China is cracking down — and this time it’s serious — so where next for the lucrative cryptocurrency?
An Australian investor recalls a trip to China four years ago for a bitcoin conference.
During his 10 hour flight from Sydney to Shanghai, the price of bitcoin plunged 30 per cent. “They’ve just banned bitcoin in China,” a colleague informed him on arrival.
The conference went ahead anyway. It opened with a Chinese regulator. “He gave this speech about how blockchain had good potential, but bitcoin was bad. Everyone clapped, he walked off and it just went on as planned,” he says, laughing. “It was – off we go! It was all quite bullish and bitcoin rallied back.”
That was September 2017, the month Beijing banned the operation of crypto exchanges in mainland China.
It was, however, a very different story this year when Xi Jinping’s economic tsar, Liu He, uttered eight words that upended the cryptocurrency universe.
“Crack down on Bitcoin mining and trading behaviour,” Comrade Liu instructed China’s most senior regulators on May 21.
Today, the industry, worth more than $1 trillion, is still roiling.
The anarchic digital currency has a huge following among Chinese investors. Beijing’s regulators have long been uneasy with bitcoin, clamping down as it surged to record highs in 2013 and again in 2017. At first, investors did not know how seriously to take Vice-Premier Liu’s warning in May.
“This has been almost a joke in the industry,” says Henrik Andersson, chief investment officer at Melbourne-based crypto fund Apollo Capital. “How many times can China ban bitcoin?”
There is a lot more clarity now.
Liu, with the full authority of his childhood friend President Xi, is overseeing the biggest regulatory crack down in the currency’s history. From China’s capital to its most western provinces, crypto businesses are being purged.
Investors quickly got the message. More than $400bn of the total value of bitcoin was wiped out as it dawned on them: Beijing is not joking.
For years, the People’s Republic of China has dominated the world’s most disruptive cryptocurrency.
Farms of computers around the world “mine” for bitcoin by solving the cryptographic puzzles that validate the currency’s transactions. Every day, more than 900 new bitcoins are released – each worth more than $60,000 on the market today. The miners compete for the daily loot.
In mid-May, more than half of those energy-hungry machines were in China, plugged into the cheap energy supply in the country’s west.
Many of the machines migrated internally. Workers would carry the machines to Sichuan for the summer, as heavy rains motored the province’s hydropower stations. In the drier months, they were carried to neighbouring coal-powered stations in Xinjiang and Inner Mongolia.
The whole operation had the blessing of local authorities, eager for the opportunity to transform gluts of power into local jobs and to boost their provincial gross domestic product numbers.
Not any more.
In June, the farms of China’s last bitcoin haven were shuttered as the Sichuan government demanded the closure of more than 20 cryptocurrency mining projects in the province.
“The proof is in the hash rate,” explains Alex Brammer, the Seattle-based vice-president of the cryptocurrency mining and data firm Luxor Technologies.
Bitcoin’s hash rate measures the amount of computing power mining new coins. The helpfully transparent indicator reveals this crackdown is real. Indeed as, one by one, China’s provincial governments followed instructions from Beijing to outlaw large-scale bitcoin mining, bitcoin’s hash rate halved. That was great news for the world’s non-Chinese miners, whose profit margins ballooned as more than half of their international competition suddenly went offline.
Now a great international migration of bitcoin machinery is under way – to the former Soviet Bloc and, intriguingly, to the US.
“It’s unlike anything we’ve ever seen before,” says Brammer, who is advising partners in China as they relocate. Some of the older Chinese hardware is heading west into Kazakhstan and Russia.
Much of the newer equipment is off to destinations the industry dubs “tier 1”, such as the US and Canada. The Republican Governor of Texas, Greg Abbott, has boasted that his state is becoming a “Mecca’’ for bitcoin miners — although his ambitions could yet be undermined by energy infrastructure woes.
China’s miners had been using 83 Terawatt-hours a year, according to the Cambridge Bitcoin Electricity Consumption Index. That was more than Chile’s entire annual power consumption. Beijing’s economic planners made it clear to the provinces the industry had no future in the world’s second-biggest economy.