China’s been “banning” Bitcoin for years. But this time they’ve actually done it – and the consequences are profound.
For most of its history, Bitcoin has been a Chinese venture in all but name. Despite the OG crypto’s talk about decentralisation and being the digital era’s take-all-comers global currency, two basic facts have held a disproportionate sway over Bitcoin’s fate:
- The vast majority of Bitcoin’s mining power came from China; and, as a result,
- Large portions of Bitcoin’s market-shaping over-the-counter (OTC) trades also occurred in China.
It’s hard to think of a more consistent meme in the Bitcoin universe than the concept of China FUD (fear, uncertainty and doubt). Year after year after year there have been stories about China banning, blocking or cracking down on Bitcoin mining, trading and investing. And year after year after year they’ve come to naught, short-term price suppressants that have done little to slow Bitcoin’s astronomical growth – or had any appreciable impact on the Chinese Bitcoin industry.
So, when a May 21 government directive called for a country-wide crackdown on Bitcoin mining it was greeted with a collective eye-roll by the crypto community. Hell, some people probably used it as an excuse to go all-in – during the 2017 bull run, a similar announcement was the catalyst for a 600% price increase.
But a few days later Inner Mongolia announced that they were shutting down the region’s mining operations. Then Xinjiang and Sichuan followed suit. Then China’s crypto influencers were banned from Weibo en masse. Then the central bank issued its own directives telling the country’s financial institutions to stop letting citizens and OTC desks conduct crypto-related transactions. And just like that, in a little over four weeks, China’s crypto industry was dead in the water. Thanks for playing!
When the FUD is real
Do not underestimate the scale of what has just occurred. Even a few months ago, it was thought that China accounted for at least two-thirds of all Bitcoin’s mining power. And over the last few weeks 90% of that power has either migrated or disappeared entirely.
To put this into perspective, the Bitcoin hashrate peaked in early May at 190 exahashes per second. Earlier this week it collapsed to around 65EH/s, a drop of almost exactly two-thirds. In pure energy terms, the network has gone from consuming around 141TWh to 67TWh – the equivalent of the entire country of Chile simply going dark. Industrial-scale mining farms are being packed down rig-by-rig and dispatched to new, more agreeable locations. Others are presumably being fire-sold to the highest bidder.
This isn’t just significant from a crypto perspective – the amount of energy and infrastructure being rearranged represents one of the biggest (and certainly the fastest) industrial migrations in human history.
From the ashes
So, how has such a seismic event damaged the Bitcoin network? Well, the price has certainly suffered. And right now, the block lengths are as long as they’ve been in Bitcoin’s entire history, an indicator of how out-of-kilter the network currently is. But by-and-large Bitcoin has kept on doing what it’s been doing every second of every day since January 2009: processing and recording transactions on an immutable and publicly available blockchain. That’s no small feat.
But despite the shutdown’s painful impact on the price, this can only be a net good for Bitcoin. Having that amount of mining power located in a single country was problematic from the start. Spreading the hashrate more evenly around the world helps prevent the kind of systemic threat that we’ve just witnessed, while also reducing the scope for black swan market events.
It also hopefully brings mining operations into more transparent and well-regulated locales. Bitcoin needs to become greener and more accountable and that was never going to happen while so much of the network was hidden behind China’s famously opaque (fire)walls.
Bitcoin is only 12 years old. Growing pains are inevitable. But the old adage still applies: when in doubt, zoom out. The big picture hasn’t changed. The price continues to surge up, year on year. The technology has just survived its greatest ever stress test. And now the rest of the world has the chance to make Bitcoin stronger than it’s ever been.
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