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What Is Bitcoin’s Historic Hash Rate Migration?

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Bitcoin miners are leaving China permanently. Since early last year, around 65% of the Bitcoin hash rate was domiciled in China. However, with bans growing across East Asia, the next 12 months may see the greatest shakeup in the geographical makeup of Bitcoin.

Bitcoin’s hash rate has dropped steeply after the Chinese government moved fast to shut down Bitcoin mining operations around the country. Citing concerns about financial stability, the crackdown will result in more than 90 percent of China’s mining capacity being offline, according to the Communist Party-backed news outlet Global Times.

The data by MiningPoolStats partly supports the claim, showing that China-based 1THash, one of the world’s 15 largest mining pools, lost about 70 percent of its hash rate last week. As a result, the overall hash rate dropped by about 17 percent from its all-time high:

Hash rate 1

Two implications from the drop in hash rate

What does this mean for Bitcoin after the sudden drop in the hash rate? First, Bitcoin is designed to handle an event like this. It has a self-correcting system called “mining difficulty,” which decides how difficult it will be for miners to find the next block in Bitcoin’s blockchain. The goal of this self-correcting system is to make sure that blocks are added to the chain at an average steady pace of every 10 minutes.

For example, from the last adjustment to June 9, Bitcoin’s average block production interval was around 9.9 minutes, close to its 10-minute goal. However, the block production interval has soared to more than 12 minutes between June 9 and 14 after the Chinese government’s crackdown.

So, what will happen? Of course, Bitcoin will self-adjust again to make it easier for miners to find the next block. In other words, mining Bitcoin will become easier for those still on the network, which often makes the remaining miners more profitable until the miners who left are able to restart their mining activities. This occurs every two weeks, so the average block production interval should eventually re-adjust to about 10-minute intervals.

Second, some experts believe that the drop in hash rate will be temporary as many Chinese miners are relocating to the U.S. and Europe. Yemu Xu, the co-founder of Bella Protocol, a cryptocurrency banking service provider, said that miners used to flock to where the cheapest energy was.

However, they are now looking for “stable political regimes, mature regulation and better policy support,” Xu said, adding that “mining in countries like the U.S. and Canada have been picking up.”

In fact, the hash rate from U.S.-based mining operations, such as Foundry USA, has been steady while hash rates from other foreign-based miners are plunging:

Foreign-based miners

According to The Washington Post, one Chinese miner, who spoke on the condition of anonymity, said he predicted that 60 to 70 percent of Chinese miners would move their operations to the U.S. or Europe.

Another major miner, Jiang Zhuoer, said that U.S. electricity will be about six times more costly than in China, and he would have to pay higher wages to I.T. staff to manage his computers. However, the political stability outweighs the cost for Zhuoer, he said.

“A change in government policy that suddenly forces out all miners — that would never happen in America,” Mr. Zhuoer said. “It’s a capitalist system.”

Texas governor and Miami mayor openly recruits miners

Unlike the Chinese government, some U.S. politicians are actively promoting Bitcoin miners to set up operations in their states. Texas Governor Greg Abbott has tweeted about Bitcoin frequently. He recently tweeted that Texas will become the crypto leader.

Greg Abbott tweet

Miami Mayor Francis Suarez is actively recruiting Chinese miners to his city, pointing out that Florida’s nuclear power. He told CNBC, “The fact that we have nuclear power means that it’s very inexpensive power.”

In the same CNBC interview, Mayor Suarez said he’s working with utilities to reduce the cost of energy: “We understand how important this is...miners want to get to a certain kilowatt price per hour. And so we’re working with them on that.”

This leads Brandon Arvanaghi, a Bitcoin mining engineer, to believe that Bitcoin mining will be a major opportunity for the U.S.: “You are going to see a dramatic shift over the next few months…It is going to become a real industry in the United States, which is going to be incredible.”

What we can expect in the near future

Bitcoin experts believe that miners moving out of China can lead to a short-term decline in hash rate due to inventory sales.

“Longer-term, most see hash rate moving out of China as positive but in the near-term may have/has already resulted in inventory sales,” said Jonathan Cheesman, head of over-the-counter and institutional sales at crypto-derivatives exchange FTX.

However, miners may eventually migrate to new places to set up businesses again, which can be a boom for the U.S. economy. Until then, Bitcoin’s self-correcting system will make sure that the system continues to run efficiently.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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