Blockchain enthusiasts tout Bitcoin and its cryptocurrency kin as decentralized digital assets, but the massive computing power required to maintain the digital ledger is heavily concentrated in a single country: China.
According to the Cambridge Centre for Alternative Finance, roughly 70% of the hashrate for mining Bitcoin—that is, the processing power for verifying transactions on the blockchain’s ledger—is generated in China. The mining operations are clustered within a few geographies well-suited for housing large data centers: areas with low rents, temperate climates, and reliable access to cheap electricity.
Inner Mongolia—one of China’s five Autonomous Regions, akin to provinces—contributes about 8% of global hashrate. Or at least it did, before the provincial government imposed a ban on Bitcoin mining in March, citing heavy pollution, and gave the mine operators two months to clear out.
The edict sounds ominous but, far from being a disruption, the ban could be a good thing for Bitcoin.
The exodus from Inner Mongolia will fracture the consolidated industry, decreasing the risk of exposure to so-called black swan events—like the blackout caused by a flood at a coal mine in Xinjiang last month, which knocked the region’s Bitcoin mines offline, disabling over a third of Bitcoin’s hashrate.
The ban in China could also bolster a burgeoning mining business in the U.S., as Chinese miners look for stable regulation overseas.
A dirty business
Bitcoin mines are essentially giant data centers—factories housing thousands of computers—where each computer, or mining rig, is dedicated to verifying transactions recorded on Bitcoin’s blockchain ledger. When a transaction is verified, resulting in a new block being added to the chain, miners are rewarded with Bitcoin payments, making it a profitable enterprise—if you have the computing power, and the electricity to run it, that is. According to the Cambridge Bitcoin Electricity Consumption Index, the global Bitcoin mining enterprise uses more electricity than some entire countries, such as Argentina or Ukraine.
In 2020, China accounted for over half of all coal-powered electricity generation in the world. Inner Mongolia is China’s largest coal producer. Previously, the province’s easy access to cheap and reliable electricity made it the perfect site for booming Bitcoin mines, which demand storms of electricity.
But China’s energy landscape is changing. Last year, President Xi Jinping pledged China would reach net-zero carbon emissions by 2060, and provincial governments have targets for reduction that need to be met.
Beijing set several regions’ targets for energy reduction in 2019. Inner Mongolia was the only one that exceeded its quota, earning provincial leaders a reprimand from Beijing.
The provincial government—which plans to add twice as much coal power in 2021 as it did last year—responded by blaming Bitcoin mines. In August last year, Inner Mongolia labeled 21 of the region’s 30 crypto mines as “unqualified” and cancelled their access to preferential electricity rates.
Then in March this year, the local arm of the China’s economic planner, the National Development and Reform Commission, banned all crypto mines, giving miners two months to close operations—and move somewhere else.
“I believe the Inner Mongolia ban was primarily an isolated incident that will not significantly affect other mining ecosystems,” says Da Hongfei, founder of the China-based blockchain platform Neo. Already, many operations have migrated to other areas in China.
Head west
China’s other mining hotspots are Xinjiang and Sichuan. Xinjiang emerged as a mining powerhouse in the world of Bitcoin for many of the same reasons Inner Mongolia did. Xinjiang is estimated to hold over 40% of China’s coal reserves. The Autonomous Region also occupies an even larger area of land than Inner Mongolia, sprawling over 642,000 square miles—three times the size of France.
Xinjiang’s vast footprint lowers rent for Bitcoin miners. Despite the abundance of available space, miners appear to have clumped together in a relatively small part of the region. The blackout last month affected only four of Xinjiang’s 61 counties, but the power outage knocked out 35% of Bitcoin’s global hashrate.
But according to Whit Gibbs, CEO and founder of Bitcoin mining service provider Compass Mining, a sudden drop in hashrate isn’t actually a bad thing for Bitcoin as a whole. The mines hit by the blackout in Xinjiang undoubtedly lost money. But the shutdown allowed miners elsewhere a chance to pick up the slack and earn more.
“Bitcoin has self-correcting economic measurements that help it to sustain in these times,” Gibbs says. When some mines go offline, mining competition decreases for those that remain online, making the mining process easier and therefore more profitable.
China’s mining operations are accustomed to shutdowns. “At least twice a year you have miners shutting down operations for a few weeks as they move from Sichuan to Inner Mongolia, or vice versa,” Gibbs says.
Miners in Sichuan rely mostly on hydropower, which is cheaper in the wet season between May and October. When the dry season starts and electricity prices go up, miners pack up their rigs and move to areas powered by fossil-fuels, like Inner Mongolia and Xinjiang.
Da says most of the miners who once operated in Inner Mongolia’s have moved to Sichuan, where “local governments have succeeded in driving blockchain growth while also reaching target emission goals.”
But with a mining ban now in place in Inner Mongolia, miners will be looking for other destinations to move to when the rainy season in Sichuan ends. Some, Gibbs says, are even moving to the U.S.
Howdy, y’alt
According to Bloomberg the world’s largest singular Bitcoin mine is housed in Rockdale, Texas, and owned by German miner Northern Data. The claim of “world’s largest” is contended by China’s Bitmain, however, which built a mining center the size of three football fields in 2019, also in Rockdale.
Thanks partly to cheap electricity, Texas, already home to a thriving tech scene, has emerged as the biggest U.S. Hub for Bitcoin mining. Governor Greg Abbott has encouraged the nascent industry. In March he tweeted that the Lone Star state should “lead on [cryptocurrency] like we did with a gold depository.”
Still, the U.S. Remains leagues behind China in terms of total mining capacity. According to the Cambridge Center for Alternative Finance, the U.S. Only accounted for 5.29% of total global hashrate between September 2019 and April this year.
China’s capacity for enacting sudden and sweeping regulatory changes—like the ban in Inner Mongolia—makes the country less attractive for new entrants to the mining space, Kochmar says. Countries like the U.S. Have the benefit of slow and relatively predictable regulation.
But China has a lead in mining that will hard for the U.S. To make up.
“There will always be mining capacity in China, and I don’t think the North American capacity will overcome China,” says Olga Kochmar, CEO of mining firm Zionodes and a founding member of the Bitcoin Association of Hong Kong, although she adds that more mining is opening up in North America.
“China offers more opportunity,” Kochmar says. “If you can adapt fast.”
