So, this time it seems that China really has banned Bitcoin.
Or at least that’s the conclusion the media has come to.
But is this accurate? And what does it mean for the long term future of Bitcoin? Actually, what does it mean for the short term future of Bitcoin? Does that explain the recent price drop? Is China doing something very smart here? Or is it the exact opposite?
As a long time Bitcoin user, analyst, large scale miner and environmentalist, it seems I am well placed to comment on the unfolding events, at least according to the number of DMs I’ve been receiving. So, as requested, here’s my take even if, as yet, we don’t have all the facts.
We do, however, have enough to extrapolate the most likely outcomes.
And they make fascinating reading.
How we got here
China has, of course, been going on about banning Bitcoin and all associated activities for some years, sometimes putting something in place, then later amending it, sometimes even seemingly back-tracking temporarily. However, none of these moves could ever be construed as “pro-Bitcoin.”
Even as far back as 2013, China made statements concerning the anonymity, borderless and unregulated nature of bitcoin, telling domestic financial and payment institutions not to carry out bitcoin-related activities.
Then, in 2017, China was pretty clear on what it thought about cryptocurrency exchanges, effectively shutting them down overnight where they were located anywhere on Chinese territory. A significant portion of the world’s Bitcoin trading was wiped out overnight, contributing to the crypto winter than followed.
This was then followed up in June 2019 when the PBOC (People’s Bank of China) issued a statement saying it would block access to all domestic and foreign cryptocurrency exchanges as well as ICO (Initial Coin Offering) websites, aiming to clamp down on all cryptocurrency trading.
That same statement also went on to say that virtual currencies “are not supported by real value”, their prices are easily manipulated, and trading contracts are not protected by Chinese law, echoing sentiments first published back in the 2013 decrees.
The three central councils of the National Internet Finance Association of China, the China Banking Association and the Payment and Clearing Association of China all issued and supported it unanimously.
Put it this way, life has never been easy if you’re a Bitcoiner in China.
However, China’s position as a power player in the world of cryptocurrency has always, in my view, been significantly overstated. That said, it hasn’t stopped ripples (or even Tsunamis) going through the global markets every time it makes a new announcement.
That perceived power came from the sheer amount of hashrate that has traditionally been produced by Chinese mining farms supporting the Bitcoin network, estimated to be anywhere between 50% and even as high as 70% of the global output.
As a result, many people worried about whether China would try and hijack the network or if they tried to ban mining — even though the former is essentially impossible and the latter is entirely irrelevant.
Even so, perception is often more powerful than reality and markets often move more on belief than on fact. It’s simply the way it works.
We humans are fickle.
The ‘new’ rules
At first glance it is easy to read the rules as a blanket ban, but in fact that’s not exactly what it says. As always with a Chinese edict, you need to look at the detail and how it’s presented.
It seems there are two main aspects to this and the practical implications are slightly obscured by the objectives set by the central authorities. In theory, this allows some interpretation room — assuming you’re brave enough to engage, that is.
Get it wrong and the Chinese authorities have a reputation for being, well, a tad harsh.
Those two aspects boil down to concerns about “financial risk” and “power consumption” which, at least on the surface, are admirable goals and have certainly been spun that way.
The first appears to be the main “catch all” phrase that drives the assault on all things crypto within the Chinese borders and the second is simply a mechanism to go directly after Bitcoin miners.
The wording makes it clear. The minutes of the recent meeting of the “China Financial Stability Board” read as follows:
We resolutely prevent and control financial risk [….] we shall crack down mining and crypto trading activities in order to prevent individual risks from being spread to the social level.
This simple line has it all and is, most likely, the driving force behind the moves currently being made. And those moves came quickly.
On May 18th, Beijing announced rules that directly prohibit financial institutions and payment companies from providing services related to digital currencies citing the “financial stability” argument. On the 25th, it went after mining and trading operations citing the “energy” argument.
China appears to be disassociating itself from any involvement with non-sovereign digital currencies. Why?
Well, China is busy promoting its own digital yuan, having, ironically, fully embraced the very same blockchain technology that sits behind Bitcoin. Beijing sees this as a powerful tool to track the spending if its citizens and perhaps even as a challenger to the U.S. dollar’s status as the world’s reserve currency.
The trouble is, Bitcoin can offer a real, solid alternative to state monitoring and there’s at least a good chance that citizens will use it if they’re able.
Bitcoin is a problem for the Chinese authorities.
It needs to go away.
China has a pseudo federal system meaning that its provinces have some degree of autonomy. For example, in April this year, China’s Inner Mongolia province completely outlawed Bitcoin mining, effectively starting the process of forced relocation of miners in that area. They were simply slightly ahead of the what was coming from the central authorities.
But the argument is complex. China’s power grid, objectives and narrative have always appeared confusing to the outside world and uses a wide mix of fuel types. They acknowledge they are one of the world’s biggest CO2 producers and have engaged heavily in the production of new solar generation plants over the last few years as a way to get round this.
In fact, it is currently the world leader in new solar installations. According to Our World in Data, China increased its solar capacity by 115 Twh — enough to power the Netherlands for an entire year — in just one twelve-month period. (The year prior it had increased it by another 145 Twh).
It’s very impressive and so typical of the Chinese. When something needs doing it just gets done, efficiently and quickly. There is also a significant hydro-electric output right across the vast land mass.
Yet, at the same time, China is also building new coal fired plants at an astonishing rate, completely going against global trends. This is, at best, a confusing message.
So it’s true that some Chinese miners use “dirty” power just as it it is true that they primarily use hydro in the wet season between May and October. Often these hydro stations produce far more power than is required in the regions they serve, resulting a glut of wasted energy. It is this excess that has been eagerly hoovered up by power hungry mining operations to the benefit of all.
Until now, that is.
Using “power concerns” as a driver, this will no longer be the case. While getting access to power (at least on a small scale) isn’t expressly forbidden, it’s the main narrative being offered up. But the reality is that the second part of the decree contains the real teeth.
Sometimes I can’t help but think of the Chinese society like the Borg from Star Trek. However, before I get arrested by whichever department of political correctness deals with comparing entire societies with fictional space-faring races, let me clarify:
This is all about society as a whole, or, in this sense, the “collective”. While China has been accused on numerous occasions of being brutal with individuals, it is extraordinary protective of the society and way of life as a whole. It’s wellbeing takes priority over everything, including the individual.
This important point gives context to the wording from the minutes mentioned above, especially the last line:
… to prevent individual risks from being spread to the social level.
This is all about the state disallowing any activity that could ultimately create problems for society as a whole, like trying to prevent contagion. In this case that’s diverting power, capital and infrastructure to something that is not considered to be in keeping with society or, more likely, the plans of the central authorities.
However, what’s interesting is that the Chinese authorities do appear to allow individual citizens to take any risk they like, as long (broadly) as it affects literally no-one else. This seems to include Bitcoin since the wording of the 2013 decree — which still appears to hold true — is as follows:
Bitcoin trade, as an online purchase and sale activity, the general public has the freedom to take part in at their own risk
In other words, don’t come running and crying to the state if you lose your money.
Actually, probably best to not mention it at all.
But this could also apply to mining, at least according to Jiang Zhuoer, founder and CEO of mining pool BTC.TOP. In a recent Twitter thread he explained that small home miners are not the target, since they can operate through simple equipment that they themselves risk buying and running without any impact to society as a whole.
However, a “datacenter” (which is what the Chinese tend to call mining farms) is a different issue. It requires capital, power and infrastructure that can be used better elsewhere for the good of society as a whole. Therefore, under the new directions, it has to go.
And that process has already begun.
Short term impact
Since people are understandably reluctant to go against the all powerful Chinese authorities, things started to happen very quickly.
Huobi, one of the world’s largest crypto exchanges issued a statement on the 23rd May saying that is was suspending crypto mining hosting services and the sale of crypto mining machines in China. In fact, Huobi’s pool hashrate has already dropped from 11.73 Eh/s on the day of the announcement to 6.24 EH/s at time of writing. It’s unlikely to recover unless something else changes.
Meanwhile, BTC.TOP, Zhuoer’s mining pool (which also directly owns a number of mining operations) announced a withdrawal from Chinese operations, citing “regulatory concerns”.
Mine operator HashCow also indicated it will suspend new businesses in China and stop purchasing new mining rigs, according to a Reuters report.
A period of transition is already underway. As China dismantles its mining infrastructure, it effectively hands its power — perceived or real — to the rest of the world in terms of Bitcoin.
Global hash rate has already fallen. On-chain analytics show that wallets associated with Chinese miners have been offloading coins on the open market, presumably liquidating out of fear or because they need to finance relocation activities. This has undoubtedly added to the selling pressure by providing extra supply.
Usually at the end of May we’d see a jump in hash rate as the great exodus from coal burning to hydro power completes, but that hasn’t happened either, although the weather itself has not helped this year. Instead, hash rate is currently sitting at a level last seen in January 2021.
There have been anecdotal reports of miners reaching out to find hosting facilities in Russia, Africa, Iran, the US & Kazakhstan, and this list is probably not exhaustive.
The bottom line is that the exodus of mining from China is happening.
And it’s happening now.
Long term impact on Bitcoin
The short answer (which I was genuinely tempted to write and leave here as the whole section!) can be summarized in one simple word:
Bitcoin is truly global. It is — despite its detractors’ inaccurate claims — highly decentralized. As far as Bitcoin is concerned, it is entirely irrelevant whether you’re involved in it or not or how much hash power is supporting it above a certain level.
The coding is such that even a change of this scale — albeit temporary — will be compensated for via the algorithm and block times will not change. Security will not be compromised. The correct amount of Bitcoin will be produced exactly as the algorithm stipulates. Literally nothing will change.
Other long term impacts
Of course, that doesn’t stop the markets freaking out because, well, “China is banning Bitcoin”. I would argue that the correct point of view is more that China is trying to remove itself from the Bitcoin network. Bitcoin itself, as we’ve seen, couldn’t care less one way or the other.
After all, even the great and powerful nation of China can’t actually stop it permeating its borders although they are, arguably, one of the very few nations on the planet who might come close.
But what does this actually achieve for one of the most powerful nations on the planet?
Well, it clears the way for its own digital currency. It forces its people to accept the payment systems dictated by the ruling parties with all the benefits that brings in terms of surveillance and financial controls. Perhaps, with Bitcoin out of the way, it will even give it a shot of becoming the next reserve currency, something the Chinese authorities relish.
In reality, if that’s the endgame then there’s no choice. China cannot be seen to support any competing currency within its borders and certainly not one that isn’t under their direct control. Being seen to be in total control of the economy is paramount. But, at the same time, it IS a significant gamble.
If Bitcoin’s adoption continues at its current rate by individuals, institutions and payment systems, there is at least a chance that some of the more disruptive developments can occur.
It would, for example, only take one sovereign state to declare Bitcoin as part of its reserve assets to open the flood gates. No nation could afford to be left behind once the race begins.
Countries would complete to acquire as much of the asset as possible, almost certainly beginning international hash wars.
This would then be a disaster scenario for China, having willingly moved from a position of hash dominance to what will almost certainly be a tiny global contribution, if anything at all.
Worse, they would have provided their competitors with all the equipment to do it, since most of the globally dominant Chinese manufacturers will be forced sell only abroad as a result of these same regulations. Or, they will simply relocate entirely.
In short, China would be left behind.
Of course, their actions indicate that they don’t believe this for a moment and are (literally) betting the farm on the success of their own digital currency, like some vast, international poker game.
And it’s quite the bet; the equivalent of “going all in” before the flop has even been dealt.
And while the rest of us standing round the table and gasping at the sheer confidence and wondering if we’ve missed anything, there’s one thing we know for certain:
It’s going to be a hell of a game.
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Disclosure:The author of this opinion piece has been heavily involved with bitcoin for several years and holds a substantial cryptocurrency portfolio, including bitcoin. He also has a mining operation running the SHA-256 algorithm based in Siberia and is a published author on the subject of promoting the understanding of cryptocurrency. Jason is an analyst at Quantum Economics.
Disclaimer:This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. If you found this content interesting, and have an interest in commissioning content of your own, check out Quantum Economics’ Analysis on Demand Service.
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