China, until very recently, was home to more than half of the world’s bitcoin (BTC) miners. Then, amid a series of new restrictive measures against cryptocurrencies in the country, something unprecedented happened: a large part of the asset’s network went offline while companies started an unprecedented phenomenon, dubbed “the great exodus of miners”.
Bitcoin mining is the activity that maintains the decentralized network of the main cryptocurrency on the market, with countless machines around the world ceding their processing power to perform complex calculations, encrypt and record digital currency transactions in a public ledger and transparent called blockchain.
Of course, no one gives up their machines and computers to encrypt and record transactions for free. Miners are rewarded with the periodic generation of new units of the digital asset if they manage to successfully process one of the highly sought-after blocks of data. In addition, each bitcoin movement is subject to an administrative fee that is also allocated to them.
It’s an activity that has demonstrated such profit potential that giant tech companies have started to devote part of their operations to it, while others were created from scratch exclusively to mine bitcoin. But keeping so many machines and computers turned on 24/7 is something that demands a lot of electricity. By the most basic rule in the commercial world of lowering costs and increasing profits, most miners look for places that can offer them cheap energy.
As a result, the home of multiple gigantic industrial hubs has also become a favorite destination for bitcoin miners. Providing cheap electricity from coal-burning, which is abundant in the region, China quickly became the nation where most of the global hash rate (unit of measure for cryptocurrency mining) was concentrated. While Beijing ignored the problem for years, more drastic measures began to be taken from the end of 2020.
The biggest downfall in the history of the bitcoin network
This year, the Chinese government realized a few things. Miners, mainly from foreign companies, were enjoying their cheap energy while the gains from the process were exported. Its climate goals began to be affected by the exacerbated consumption of electricity in multiple provinces whose primary energy matrix is still coal. Finally, China is already implementing its own central bank digital currency (CBDC), the so-called digital yuan, and Beijing does not want private cryptocurrencies in the country as they can compete with its new currency technology.
Faced with so many potential motives, the Chinese government quickly began cracking down on the country’s bitcoin miners. In May, authorities began to take a more severe stance against mining and trading in cryptocurrencies by implementing new bans, triggering what has been dubbed by the crypto community as “the great exodus of miners.” This mass migration is still taking place slowly, and it is starting to show signs that companies are finally finding a new home to allocate their thousands of machines. One of the main destinations is the United States.
This phenomenon may have been accentuated as of May, but it has been occurring slowly since the end of 2020. It was still in 2017 that China banned financial and payment institutions from offering services related to cryptocurrencies. Since then, the country has theoretically become an enemy of digital currencies, as they pose a potential risk to the monetary sovereignty that the federal government seeks to maintain over the local economy. Bitcoin, for example, could provide more freedom and financial options for the population than Beijing would like.
That said, the restrictive measures were constant and gradual. In October 2020, China banned people from selling cryptocurrencies and restricted domestic companies from issuing their own digital currencies. According to data from the Bitcoin Mining Map of the Center for Alternative Finance at the University of Cambridge, it was from this month that the country began to gradually lose its participation in the mining of the asset.
The great exodus of bitcoin miners
As of October 2020, China was responsible for approximately 67% of all bitcoin mining in the world. This percentage reached its peak in September 2019, when the country registered more than 75% participation in the global hash rate. Activity has always focused on four Chinese provinces: Xinjiang, Inner Mongolia, Sichuan and Yunnan. Sichuan and Yunnan’s hydroelectric power make them renewable energy hubs, while Xinjiang and Inner Mongolia are home to many of China’s coal-fired power plants.
However, in November 2020, the Chinese share in the maintenance of the bitcoin network dropped by more than 12%, starting to make room for the growth of the United States in that market. In the same period, while China declined from 67.4% to 55.6% of bitcoin mining dominance, the US took off from 6.7% to 9.4%.
At that time, bitcoin was just beginning to experience the great boom that made digital assets take the news around the world throughout 2021. Naturally, the Chinese repression deepened this year, while the migration of miners also followed at slow paces to other countries. Also according to data from the Center for Alternative Finance at the University of Cambridge, which goes only up to April 2021, the United States had already taken 16.8% of the world’s share in cryptocurrency mining, while China continued to fall, registering a historic low of 46% share in the same month.
There are no more hard data from there. But the event that really triggered the unprecedented phenomenon of mass migration of bitcoin miners occurred in May 2021. Following data provided by the cryptocurrency monitoring platform Blockchain.com, the digital asset’s hash rate took an unprecedented hit: a historic drop from the peak of 180 exahashes per second (EH/s) recorded in mid-May to an annual low of less than 85 EH/s in early July.
This huge variation in the processing power of the bitcoin network is what denounced the acceleration of the process that had already taken place: miners in China were either shut down, or began to voluntarily completely stop their operations before the prohibitionist measures reached them.
One of the first events that exemplify what happened in mid-June, when the government of the Chinese province of Sichuan, one of the main cryptocurrency mining areas in the country due to its abundant hydroelectric power, issued an order to suspend the supply of electricity to China. 26 local facilities dedicated to bitcoin extraction (BTC).
Migration is beneficial to bitcoin in the long run
According to Daniel Hwang, special projects leader at f2pool, the world’s largest bitcoin mining pool, this unprecedented phenomenon in the world of cryptocurrencies served mainly for one thing: to decentralize the processing power of a single country’s cryptocurrency network, which, in his view, it is extremely beneficial in the long run.
He explained in an interview with Techblog that China holds more than half of the entire global hash rate of bitcoin mining is not a good thing for the web, cryptocurrency and the future of the digital financial market in general. This is exemplified very clearly by the latest crackdowns on digital currencies implemented by Beijing. So, the more geographically concentrated the activity becomes, the more unstable the asset structure will be.
While this phenomenon may have gone down in cryptocurrency history as the biggest drop in network processing power ever recorded, it has also served to create a more decentralized, independent and robust structure that paves the way for the future of digital assets.
Hwang recounts firsthand the experience he has had with his partners. While f2pool is not a company that actually buys and installs cryptocurrency mining machines, he describes it as a “global entity”, a platform that brings together multiple partners into a single pool to improve the probability of processing a block of data, consequently increasing gains in digital assets.
Thus, Hwang says that many of his partners actually operated in China until recently, but now they are looking to relocate to other countries and resume their activities. But the most interesting thing is that his speech differs a bit from what the global media has been reporting.
While the Chinese government’s persecution of miners of bitcoin and other cryptocurrencies in the country is undeniably true, many questions are raised about how Beijing could actually identify and expel so many companies in such a short period of time. The month of July was the most important time window for this sector. It was precisely in this period of a little over thirty days that companies shut down countless machines that supported the bitcoin network, obviously affecting the stability of the cryptocurrency.
However, Hwang clarifies something very important: “Beijing did not effectively expel all these people from the country”. In fact, provincial governments, in line with federal government directives to crack down on services related to bitcoin and its mining, began cutting power to facilities that had been proven to carry out the activity. From a bureaucratic point of view, the miners’ lives had also become increasingly complicated over the past few months. Finally, energy incentives applied to industry in general were also being denied to those who could pull electricity to mine cryptocurrency.
Where do “homeless” miners go?
The “great exodus” of miners was also caused by the fear of other companies present in the country. As much as some companies had their facilities shut down, the restrictive measures were not as severe as Western media pointed out, according to Hwang. However, they served as a trigger for miners operating in China to choose to internally organize their temporary disengagement and migration to other countries while they still could, before complications with the government arose.
So it’s no surprise that the global hash rate plummeted by more than 60% between May and July. However, we are already seeing concrete signs of recovery and normalization in the activities of bitcoin miners. The most recent data from Blockchain.com indicate that the cryptocurrency network already operates at almost 130 EH/s, the same level as in December 2020 and April 2021.
In an interview with CNBCAlejandro De La Torre, vice president of another Hong Kong-based mining pool called Poolin, said the platform’s partner miners sought to leave the country as soon as possible to reduce their losses. “We don’t want to face every year some kind of new ban coming to China,” said the executive. “So we’re trying to diversify our global mining hash rate and that’s why we’re moving to the US and Canada.”
De La Torre’s comment and the behavior of his mining partners is familiar to that described by Hwang and those who participate in f2pool. The final destination? It is uncertain to say, but North America appears to be the new cryptocurrency mining hub, with a special focus on the US state of Texas, which has been offering cheap energy and bringing incentives to this emerging sector in the country, despite growing regulatory concerns rounding up Congress, which most recently passed new taxes on digital assets.
Even so, fate seems solid. There is physical space, cheap energy and political opening for multiple companies, which were previously homeless, to settle down and resume their activities.
Kazakhstan is the closest and most accessible destination
Didar Bekbauov runs Xive, a company that provides hosting services to international miners. The company also sells the specialized equipment needed for mining bitcoin and other cryptocurrencies. In an interview with Techblog, the company’s CEO said that he “lost count” of how many mining clients contacted them seeking help in the migration process from China to other countries.
His experience also reveals what Hwang described. “A bitcoin miner told us that only government power plants have restricted mining, while private ones will continue to serve them,” Bekbauov said. “But most of the electricity is generated by government power plants, so companies will have to move,” he concluded.
Based in Kazakhstan, the chairman of Xive noted that China’s neighboring country has also become another popular option for homeless Chinese miners. Because it offers low-cost fossil energy and makes the transportation process cheaper due to its geographic proximity, the region attracted many companies throughout July and August. However, some of them decided to settle permanently, while others used the country as a temporary base to then continue their trip to North America.
Bitcoin more sustainable?
In addition to the positive changes in the structure of the bitcoin network, the process of decentralization and mass migration in China also made possible another great advantage for the cryptocurrency: to change its dominant energy matrix. As the price of bitcoin took off in 2021, people began to question the sustainability of the digital asset. The pressure on the image of the investing companies was enough for Tesla to suspend the cryptocurrency payment option just one month after implementing it.
Thus, once migration became almost mandatory, miners found themselves with the opportunity to clean up the environmental impact of their activities and the image of the cryptoactive by settling in regions that use clean energy. In this sense, the United States and Canada are two of the favorite destinations that supply electricity from nuclear and hydroelectric plants.
To talk about it, the Techblog also interviewed the spokesperson and marketing director of blockchain service provider Hathor Labs, Guto Martino. For him, this window of opportunity is important, but it requires proper incentives. After all, as with any business model, miners want to spend as little as possible to make the most profit.
That’s why Martino explains that a miner can actually choose to settle in regions that provide clean energy and really contribute to a greener future for bitcoin. But relying on the simple “good will” and environmental awareness of companies is a naive thing to do. Therefore, he believes it is important to encourage this transition, exemplifying what his company already does with “Hathor Green”, a program that monthly rewards bitcoin miners with a bonus in the native HTR cryptocurrency when they prove they use clean electricity.
As much as the bitcoin network has suffered one of the biggest blows in its history and its miners have experienced something unprecedented, the negative sides have already been felt and overcome. Bitcoin now has a chance to be rethought for a greener, more stable and more robust future, opening the first doors to more tangible global practical use. Is cryptocurrency really the “currency of the future”?