Increased regulatory scrutiny from China is changing the bitcoin mining landscape. But where will hash rate go?
China is banning Bitcoin for real this time.
Well, more accurately, it’s banning Bitcoin mining. Following bans last month in Xinjiang and Inner Mongolia, government officials have banned bitcoin mining in Sichuan (the epicenter of Bitcoin mining in the country) and Qinghai, as well as levying new, hyper-restrictive regulations on operators in Yunnan.
The bans aren’t exactly shocking, but their sudden manifestation and stringency have left miners in the region reeling nonetheless. Roughly one million or so mining computers are now stranded in China, and miners are faced with a Rubik’s cube of logistical problems. Do they ship machines to new locations? Do they even have a new location to move them to? Maybe it would be easier to sell them — if they can find a buyer, that is. If they have a new location, how do they staff it properly? Miners are hemorrhaging potential profits as they search for answers to these questions so they are moving as quickly as they can.
But a number of hurdles are ahead of them before they can get their machines back to work. With inflation taking hold and multiple industries facing labor shortages, shipping costs are skyrocketing, so transporting machines would be costly — but so would repurchasing them. Another problem is sourcing reliable rack space for machines; some companies will host with third parties, while others will opt to build new farms from scratch.
Building from scratch will be costly as well, given that raw materials are ticking up in price with everything else. But some miners do not have a choice, given the scarcity of available warehouse space in mining centers like the U.S.
Speaking of locale, where are these miners trying to go, anyway? We estimate that a substantial minority (anywhere from 30% to 40%) of China’s orphaned hash rate will end up in the United States, with Texas leading the charge.
Miners we’ve spoken to are also evaluating countries in Central Asia, primarily Mongolia, and those in the Commonwealth of Independent States (namely, Russia, Kazakhstan, Uzbekistan, Kyrgyzstan and Ukraine) for their close proximity to China.
Indeed, miners are looking to places in their backyard for a quick fix, though jurisdictions like the U.S. and Canada are attractive for their strong legal codes and rules of law. But they’ll ultimately go wherever there is power and space, and other areas that surfaced in our research include Argentina, Iceland, Paraguay, the U.K. and Venezuela.
The migration will be messy. Unforeseen problems will surface, trends will change and it will take at least a year if not longer before the dust settles. But once things smooth over, the dispersion of miners will likely be a boon for the network in the long run as hash rate becomes even more distributed across various jurisdictions.
The U.S. is positioned to benefit greatly from the shakeout. We anticipate over 40 exahashes (EH) will be managed by U.S.-based mining pools by the end of 2021.
As miners leave China and settle elsewhere, some other trends we anticipate:
- A drop in ASIC prices as miners liquidate their machines (indeed, we can already observe a dip here, though this is also in response to bitcoin’s anemic price).
- Increase in the value of hash rate, as difficulty levels stay depressed for extended periods of time. This will result in higher mining profitability and valuations for non-China based miners given the reduction in mining competition.
- An increase in Bitcoin and/or mining specific legislation and regulations as jurisdictions absorb industry participants and as nation states respond to China’s ban with their own laws.
- Many miners migrate to new pools within their jurisdictions, as counterparty risk with Chinese pools increases and the mining pool business continues to integrate into the financial services stack.
You can read the full report on the future of Bitcoin mining following China’s regulatory actions here. Additionally, please visit Luxor Technology’s Hashrate Index for more insights and research, as well as one-of-a-kind metrics and data for Bitcoin’s mining market.
This is a guest post by Colin Harper. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.