Over the past few weeks, China has renewed its efforts to force cryptocurrency firms out of its borders.
As Blockonomi reported earlier this month, Beijing’s new offensive on cryptocurrency forced five locally-operated exchanges to suspend or cease their activities in the country. The exchanges that have shuttered include Bitsoda, Akdex, Bituex, and Biss.
Despite this, a top cryptocurrency research and investment firm, CoinShares, has confirmed that China remains the most powerful region in terms of Bitcoin hash rate output in the world. This statistic comes shortly after the Chinese government removed cryptocurrency mining as an industry to be banned from the country in the coming decades.
66% of Bitcoin Mining Takes Place in China
According to a recent report from Reuters, a recent report from CoinShares has confirmed that Chinese Bitcoin miners control two-thirds of the network’s computational output, “a growing share that is likely to benefit the country’s miners.”
This 66% figure is purportedly up from 60% in June, which marked the top of the recent bull run, and is actually the most centralized CoinShares has seen Bitcoin since it began tracking geographic ties to the network’s hash rate some two years ago.
CoinShares’ head of research, Chris Bendiksen, attributed this trend to the growth in ASIC deployment, specifically citing the IPO of Chinese miner Canaan and other companies in the region that have recently released new chips. Chinese miners are seemingly afforded special access to these machines due to the decreased transportation cost of these machines to miners, hence the slight uptick in centralization.
The fact that China’s share of the Bitcoin hash rate is up from 60% in June also implies that the recent 50% decrease in the BTC price has forced more expensive miners, who operate in countries like the U.S. and Canada, to temporarily pause their operations.
Centralization May Continue
Unfortunately, this centralization may continue. Speaking to industry outlet The Block in a recent interview, Leo Zhang, Principal at Iterative Capital Management, said that mining is likely an exercise that will only become more and more expensive with time. He said more specifically:
“There is no real efficient way to actually hedge, and the best you can do is keep your expenses as low as possible. I think mining as a business is going to become more and more expensive to run and requires more and more financialization.”
He added that per his company’s estimations, the Bitcoin block reward reduction slated to take place in the middle of next year will likely force the cost of mining one coin to $17,000 from the $7,000 at current, driving more cost-ineffective operations out of this market.
With China’s Sichuan region currently offering dirt-cheap electricity rates, especially during the flooding seasons, the halving has the potential to further centralize Bitcoin’s hash rate output in that region.
The Dangers of the Chinese Bitcoin Centralization
Sure, the Chinese government has shown no signs that it wants to nationalize Bitcoin mining with a hostile takeover, though industry commentators assert that the geographic centralization seen in who processes cryptocurrency blocks may be a long-term danger.
Bitcoin commentator and podcaster Eric Savics in October released an extensive thread on why “We must get Bitcoin mining out of China.” Firstly, he remarked that it is simply naive of cryptocurrency investors to “think the Chinese Community Party is ignoring Bitcoin,” likely remarking on how big the industry has become in the nation.
“There is a high probability that Bitmain has backdoors into all the ASICs they produce,” Savics continued, obviously speculating but referencing the so-called “Antbleed” backdoor controversy that took place over a year ago, which largely implied that Bitmain had the ability to shut off their machines connected to the internet.
While Savics didn’t say it explicitly, he largely that government actors working within China could threaten the decentralization of the network, and thus the immutability of Bitcoin transactions, if the nation continues on its path to control everything, evidenced by the “social credit” system.