Is the decline in Bitcoin’s hash rate an opportunity in disguise?

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China’s restriction on Bitcoin mining causes a reorganisation of the ecosystem’s distribution, which has an immediate influence on hash rate.

The Chinese government’s crackdown on Bitcoin (BTC) mining operations has resulted in a large reduction in the network’s hash rate, but industry participants think it represents an extraordinary opportunity for the mining ecosystem as a whole.

China has long been a key contributor to the Bitcoin mining industry, accounting for more than 70% of the worldwide hash rate of the world’s leading cryptocurrency at times. That was up until June 2021, when the Chinese government moved to shutter a number of the world’s biggest mining centers.

The Chinese southwestern province of Sichuan, which is fed by Asia’s biggest river, the Yangtze, has an abundance of hydroelectric power. Due to the introduction of ASIC mining, the province has become home to some of the world’s largest mining operations in recent years, owing to its advantageous energy costs. However, it is coming to an end as a result of the country’s tightening stance on cryptocurrency mining and the ecosystem in general.

Local media has reported that 26 major Bitcoin mining hubs were forced to shutter in Sichuan, which has had a dramatic effect on the global hash rate. The Bitcoin hash rate peaked mid-May at 171 terahashes per second (TH/s) but has dropped to a low of 83 TH/s on June 23 — marking a 50% drop in just over a month.

According to industry estimates, more than 70% of China’s entire mining capacity has been shut down in the last week, with that figure expected to rise to more than 90% in the following weeks.

In a Twitter thread, Kevin Zhang, vice president of Foundry Services, a mining infrastructure business, presented an outline of the situation in China. The main conclusions were that operators were given very little time to pack up their belongings, and that most of their electrical infrastructure is incompatible with systems in other nations.

Bitmain, one of the world’s leading producers of ASIC mining gear, has temporarily halted sales of new mining equipment in order to assist miners wanting to sell second-hand hardware.

The initial impact

At a glance, the situation looks troubling, but some believe that the resilience of the Bitcoin mining ecosystem will prevail. The regulatory clampdown in China presents a unique opportunity for miners in other countries to accumulate BTC holdings.

Daniel Frumkin, mining researcher at Braiins and Slush Pool, unpacked the initial impact of this latest drop in hash rate in his correspondence with Cointelegraph:

“Difficulty has gone down in three of the past four adjustments, and the next adjustment may be the largest downward adjustment in Bitcoin’s history. For miners outside of China who focus on maximizing their BTC accumulation, this is an incredible opportunity as the hash value (BTC/TH/day) is increasing rapidly during a time when everybody would have been expecting the opposite.”

The researcher also stated that despite the scale of hashing power that has been taken offline in recent weeks, the security of the Bitcoin network has not been compromised, adding that “Chinese miners are relocating machines all over the world, so the geographic distribution of hash rate will likely be far better in 6–12 months than at any previous time period in the ASIC era.”

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Nonetheless, the impacts of the Chinese mining crunch were felt throughout cryptocurrency markets, as Annabelle Huang, Amber Group’s head of GlobalX, highlighted a recent sell-off and collapse in different cryptocurrency prices:

“Following Inner Mongolia and Xinjiang, Sichuan province officially shut down BTC mining earlier this week despite hydro being a greener option than coal-based mining. Coupled with Fed’s hawkish sentiments, we saw a significant sell-off in the crypto markets. The shutdown in Sichuan came as a bit of a surprise and likely will cause medium-term selling pressure from miners who levered up to scale their operation during the bull run earlier this year.”

Rack space at a premium

As Chinese-based miners go down, there have been some intriguing side consequences. To begin with, these miners are seeking for other locations to resume their operations, and some have sold their equipment.

Frumkin noted that the market for ASIC hardware would become saturated with a large amount of used hardware for sale, while third-party hosting service providers may very well find their excess space quickly filled up by miners looking to take ASICs online: “Existing mining facilities that offer hosting to third parties are filling up fast, and new mining infrastructure takes a lot of time to plan and build.” He added further, “Any companies and countries who are able to quickly build infrastructure to host thousands of ASICs can be the biggest winners from this situation.”

The introduction of ASIC mining severely hampered the efficacy of small-scale, hobbyist Bitcoin miners, who simply could not compete with the scale economies of industrial-sized mining operations. Smaller mining businesses may be able to expand their operations for the first time in many years, although significant restrictions remain, as Frumkin noted further:

“Many smaller-scale miners use third-party hosting services that offer better electricity rates than typically found on regular energy grids. Since this hosting capacity is in high demand, it’s likely not very easy for those miners to scale right now. However, any miners with off-grid facilities (e.g. next to gas wells) or who otherwise have direct access to some source of surplus energy are in a better position to start mining or to scale up than at any time in the past year or so because hardware is cheaper and more accessible, and the hash value (BTC/TH/day) is unexpectedly high.”

The great migration?

The fact is that the geography and distribution of the Bitcoin mining ecosystem are changing drastically and fast as a result of China’s new legislative action. Over the last two years, as rumblings of a broader crackdown surfaced beneath the surface, some Chinese businesses have been deliberately seeking for other areas to set up mining hubs.

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Canaan, which transitioned from hardware manufacture to mining, has established a base of operations in Kazakhstan, employing its own unique Avalon mining machines. BTC.com, the fifth-largest mining pool in the world, has also transferred its first batch of miners to the nation.

A shift to neighbouring Asian nations would undoubtedly be the simplest exporting option for Chinese miners, but space and power will be scarce, and possibilities further afield are already being considered.

As Foundry’s Chang put it on Twitter, the so-called “great ASIC exodus” will be everything but smooth, as companies struggle with logistical issues, hosting agreements, and negotiations. This, according to Frumkin, has tilted the scales in favour of hosting firms: “This is a huge opportunity for mining infrastructure companies to capitalise on increasing demand for hosting capacity.”

Indeed, the death knell for mining in China may already been rung, and the big exodus of mining equipment has begun. Frumkin believes that all of these reasons lead to North America becoming the next Bitcoin mining hotspot in the coming years. He argues that Chinese miners benefit from their closeness to hardware suppliers, adding, “Meanwhile, many larger miners in North America have found sub-four and even sub-three cents per kWh electricity, which is on par or better than the prices Chinese miners have been paying in recent years.” He came to the conclusion:

“Now that they’re no longer facing a competitive disadvantage in hardware procurement, the stage is set for these North American mining companies to become dominant players in the next few years.”

As Darin Feinstein, founder of Core Scientific, aptly summed up on Twitter, the resilience of the Bitcoin mining network was evident in the fact that, despite a huge portion of the network’s hash rate being forced offline, firms quickly looked to relocate in an uncoordinated fashion while the end-user was largely unaffected.

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According to him, “China forced the shutdown of 60 percent or more of the Bitcoin network infrastructure.” There had been no lawsuits, bankruptcies, bailouts, or downtime. The network infrastructure just shrugged and migrated to nations with greater liberties.”

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