China’s place at the centre of global bitcoin mining is fading as Beijing ramps up the pressure on heavy energy-use practices amid growing green ambitions and rising concerns over the financial risks posed by cryptocurrencies, according to experts.
“We are seeing the cryptocurrency market enter a path to ‘de-China-isation’ – first on trading and now on computing power, based on a series of stronger steps taken against cryptocurrencies and bitcoin mining last week by Beijing,” said Wang Juan, associate professor on blockchain at Xi’an Jiaotong University and a member of the OECD Blockchain Expert Policy Advisory Board.
Although the creation and trading of cryptocurrencies like bitcoin has been illegal in China since 2019, pushing exchanges like Binance, Huobi, and OkEx offshore, the government has, up until recently, turned a blind eye to the country’s bitcoin miners – companies and individuals that operate the computers that make up bitcoin’s decentralised network.
However, bitcoin mining requires large amounts of electric power, and with China setting a bold target of achieving carbon neutrality by 2060, historical tolerance for these mining operations is fading fast. Bitcoin miners currently take advantage of cheap, coal-powered electricity in places like Inner Mongolia, Sichuan and Xinjiang.
China currently accounts for about 65 per cent of the bitcoin hash rate, a measure of the processing power used by the bitcoin network to verify transactions and mine new tokens of the cryptocurrency, according to estimates by Cambridge Bitcoin Electricity Consumption Index (CBECI).
The mining of bitcoin requires massive amounts of electricity to run the large computer server arrays needed to do the complex calculations required for cryptocurrency transactions, as well as for the air conditioning needed to cool these facilities.
Mining bitcoin uses around 121.36 terawatt-hours a year, which is larger than the total energy used by Argentina, according to a recent report by Cambridge University.
“Bitcoin mining in China consumes around one per cent of all of China’s electricity, as energy efficiency is often measured in many fractions of a per cent, so a full 1 per cent increase in potential energy availability would be a big saving for society,” said Richard Turrin, Shanghai-based fintech expert and author of Cashless, a book on China’s digital currency revolution.
Cryptocurrency mining operations have already been targeted by a number of Chinese municipal and provincial governments. Earlier last week, Inner Mongolia, China‘s northern province, urged more extensive reporting by such firms to weed out high power-consumers in the region.
A China Youth Daily article republished on Tuesday by the People’s Daily, a mouthpiece for the Chinese Communist Party (CCP), said that regulatory scrutiny means that bitcoin mining will become “a thing of the past” in the country.
Regulators have also voiced increased concerns about the financial risks posed by cryptocurrencies, with recent statements from state-backed financial institutions and Chinese Vice-Premier Liu He highlighting the recent volatility in bitcoin and other cryptocurrency prices.
Last Friday, Liu and the State Council said in a joint statement that it was necessary to “crack down on bitcoin mining and trading behaviour, and resolutely prevent the transmission of individual risks to the social field,” sending bitcoin prices sharply lower.
“Chinese investors love volatile investments that they feel can make them money in the short term. Bitcoin has been highly volatile in recent months … and attracted many new Chinese investors chasing fast returns,” said Turrin. “Because of that, it was imperative for the government to issue a warning.”
China’s central bank has been promoting its own digital currency (CBDC), a digitalised fiat money issued by the People’s Bank of China that is equivalent in value to the country’s notes and coins. Chinese financial institutions, banned from handling transactions that involve cryptocurrencies, are embracing the digital yuan.
“The recent price fluctuations of cryptocurrencies like bitcoin and dogecoin have challenged not only the renminbi, digital yuan, and US dollars, but even the share of gold as a store of value. Many investment institutions have reduced their shares [in traditional assets] … to invest in cryptocurrencies,” said Wang.
Bitcoin was trading at just over US$38,000 on Monday, down almost 50 per cent from its year high of US$64,895 on April 14.
But beyond daily volatility in cryptocurrency prices, analysts say the big trend in China will be the movement of bitcoin mining offshore.
“Obviously, we‘ve seen the price impact. What we should now look for as a general trend in China, already under way, is the movement of bitcoin mining offshore,” said Turrin.
The bitcoin network’s hash rate attributable to China has already decreased from 75 per cent six months ago to about 65 per cent now, according to the CBECI.
“A crackdown on mining in China could cause a drastic decrease in bitcoin’s computing power as several thousand mining machines go offline, but such a decrease would not last very long due to new mining machines coming online in other countries,” said Nishant Sharma, founder and chief executive at BlocksBridge, a consulting firm focused on cryptocurrency mining.
Although last Friday’s statement stopped short of an outright ban on cryptocurrency mining, and did not elaborate on the measures involved or the scale of the crackdown, analysts all agree that there will be further policies issued in future – at a national and provincial level – aimed at curtailing cryptocurrency mining in China.
“In 2019, Beijing came very close to eliminating bitcoin mining in China but decided to let it continue. Now with further emphasis on green policies and carbon reduction, it will be harder to justify the continued use of bitcoin mining,” said Turrin.
But the process could be gradual, given the size of China’s crypto mining industry.
“As cryptocurrency mining is a big industry in China, employing hundreds of thousands of people across the country and generating economic growth for the regions where it is present, a sudden crackdown seems unfeasible,” said BlocksBridge’s Sharma.