China's Bitcoin Crackdown Is Good for America

The U.S. dominated the mining marketplace in 2021.

It's something of a running joke that China bans bitcoin every year. It's not hard to see why the famously centralized Chinese state might look askance at a fundamentally decentralized and uncontrollable tool for monetary sovereignty, especially at a time when the CCP is rolling out its much-vaunted "digital yuan" over its citizens. But in most cases, headlines about "Chinese bitcoin bans" turned out to be exaggerated (and an opportunity to scoop up some cheap coins).

In 2021, the joke was more true than normal. The Chinese government indeed began cracking down on bitcoin in a big way, with a particular focus on bitcoin mining.

Bitcoin mining is what powers the network. Miners contribute computing power in exchange for chance to earn new bitcoins. It's like a lottery. If you buy more tickets (or contribute more computing power), you have a higher chance of "winning."

Imagine if a lottery player had a way to buy tickets for cheaper than everyone else. This was the situation in China for a long time, and a reason that some 70 percent of the global hashrate (or total processing power) had flocked to the country by 2020. Miners were effectively subsidized by better mining climates (hot-running mining equipment works better in the cool air of Xinjiang) and laxer environmental regulations and literally subsidized by the Chinese government.

The concentration of mining in China had been a big sticking point with bitcoin critics. There was a risk that mining could be adversely influenced by that not-exactly-libertarian government. Would it demand changes to the network? If mining in China was shut down, where else would it go? Would the network be thrown into chaos? Would other cryptocurrencies with different, ostensibly less energy intensive mining mechanics win out? (This story has a happy ending.)

The bans started in Inner Mongolia, home to 8 percent of bitcoin's hashrate at the time. The regional Development and Reform Commission issued a ban on bitcoin mining and gave operators two months to get out. A hotline was set up to receive "tips" on any remaining stragglers.

Similar bans and restrictions emanated from other hotbeds of mining activity—Xinjiang, Qinghai, Yunnan, and the holy hydropower grail of Sichuan all fell like dominoes.

By May, it became clearer what was going on: the Financial Stability and Development Committee, the top financial regulator under the State Council, issued a statement promising to "resolutely prevent and control financial risks," which included a "crack down on bitcoin mining." Regions might have shuttered mining operations under the pretext of energy worries, but as far as the CCP is concerned, bitcoin mining presents a threat to the party's control of the Chinese economy.

This was all obviously bad news for Chinese bitcoin miners and users. It was also temporarily chaotic for the bitcoin network.

The network takes stock of the total hashrate every ten minutes and adjusts the "difficulty" (or likelihood that you have winning lottery ticket) up or down depending on if there is more or less computing power online. If there is less computing power—fewer people buying lottery tickets—it gets a little easier to win new bitcoins. If there is more, it gets harder. This works well to calibrate the network amidst temporary fluctuations.

It also works well to calibrate the network amidst huge shocks like we saw in China. But we humans are another story. The people who make bitcoin transactions on the network don't automatically adjust behaviors every ten minutes in response to hashrate outages. They're still trading and moving money around as if nothing happened. This means the network gets congested, so people must wait a little longer for transactions to reconcile or pay a little more in transaction fees. Bitcoin needed to get new mining infrastructure up ASAP.

Contrary to some of the chicken littles out there, the network did not crash and another cryptocurrency did not take off and the Chinese government did not commandeer the bitcoin project. The miners flocked elsewhere.

The bitcoin network is resilient. Almost overnight, Chinese mining operations started packing up their ASICs and looking for more hospitable climes. For bitcoin miners, time really is money. Each hour their expensive hardware remains offline means forgone bitcoins to recover capital costs and earn profits.

Bitcoin miners needed a new, non-hostile home, and they needed it quick. They found a welcoming one in the state of Texas. Not only does Texas house a bustling cryptocurrency scene in Austin, power is cheap and abundant—two things that miners love. Furthermore, the state has taken steps to pass pro-Bitcoin laws that encourage the development of the industry in the state.

Today, the United States is the world leader in bitcoin mining, hosting some 35 percent of the global hashrate. The runners up are Russia (11 percent) and China's neighbor Kazakhstan (18 percent)—the latter absorbed many of the runaway Chinese miners in the wake of the CCP ban. Kazakhstan is suffering its own civil unrest at the moment, so we may see miners move once more, perhaps to nearby Russia or even a farther destination like the United States.

This is not to say there is no mining in China. A plucky underground of illegal bitcoin miners still whir away in Sichuan, trying their best to make some money and not get caught. There are no official figures, but some estimate that these bitcoin bootleggers might constitute some dozen or so percent of the hashrate. How sustainable this covert practice is remains to be seen.

The Chinese bitcoin mining ban was great for bitcoin and the United States. The network withstood a fifty percent hashrate shock with little disruption. Mining infrastructure quickly recalibrated and relocated to other more welcoming locations. Now that a similar dynamic is occurring in Kazakhstan, seasoned bitcoin users don't need to fear that the network will be disrupted (even though weak hands may see this as a reason to sell). In terms of uptime, bitcoin keeps on delivering.

The great mining migration of 2021 is a fantastic opportunity for the United States.

A common line of attack is that bitcoin is "bad for the environment." This is the excuse China gave for banning bitcoin. Let's side aside the facts that spending energy on good things (like secure sovereign money) is … good, and that we "waste" more energy on things like Netflix alone without blinking an eye. In truth, Bitcoin encourages parsimony in energy expenditures because miners have an economic incentive to get costs down as low as possible.

Bitcoin miners might be the most energy-conscious technology ever invented. They want to make money with energy as cheaply as they can. One cool innovation: natural gas flare harvesting. The natural gas industry has to literally burn off excess gas into the air because there is nothing they can do with it when demand is too low. Bitcoin miners have started forming partnerships with natural gas companies to turn that wasted energy into mined bitcoins. It's a fantastic illustration of how bitcoin mining can encourage better energy use and environmental practices.

If the United States can look past the misinformation on bitcoin and energy, we have an opportunity to consolidate a robust mining industry in the United States. This would not only create a growth industry at a time when few are to be found, it would help us devise better energy practices at the same time.

This manna is ours to lose. If the US bungles bitcoin like China did, mining will simply go to a better location. The bottom line is that when it comes to mining, the bitcoin network is resilient and consistent—exactly what you want in a decentralized global store of value.

Comments

[Overt]

It is important to note that China hasn't banned Bitcoin, any more than the US's Executive Order 6102 on 4/5/1933 banned gold. And it is important to note that the flight of mining to the United States isn't just automatically a good thing.

Bitcoin, like many hard currencies, is a store of excess productivity. After providing for food, shelter, defense and many other necessities and luxuries, many people and nations still have excess productive capacity. Sometimes that goes to waste (grain rotting in a storehouse or electricity wasted in the grid). Other times they convert that excess capacity into a durable good that then becomes used as currency. Colonial settlers fermented and distilled their excess corn to make whiskey that they used as a currency. Ancient civilizations sent excess workers into the mountains to dig gold out of the ground. And today, companies take "excess" electricity and use it to mine bitcoin. ("Excess" is shorthand for energy that is so abundant or situational that it is more economical to spend it mining than on other potential uses.)

The important note here is that China's infrastructure does not operate like an efficient market. Their manufacturing, electrical generation, and other key infrastructure is a collage of crony-capitalist, mandated, 5-year-plan policies and investments that have completely distorted their economy. A small increase in the cost of electricity can therefore cascade through their manufacturing centers to shake loose all sorts of fragile structural flaws.

China has a big problem with excess electricity. Their Three Gorges Damn system was incredibly stressed during 2020, with many hydroelectric plants failing due to the floods in the country. Years of capital mal-investment is now catching up with them in the form of shortages in certain areas, while they have excess in others. And so they are reacting by trying to 5-year-plan themselves out of this mess.

The net result is that they want excess electricity spent on other stuff. *That doesn't mean they are uninterested in bitcoin!* What they have found is that around the world, countries are willing to subsidize excess electricity to bring jobs in. And so all these Chinese companies, that remain owned by Chinese nationals, who remain closely attached to the CCP, have moved their mining operations overseas. The Chinese Government is now acquiring bitcoin with electricity sourced from other countries.

[Overt]

It is also important to note that Bitcoin and Crypto Currency is just one small "bet" that China has made. If a crypto currency becomes an effective reserve asset, then they don't have to rely on reserves of American Dollars to handle trade.

But, like gold back in the 30's, a reserve currency that is "scarce" like bitcoin can be difficult to accumulate. So what does China do? Make it illegal for their own citizens to accumulate the bitcoin locally. Just as FDR made it illegal for American Citizens to compete for gold coins, China is making it difficult for Chinese to compete for bitcoin. But their Chinese companies continue to accumulate it for now.

[AshleyPuckett]

Get $192 of an hour from Google!…Yes this is Authentic as I just got my first payout and was really awesome because it was the biggest number of $24413 in a week. (qd04) It seems Appears Unbelievable but you won’t forgive yourself. if you do not check it go this site…… CLICK NOW

[rbike]

Is it just me or is the process of spending valuable energy on "mining" of bitcoin stupid- also raising the prices of energy due to increased demand. Sure mining physical gold has the same issues but I at least end up with something shiny when done that might be used in some process. Here it is just churning electrons. Might as well manufacture tractors. Or grow Tulips. Note: I have $0 invested in any bitcoin.

[DRM]

In terms of the 2072 market value, everybody has $0 in Bitcoin. The only question right now is how many Greater Fools will be taken in before the final crash.

[Overt]

As noted above, spending excess capacity to create something is how currency is made. A country could spend its excess capacity growing food that will rot, or making tractors it doesn't need or mining gold that is a store of value. Early colonial farmers could grow extra grain that would rot, or distil it into whiskey that they then traded as a currency.

In all of these cases, even if the thing you have is "physical" it is still pretty much useless to you if you actually need to eat or sleep under shelter or provide for various other needs and wants. What makes the currency important is that it represents a tradeoff of excess productive capacity.

" Here it is just churning electrons."

Is that really substantially different than the US dollar? Some 90% of the US dollar supply is electrons- only about $1.4 trillion of our $14 Trillion money supply being actual, printed dollars. The rest is "liquidity" from central banks or deposits on a balance sheet.

It is precisely the "wastefulness" of bitcoin that makes it useful as a store of value. Rather than just adding a zero to some balance sheet as the fed can do, for someone to mint a new bitcoin they have to expressly choose to spend their energy on mining it. If there are other more productive uses of that energy, they would spend their money on that. And that energy isn't "wasted" it is used to cryptographically secure and distribute a digital ledger that guarantees a bitcoin cannot be double-spent. It is the use of energy to solve a problem that previously could only be solved with a physical asset like a gold coin.

This isn't to say that bitcoin's price or the individual decisions of miners are completely rational- or even if they ARE rational that they are going to result in a long lasting store of value. Bitcoin may indeed have other flaws that will sink it in the future. But the idea that mining is some sort of wasteful activity is not a flaw- indeed it is a key strength that ensures each bitcoin is both tied to production tradeoffs in reality and secure from problems like double spending.