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.
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.