Bitcoin Price Seems Mute To China’s Mining Crackdown

Bitcoin is up as much as 25 percent since the news came during the past week that China might look to ban bitcoin mining.

At a recent $5,280, the digital currency is leagues above its nadir of $3,400 during the crypto crash, and leagues below all-time highs of about $20,000.

The move may seem like a bit of a head-scratcher: China is ground zero for bitcoin production, as estimated in a paper penned in part by PhD students from Princeton and Florida International. Research here stated that 74 percent of “hash power” (let’s use that as a proxy for production) tied to bitcoin comes from China. And within that concentration, as much as 80 percent of bitcoin mining is performed by six mining “pools” – and five of them are in China.

In terms of the news itself, China’s government, through its National Development and Reform Commission, which regulates planning, has now said bitcoin mining stands on a list of 450 activities that are thought to be wasteful and should be eliminated.

A public comment period is slated to run until May 7, and a decision will then ultimately be rendered.

Shouldn’t it stand to reason that the threat of a wholesale ban on production should send the price crashing? There are a number of reasons why the price may be propped up. One is that the ban is not a ban, at least according to some observers. In The New York Times, Zhao Qianjie, a former cryptocurrency exchange executive, said mining “is categorized as an industry that is not encouraged or allowed to expand, but it is not a ban.”

And the wheels of regulatory machinery may grind slowly, with any real shakeout taking years (there is no set date for when a ban might take place), as noted in Wired – and if larger pools shutter, then smaller miners compete more effectively. Thus, the thought of a wholesale loss of production seems a bit far-fetched.

But those who bank, simply, on supply moving elsewhere – or even a hiccup in bitcoin supply giving rise to scarcity value (and helping to support or drive a process) – may be missing a bit of longer-term trend.

The Chinese Commission’s statement is that bitcoin mining has “seriously wasted resources,” which gives the nod to wasted natural resources such as electricity and the inputs that make electricity, such as coal.

Nature Sustainability has estimated that anywhere from three million to 15 million tons of carbon dioxide are released globally that can be traced to crypto mining. Since China is responsible for 74 percent of crypto mining activity, it stands to reason that the country is ground zero for the pollution that is the (literal) fallout of bitcoin and its digital currency peers.

The outright mulling of a ban comes after various mechanisms and attempts to rein in the mining – which is virtual, of course – and where the energy and natural resources drain comes as hugely powerful computers are used to generate the blockchain data that helps fashion cryptos of all stripes.

In the past, China has boosted power prices to help curb production, as raising that input would make it economically unfeasible for miners to operate with the zeal that had been in place. The country also banned crypto exchanges catering to Chinese investors and speculators, and ICOs are a no-no.

Yes, production may go elsewhere, away from China, but that seems no easy task in an environment where rows of servers are needed to mine bitcoin, and where proximity to cheap input costs is important. Bitmain, which is among the marquee names in computing mining and which banks on China for a large swath of business, said last month that it would deploy 200,000 units of its own mining equipment in the country to take advantage of cheap hydroelectric power (though we wonder if the April ban might have a chilling effect on miners’ expansion plans). It has also said in the past that it would bring some mining operations to the U.S. If the Chinese ban has a relatively short timeframe – months, not years – or a sudden freeze on production, that could spell trouble for efforts to shift production smoothly.

Decentralized production is generally desirable for any commodity, as it keeps too much “power” out of any one group of producers’ (or even a geographic region’s) purview. But given China’s weight here, that process would be slow-going.

In the meantime, it is clear that the add-on effects of conjuring “coins” out of thin air are no longer desirable to the Chinese government – at least not without more regulation.

Break Even or Broke, Even?

And it is against a backdrop of more regulation and a discouragement of mining that the input costs may rise enough to start a shakeout in bitcoin and turbulence for speculators. Estimates of break-even points for bitcoin are all over the map. Wall Street estimates (and we use Wall Street because that’s where speculation has been part of the game for hundreds of years) have ranged from $2,400 to $5,000. The true break-even point is tough to pin down, as it depends on a market-by-market basis where utility costs have varied, and thus the margins realized on bitcoin mining have varied, too. Consider the fact that in China, miners have relocated to rural areas where coal and electricity are relatively cheaper, and there are some rumblings of miners basing operations in places where power (such as hydroelectric power) is cheap.

Interestingly, we posit that the recent bull run, which seems based on scarcity value, seems not to have much in the way of tangible demand baked into the enthusiasm – you know, as in use cases. After all, it is use cases that help underpin the longevity of cryptocurrencies, and it is a lack of use cases that may ultimately doom them.