – which should allow for mass surveillance and the debanking of dissidents. Jim Cramer said China’s central government perceives Bitcoin as a “direct threat” to the regime and its ability to control currency flows within the country, describing the cryptocurrency as “a system that is beyond its control”.
China could tap into Bitcoin’s potential, but a cypherpunk cryptocurrency may not be as submissive as an authoritarian government wants.
So, China carried out a new attack. On May 21st (note: two days after the Elon Musk bloodbath), the Chinese Financial oversight committee (FSDC) announces a goal to ”crackdown on bitcoin mining and trading”.
This timeline of China’s actions against Bitcoin was compiled by Galaxy Digital Research:
The Bitcoin Miners’ Counterattack
The actions required a reaction from miners, but they initially succumbed. Used mining rigs are now being sold at a steep discount, spurring the secondary market. The drop in the price of mining rigs was so sharp that Bitmain officially announced that it has suspended the sale of its ASICS.
The effect of China’s bans can be seen in the drop in the network’s Hashrate:
The hashrate drop has reached the levels of January 2020. The big drop demonstrates that most of the machines that started to be turned off on May 13th have not yet been turned back on. The exodus is just getting started.
Falls in hashrate have historically accentuated or caused the price of bitcoin to fall, both because the metric is a direct indicator of global confidence in Bitcoin and because of sales pressure from miners. Miners interested in continuing the activity need to shut down their equipment, pack their machines, find new territories, set them up again, and start their activities. Big layoffs and no profits.
In addition, there will be new problems, such as high import tariffs on Chinese products.
Some pools have already made their move. BTC.com — a mining pool owned by the NYSE-listed Chinese lottery service provider 500.com — has already relocated its first batch of mining machines to Kazakhstan.
Some cities also reacted. The mayor of Miami is inviting mining companies to the city, offering favorable taxes, minimal regulations and an ample supply of nuclear electricity.
As miners shut down in China, US mining power is growing. As early as April 2020, Chun Wang, co-founder of one of Bitcoin’s biggest mining pools, F2Pool, announced that for the first time there was more hashrate outside China than inside it. A year ago, the pool allocated at US Foundry held less than 1% of the network’s hashrate, now it holds more than 7%. Also, Foundry was one of the only pools to grow in recent weeks.
Lose a Battle to Win a War
Yes, the Bitcoin hashrate rate has dropped drastically as has its price – which is however still 200% above its value a year ago – and that will trigger sensational headlines.
But Bitcoin’s design was created to deal with this situation and its adjustable difficulty will inevitably create incentive situations for miners to keep their activity. The drop will drive Bitcoin miners to seek lower-cost power, specifically in regions where there is greater political stability.
The big thing is that in the long run, the geographic decentralization of Bitcoin mining is excellent. As miners expand to other locations – amid environmental concerns – we will see innovative initiatives. The combination of Bitcoin’s economic incentives with a more decentralized network with sustainable solutions draws a promising future.
While the mining ban is great news for Bitcoin, we may be watching the beginning of the fall of China. China is an economic phenomenon of history. In 2010, it became the second-largest economy in the world. But in choosing to insulate itself from the entire crypto economy (while the use of private DLTs increases), China chooses to insulate itself from the biggest economic phenomenon in history.
China’s ban and Elon Musk’s twitter are probably the two most positive news of the year for Bitcoin, and perhaps the worst for China even if it takes a few years for us to confirm this hypothesis.
At the end of this challenge, we have a more resilient, secure and decentralized network. While headlines focus on the price of Bitcoin, the protocol faces one of its biggest enemies in the battle to build a new open and decentralized anti-censorship, anti-dictatorship payment system.
In a battle, you don’t always have to win all fights.