As Bitcoin approaches its 3rd halving this month, many fundamentals will change within the network. One thing that won’t change is the amount of hash power China controls. With the Chinese region accounting for a majority of the mining network, how does this apply both market and political risk to Bitcoin long term? Will China target Bitcoin mining after it unleashes its centralized digital currency?
As we all know by now, Bitcoin will be entering its 3rd halving this month. Less Bitcoin will be entering circulation based on the fact that “block rewards” will be cut in half for miners across the globe. With less Bitcoin entering circulation, Bitcoins annual inflation rate will be slashed in half to about 1.8% ( a fraction of the annual inflation rates among the global economy ). Historically speaking, Bitcoin halvings have been “bullish” since it’s perceived as a long term value driver. As mining gets even more important post halving, we can’t discount the fact that market and political risks will continue to surface regarding Bitcoins mining network.
Bitcoin Mining Stats
With Bitcoin operating in a decentralized capacity, no central party exists. This is the reason that Proof-of-work mining (PoW) is so important to the Bitcoin infrastructure. In order for miners to solve complex mathematical problems, quintillions of hashing power needs to be implemented per second. Despite Bitcoins hashrate growing at a higher multiple to price, Bitcoins price has still followed the trends we see in hash rate. As hash rates go up, you tend to see that upward momentum in price. This stems from the fact that as hash rate goes up, it essentially increases miner operating costs. In order to keep them on the network, they need to see higher BTC prices to hit their break even points. With this being said, a report by ARKInvest shows the influx of capital that has been spent on mining since 2013. They project that Miners have spent nearly $17.6 billion on resources since 2013.
China’s Power Over Mining Networks
Going into 2020, a report by CoinShares outlined that China accounted for nearly 65% of the Bitcoin hashpower. This was the highest level that they saw since they first started covering the mining space in 2017. This is significant when we look at mining power on a global scale. The 2nd highest contributor would be the United States which only accounts for around 7%. This arguably undermines the “decentralized” nature of the Bitcoin network. How can something be truly “decentralized” when a country like China controls nearly 2/3rd of the mining network? This is the reason that so many people would argue the fact that the Bitcoin network could very well witness a 51% network attack which would disrupt the entire system.
Arguably speaking, China might be one of the most dangerous places for this mining dominance to exist. With the way China is run, the government essentially has control over every industry. Before Xi Jinping took over in 2012, this was never the case. China’s rapid growth was initially fueled by private enterprises. Before Xi took over, private enterprises accounted for nearly 75% of economic output. Since Xi took over, he has completely changed the governing authority, placing much more fire power on the way government and private businesses are controlled.
China’s Complex Relationship With Bitcoin
Despite people still being able to trade cryptocurrencies in China, they’ve essentially cracked down on Bitcoin tremendously. This all started around 2014 when China issued a direct order to commercial banks and payment providers to close bitcoin trading accounts. In 2017, China banned all china based cryptocurrency exchanges and trading platforms. In 2018, China then cracked down on mining operations. Despite the initial shock this sent to crypto markets, China decided in 2019 to ease up on mining activities. Mining was initially on a “pending eliminations” list, but was then removed which provided some positivity across the market.
Bitcoin Shock Wave
With the way China is governed, people argue that China could at any time decide to essentially outlaw mining activities as well. This is an extreme “political risk” that Bitcoin faces. This would no doubt induce a shock wave to Bitcoin markets. Historically speaking, Bitcoins price has been highly correlated to political risk in China. When China initially cracked down in 2014, Bitcoin prices plummeted -50% from its 2014 highs. In 2017, Bitcoins price fell another -30% when regulations took place. Eliminating a market that accounts for almost 70% of the hashpower could have a massive impact on the Bitcoin price.
China Centralized Digital Currency
Aside from the doubts China has had on Bitcoin, they’ve injected massive resources into blockchain technology. Xi recently stated that China should “seize opportunity” in blockchain technology and position it as a core technology.
This has fueled the developments behind the China centralized digital currency. Opposed to using the decentralized nature of Bitcoin, China plans to unleash a digital currency that is directly controlled by their central bank. This will arguably give China more power over their monetary system which fits their governing structure that was outlined above. The movement is real and China even got big time players like McDonalds and Subway recently involved in the testing phases.
Centralized Model A Risk To Bitcoin Mining?
With the crackdowns China has imposed on Bitcoin directly, one could argue that the centralized digital currency could be a direct threat to Bitcoin mining. With the way Xi is governing the country, it’s evident that he wants complete control over the monetary system. Once their digital currency does come to fruition, China could very well crack down on Bitcoin mining. This would ensure that the government has complete control over the economic activities occurring in the region. China has arguably taken care of the hardest part by eliminating the China based cryptocurrency exchanges and payment providers that were originally offering Bitcoin services prior to 2014. Even though cryptocurrency trading itself could remain evident in China, banning mining operations would close up loose ends for Xi and get all attention on their centralized model.
Despite this being a theory, this still puts a lot of market and political risk on the Bitcoin network. If mining dominance wasn’t so heavily in the Chinese region, then it would be easier to digest. Unfortunately as we discussed above, China regulation has had a big impact on Bitcoin price action. It would be hard to imagine the potential impact it would have on Bitcoin if China ultimately tackled mining activities.
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