Bitcoin Mining in China

Bitcoin Mining in China

In life, they say that you can only rely on death and taxes. While this may be true, I’d like to propose a third: that China will always be the Bitcoin mining capital of the world. In fact, it controls up to 80% of the world’s total hash rate, is responsible for manufacturing the vast majority of mining equipment and is home to some of the world’s largest mining farms. But how did it get so big so quickly in one country? And what does the future hold as mining becomes less cost-effective? Let’s take a look at the past, present, and future in the world’s most populous country.

The Early Days

Back when Bitcoin was nothing more than a bit of fun, mining difficulty was low, and anyone who could be bothered to do it could easily mine a few BTC with no specialist equipment – although there wasn’t really any money in it. If those people had had time machines, of course, they would have taken it a lot more seriously! But this all changed when the code for GPU mining was released. Suddenly, there was a hardware cost attached to mining, which made things more efficient, but also meant that it started to represent a living for some people.

Inevitably, as the difficulty rose, so did the need for hardware. Application Specific Integrated Circuit (ASIC) systems were built to improve efficiency and Bitcoin mining officially became big business. What we see today is just a scaled-up version of this, but of course, with mining difficulty now extremely high, the systems are far too large and sophisticated to set up at home. You need a large, energy-efficient building – a mining farm. The majority of Bitcoin mining now happens in these large farms.

China Steps In

Suddenly, the cost had become king. The priority for businesses establishing themselves as miners were to find a location that was cheap to run regarding energy costs, allowed access to large spaces at low cost and had access to affordable hardware. China had all of these in abundance and was a forward-thinking country regarding technology anyway, so it positioned itself as the ideal choice early on.

Energy in China is incredibly cheap compared with other countries – especially European and other western countries. Not only that, but large areas of the country benefit from significant government subsidy, making it far more affordable on a large scale. There is also the benefit of coal and other so-called unclean energies. China’s environmental policy is not particularly robust so that companies could get their hands on substantial amounts of coal.

Another reason to look at is the tech side. Technology is available very cheaply in China – often more so than the country in which the company in question actually is. It is also able to manufacture same-spec hardware at a lower cost. This means that companies based in China had a significant advantage on two cost fronts.

The final reason is to do with space – and this is similar to the US, where there are also lots of large mining facilities. China had a lot of rural space lying just outside city centers, where large farms can be established. This meant that companies could buy up warehouse space quite cheaply, while still retaining the same access to energy and networking as the very centers of the cities. All in all, China was an ideal location.

The Backlash

Don’t be fooled into thinking that it has all been plain sailing for China though. In fact, regarding mining, the country is experiencing something of an exodus at the moment, with a reported 20% of Chinese-based mining businesses shipping out to other countries.

Again, there are several reasons for this. Firstly, China began clamping down on cryptocurrencies a few years ago, and their progressively hard-line approach has seen some countries deciding to move to more crypto-friendly locations. Binance is a good example of this. One of the largest exchanges in the world, it moved to Malta in 2018 to escape governmental pressures.

Now, while Binance is an exchange rather than a mining business, it has still caused a bit of unrest and increased focus on major mining firms. For example, Bitmain, which made most of the world’s commercial mining rigs, has recently been expanding to other locations – particularly in America and Singapore.

While the company has not yet said that they are leaving Beijing altogether, it certainly seems like they are preparing for the possibility. The simple fact of the matter is that China is no longer the cheapest and safest option. With financial institutions banned from dealing in crypto and all ICOs now banned in the country, China quickly focused its attention on mining. The government has moved to restrict energy usage for miners and has even been known to confiscate equipment under extreme circumstances.

At the same time, other countries started heavily incentivizing mining operations. There are now several countries that offer better running costs and subsidies than China. Scandinavia is profiteering from this in particular, as they can also provide a setting with a cooler climate, which means that companies need to spend less money on cooling huge rigs and servers. All of this means that China has started to loosen its grip on the mining industry – although it still controls an overwhelming majority of operations.

What Does This Mean for the Future?

With a natural diversification in mining-centric countries, things are set to change. However, this could be for the better. One of the main concerns surrounding Bitcoin mining, in general, is that too much of the overall hash rate is controlled by too few companies. This mirrors the mainstream world of capitalism and centralization. The founding of Bitcoin was originally based around the idea of decentralization – or lack of single, controlling authority. Mining has become such big business that individuals were priced out of the market a long time ago, but it is even worse if all those companies are in the same place. To put it simply, China has too much power in the Bitcoin world. A bit of national competition could well be a positive step.

The other issue is that mining difficulty is now so high that energy demands are unreasonable. Many countries are clamping down on this, declining to offer reduced rates and subsidies. This will force mining firms to look at more environmentally friendly alternatives. This is not China’s strong point, so the expectation is that diversification will happen due to national attitude as much as governmental pressure.

The final advantage to this shift is that it will help to safeguard Bitcoin over time. It is currently a tough environment for crypto as a whole, with the heady days of late 2017 no more than a distant memory.

As BTC struggles at the $4000 mark leading up to Christmas 2018, there is a lot of Fear, Uncertainty, and Doubt (FUD) on the markets. But what if the Chinese government turned around at the beginning of 2019 and said: “no more” to mining firms?

This would cause an absolute catastrophe in the Bitcoin world, with such a huge amount of mining taking place there. The network would grind to a halt, and the price dip would likely be catastrophic. With major mining firms now located around the world, the effect would be far less devastating than even a year ago.

Beyond Bitcoin

If we look to 2140, when there are no more Bitcoin to mine, then everything becomes speculative of course. With no more rewards, miners would only benefit from transaction fees, but mining would still be necessary to verify transactions. In its current state, this would mean a major deflation of the mining market, with major firms closing down and walking away. This would then pave the way for a return to the individual, household mining.

However, the most likely occurrence is that the way in which Bitcoin works changes. The problem with the consensus mechanism on which Bitcoin operates is that it isn’t energy or time-efficient. An automated, proof-of-stake model is far easier to run, and it may be that forks in the future take Bitcoin in a new direction – far more successfully than previous attempts, such as Bitcoin Cash or Bitcoin Diamond. Changes will be necessary to keep the network operating, and this is something that many are looking to tackle right now – not in 100 years.

Despite these issues though, mining remains a big business, and China remains the undisputed king. Despite this recent shift, it is extremely unlikely that it will relinquish its status as the world’s mining center shortly, if ever. But any diversification is positive for the integrity of what Bitcoin stands for – decentralization. So, perhaps there is a shining light amid the doom and gloom of late 2018 after all!

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