Last week, the Cambridge Centre for Alternative Finance (CCAF) at the University of Cambridge released an update to its much-cited (and rightly so) Cambridge Bitcoin Electricity Consumption Index (CBECI), which aims to reveal and share the geographic distribution of Bitcoin miners around the world, among other things.
The latest Cambridge update showed that China's share of mining dropped from 34.3% in June 2021 to 0.0% in July 2021 after the country imposed a crypto mining ban. Last week's update showed that China's share of mining increased from 0.0% in August 2021 to ... 22.3% in September 2021.
Clearly something is going on here, so let's dive in. While we're at it, we'll also touch on two other issues related to bitcoin mining: 1) hashprice and 2) the problems facing mining companies.
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China banned bitcoin mining in May 2021, which was reflected in the data. In July, there were virtually no miners left mining in China. There were none in August, either. Then, in September, almost all the miners who had left the country came back. At least that's what the data indicates:
Maybe it's not obvious, so I'll say it: that didn't happen. The relocation of mining operations is not exactly easy. Most mining is not a handful of hobbyists fooling around; Bitcoin has long since moved away from that. Most miners are more like commercial operations, paying triple-net leases for storage space and relying on fancy power purchase agreements for electricity.
Bitcoin mining operations look like this (check out this amazing photojournalism piece by my colleagues):
The reason the data looks like this is because of the data collection method used by CCAF. CCAF has partnered with bitcoin mining pools to collect data on geographic mining facilities based on IP addresses (pools allow many different miners to contribute to mining, and the reward is then divided among them according to their processing contribution to equalize each miner's income). Therein lies the problem, and the CCAF warns of it:It is no secret in the industry that [miners] in certain locations use virtual private networks (VPN) or proxy services to hide their IP addresses and thus disguise their location. Such behavior can skew the sample and lead to an overestimation (or underestimation) of the hash rate in some provinces or countries.
So the actual story that I think happened here is pretty boring.
That was it. Like I said: pretty boring, actually.
That's not the whole truth, though. The better-known bitcoin mining operators have moved at least some of their operations, and the growth of mining outside China, mostly in the U.S., is well documented. For example, the hashrate - the computing power of the Bitcoin network - has increased by 40% since the ban in China. CCAF, recognizing the oddity of the data, published a wonderfully titled blog post about their update, which shows us the following:Most notable, however, is China's apparent comeback. After being banned by the government in June 2021, the reported hash rate for the entire country dropped to virtually zero in July and August. However, in September 2021, the reported hash rate suddenly rebounded to 30.47 EH/s, catapulting China to second place globally in terms of installed mining capacity (22.29% of the total market). This strongly suggests that significant underground mining has developed in the country, empirically confirming what industry insiders have long suspected.
The operative word here is "reported." So yes, it turns out that China may actually ban bitcoin mining again. Here's to more China FUD (fear, uncertainty, doubt) in our future. Or maybe everyone is screwing with us and using VPNs to move their location to China and make my job harder.
Hash price and mining company problemsIn the midst of falling
bitcoin prices, there are also some concerns about bitcoin miners and their profitability. There is a metric developed by Luxor Technologies called Hashprice, which represents the expected value of mining. The hashprice is expressed as dollars per terahash per day, where a terahash is the processing power provided by the mining equipment. Here is the trend of the hashprice over the last month.
The hash price has been trending down because 1) the USD price of bitcoin has dropped, 2) more miners have come online, and 3) the network's difficulty has increased (the network adjusts the mining difficulty about every two weeks based on the amount of active mining power). That's not exactly rosy, but it makes sense. And the decline is forcing mining operators to scale back or cease operations. Many industry insiders warn that this is the time when "only the strong will survive."
In theory, miners shut down their machines when bitcoin prices drop significantly and it becomes unprofitable to keep them running. This time, despite the drop in the hash price, we have not seen such a collapse, and we have the public records of the mining companies to prove it. All the public miners have publicly committed to something along the lines of, "We're mining Bitcoin, we want to mine more Bitcoin, we're going to keep as much Bitcoin as we can, and we're going to use other sources of capital to fund operations and growth."
That could be good, but if these miners feel more pressure, there are potential obligations to capital providers that they may have to meet. In addition, if the market deteriorates, these companies may have to do something, such as sell their bitcoin. These are not companies with the balance sheets of Apple or Google; they are more like startups that happen to trade in the public markets.
All in all, there is no particular reason to worry about the mining industry as a whole. Bitcoin mining will be fine, but the cast could change as capital markets are available until the moment they are not. Bitcoin will get better as a result, but it could be painful at the enterprise level.