China Can’t Seem to Stop Bitcoin Mining

Last week, Cambridge University’s Cambridge Centre for Alternative Finance (CCAF) released an update to its heavily cited (and rightfully so) Cambridge Bitcoin Electricity Consumption Index (CBECI), which in part looks to uncover and share the geographic location breakdown of bitcoin miners globally.

The previous Cambridge update showed that China’s share of mining went from 34.3% in June 2021 to 0.0% in July 2021 following a crypto mining ban in the country. 

Last week’s update showed that China’s share of mining went from 0.0% in August 2021 to … 22.3% in September 2021.

Clearly something is up here, so let’s dive in. While we are there, we’ll also touch on two other bitcoin mining related topics:

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China banned bitcoin mining in May 2021, and it showed up in the data. By July, there were virtually no miners mining in China. 

None in August either. Then, in September, almost all the miners who left came back. At least, that’s what the data shows:

Perhaps it’s not obvious so I’ll say it: That didn’t happen. Moving mining operations isn’t exactly easy. The bulk of mining operations isn't a handful of hobbyists messing around; Bitcoin has long since graduated from that. 

Most miners are more properly characterized as commercial operations, paying triple net leases for warehouse space and depending on fancy power purchase agreements for electricity.

The CCAF partnered with bitcoin mining pools to collect geolocational mining facility data based on IP addresses (pools allow a lot of different miners to contribute to mining, and the reward is then split among them according to their processing contribution to smooth out individual miner income). 

Chinese miners were afraid that the government crackdown was serious, so they lied or spoofed their location data and moved underground.

After some time, Chinese miners realized, “Hey, this doesn’t seem that scary,” so they felt comfortable sharing their real data.

That’s not really the whole truth though. The more visible bitcoin mining operators did move at least part of their operations, and the growth of non-China, mostly U.S.-located mining is well documented.

To highlight that, hashrate – the computational power of the Bitcoin network – has grown 40% since the China ban. 

The CCAF, recognizing the oddity of the data, published a wonderfully titled blog post about their update leaving us with this:

The operative word here being “reported.” So yeah, it turns out that China can in fact ban bitcoin mining again. Here’s to more China FUD (fear, uncertainty, doubt) in our future. 

Alternatively, maybe everyone is messing with us and using VPNs to change their location to China to make my job difficult.

Amid falling bitcoin prices, there is also some concern around bitcoin miners and their profitability. There is a metric developed by Luxor Technologies called hashprice which represents the expected value of mining. 

Hashprice is expressed as a dollar per terahash per day, a terahash being the computational power provided by mining equipment. Here is how the last month has fared for hashprice.

Hashprice has trended down due to 1) the USD price of bitcoin falling, 2) more miners coming online and 3) the subsequent increased network difficulty (the network adjusts how hard it is to mine roughly every two weeks, based on the amount of active mining power). 

Not exactly rosy, but it makes sense. And the decline is acting as a forcing function for mining operators to buckle down or shut down. Many industry practitioners are warning that this is the time when “only the strong will survive.”

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