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Last week, Cambridge University’s Cambridge Centre for Alternative Finance (CCAF) released an update to its heavily cited (and rightfully so) Cambridge Bitcoin Electricity Consumption Index (CBECI), which in part looks to uncover and share the geographic location breakdown of bitcoin miners globally.
The previous Cambridge update showed that China’s share of mining went from 34.3% in June 2021 to 0.0% in July 2021 following a crypto mining ban in the country. Last week’s update showed that China’s share of mining went from 0.0% in August 2021 to … 22.3% in September 2021.
China banned bitcoin mining in May 2021, and it showed up in the data. By July, there were virtually no miners mining in China. None in August either. Then, in September, almost all the miners who left came back. At least, that’s what the data shows:
Perhaps it’s not obvious so I’ll say it: That didn’t happen. Moving mining operations isn’t exactly easy. The bulk of mining operations isn't a handful of hobbyists messing around; Bitcoin has long since graduated from that. Most miners are more properly characterized as commercial operations, paying triple net leases for warehouse space and depending on fancy power purchase agreements for electricity.
Bitcoin mining operations look like this (check out this amazing photojournalism effort from my colleagues):
The reason the data looks like this is due to the data collection method employed by the CCAF. The CCAF partnered with bitcoin mining pools to collect geolocational mining facility data based on IP addresses (pools allow a lot of different miners to contribute to mining, and the reward is then split among them according to their processing contribution to smooth out individual miner income). Therein lies the issue and the CCAF warns as much, stating:
It is no secret in the industry that [miners] in certain locations use virtual private networks (VPNs) or proxy services to hide their IP addresses in order to obfuscate their location. Such behaviour may distort the sample and result in an overestimation (or underestimation) of hashrate in some provinces or countries.
So the real story of what I think happened here is actually quite boring.
Chinese miners were afraid that the government crackdown was serious, so they lied or spoofed their location data and moved underground.
After some time, Chinese miners realized, “Hey, this doesn’t seem that scary,” so they felt comfortable sharing their real data.
That’s it. Like I suggested: actually quite boring.
That’s not really the whole truth though. The more visible bitcoin mining operators did move at least part of their operations, and the growth of non-China, mostly U.S.-located mining is well documented. To highlight that, hashrate – the computational power of the Bitcoin network – has grown 40% since the China ban. The CCAF, recognizing the oddity of the data, published a wonderfully titled blog post about their update leaving us with this:
Most notably, however, is China’s apparent comeback. Following the government ban in June 2021, reported hashrate for the entire country effectively plummeted to zero during the months of July and August. Yet reported hashrate suddenly surged back to 30.47 EH/s in September 2021, instantly catapulting China to second place globally in terms of installed mining capacity (22.29% of total market). This strongly suggests that significant underground mining activity has formed in the country, which empirically confirms what industry insiders have long been assuming.
The operative word here being “reported.” So yeah, it turns out that China can in fact ban bitcoin mining again. Here’s to more China FUD (fear, uncertainty, doubt) in our future. Alternatively, maybe everyone is messing with us and using VPNs to change their location to China to make my job difficult.
Hashprice and mining company woes
Amid falling bitcoin prices, there is also some concern around bitcoin miners and their profitability. There is a metric developed by Luxor Technologies called hashprice which represents the expected value of mining. Hashprice is expressed as a dollar per terahash per day, a terahash being the computational power provided by mining equipment. Here is how the last month has fared for hashprice.
Hashprice has trended down due to 1) the USD price of bitcoin falling, 2) more miners coming online and 3) the subsequent increased network difficulty (the network adjusts how hard it is to mine roughly every two weeks, based on the amount of active mining power). Not exactly rosy, but it makes sense. And the decline is acting as a forcing function for mining operators to buckle down or shut down. Many industry practitioners are warning that this is the time when “only the strong will survive.”
In theory, miners turn off their machines whenever bitcoin prices drop significantly, and it becomes unprofitable to keep them running. This time, even though hashprice has decreased, we haven’t seen this sort of drop off, and we have the public mining company filings to prove it. Public miners have all publicly repped to something along the lines of, “We are mining bitcoin, we want to mine more bitcoin, we are going to hold as much of the bitcoin we mine as possible and we’re going to use other sources of capital to fund operations and growth.”
That could be fine, but as these miners feel more pressure, there are potential obligations to capital providers they might have to answer to. On top of that, if the market gets worse, these companies may need to do something, like start selling their bitcoin. These aren’t companies with the balance sheets of Apple or Google; they more closely resemble startups that happen to trade on the public markets.
All said, there is no particular reason to worry about the mining industry as a whole. Bitcoin mining will be fine, but the cast of characters might change since the capital markets are available up until the moment they aren’t. Bitcoin will be better for it, but there might be some pain coming at the company level.