Plummeting hash rate: The good and bad news
China’s ban on block reward mining is taking its toll on the digital currency markets. Over 50% of the hash rate that supports digital currency networks comes from China, and the abrupt government crackdown on mining has caused hash rate to leave digital currency networks in exodus.
Although the drop in hash rate will have a negative consequence on the digital currency markets in the short term, there are a few positive externalities that will come out of this event.
In this article, we will provide a brief summary of the mining ban taking place in China, and then we will take a look at the negative and positive outcomes created by the ban.
What happened in China?
On May 21, 2021, the Chinese government released a statement saying one of its goals was to “prevent and control financial risks,” the statement goes on to say one way of accomplishing this goal is to, “crack down on Bitcoin mining and trading behavior.”
Afterward, several provinces in China began issuing their own statements, informing digital currency miners operating in their jurisdictions that they had a specified amount of time to shut down their mining operation, and telling electricity providers in the area to terminate service with those digital currency miners within that timeframe as well.
The result has been miners leaving China, shutting down their mining operations and shipping their mining equipment to new locations that will host their equipment.
The bad
China’s crackdown caused digital currency miners in China to abruptly shut off their machines, and look for a new home for their mining hardware. As a result, hash rate has dropped off nearly every digital currency network en masse.
From May 21 to June 31, the hash rate on the BTC network has declined by 41.5842%, the hash rate on the BCH network has declined by 27.9279%, and the hash rate on the BSV network declined by 12.3288%.
The negative news had a ripple effect across digital currency markets sending prices plummeting. Hash rate tends to follow price and China’s ban on digital currency mining and crackdown on banks amplified the decline in both.
Miners scrambled to relocate, and many people believed miners would relocate to North America due to its regulatory security—but the reality is, North America does not have the infrastructure in place to host all of the mining machines leaving China. It will most likely take between 9 and 18 months for the mining facilities in North America to scale up—now you might be wondering, why is this bad?
Because the interim solution for many miners is to relocate to Khazakstan, where a majority of the country’s energy production comes from coal—a fossil fuel that has negative effects on the environment. Considering the environmental issues that many people, including Elon Musk, have raised against mining, relocating to a country that uses fossil fuel to mine digital currency adds insult to injury.
The good news
For large digital currency miners, such as TAAL Distributed Information Technologies Inc. (CSE:TAAL | FWB:9SQ1 | OTC: TAALF), the decrease in hash rate has been good for their business. For miners with the majority of their hash power already located in lawful jurisdictions with regulatory certainty, they can continue mining blocks and processing transactions while other miners are forced to go offline and relocate. With less competition, big miners can win more blocks and process more transactions themselves, meaning they should be raking in more block rewards and transaction fees compared to their normal historical average.
The mining ban in China as well as the environmental issues surrounding the energy efficiency of many digital currencies is going to force the digital currency industry to improve. The miners leaving China are looking to relocate to areas with more political and regulatory certainty. The energy issues raised around the energy inefficiency of BTC mining will drive the mining industry as a whole to find greener solutions, such as mining with solar energy and other forms of clean energy.
What to watch
In the coming weeks and months, you will want to keep an eye on China’s Bitcoin mining ban, where miners are relocating, and how energy is produced in the areas they are relocating to. We are going to see a drop in hash rate as miners continue to shut off the machines they host in China and package them up/ship them to their new homes. We are likely to see the green energy argument come back if the locations where miners are sending their equipment do not use green or clean energy.
China’s ban on Bitcoin mining and miners rushing to find a new home has shaken up the digital currency markets; contrary to popular belief, miners are the most important player on digital currency networks and anything that happens in that sector of the industry will inadvertently have effects on all others areas of the industry, so be on the lookout.
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