China’s crypto crackdown offers a boon to global bitcoin ‘miners’

International bitcoin “miners” are reaping the rewards of China’s effective ban on this energy-intensive practice, generating ever-higher profits by filling a void by creating digital tokens left behind by former Chinese rivals.

China’s largest bitcoin-producing provinces launched a crackdown on computer-based cryptocurrency mining in June, as part of a larger attempt to cut carbon emissions and a fight against cryptocurrencies private as the country works on its own official digital coin.

The country was the world’s largest producer of bitcoin, accounting for half of global production. Miners have said elsewhere that the cooling of Chinese production has opened up the market to other competitors.

“Think of the average daily global bitcoin production as the pie. The size of the pie stayed the same and every existing miner was able to use a much larger chunk, ”said Shane Downey, chief financial officer of Hut 8 Mining, a listed company based in Toronto.

Bitcoin miners create new coins using powerful computers to solve mathematical puzzles. The number of coins that can be produced each day is fixed, so with fewer rivals it is easier and cheaper to mint new currencies.

The improving economy meant that entrepreneurs were launching new mining operations in countries around the world.

The overall computing power dedicated to mining bitcoin around the world was initially halved following the Chinese crackdown, but is now around 30% less than in May, according to the Blockchain data website. .com.

The profitability of bitcoin miners depends on the prevailing market price of coins, the cost and amount of electricity needed to run the servers, and the rate at which the units can be mined. Bitcoin’s rise on Monday to $ 50,000 from summer lows of around $ 30,000 could add an additional incentive for miners.

“It’s like we’ve doubled the number of machines we have,” said Fiorenzo Manganiello, founder of private equity firm Lian Group, which owns one of the largest renewable bitcoin mining farms in Europe.

Hut 8 Mining also benefited: The company recorded a 241% year-on-year mining revenue boom in the second quarter, earning C $ 31.4 million (US $ 24.8 million), its chief executive noting that June and July were record months due to the absence of Chinese industry. Mining profits were C $ 19.3 million during the period, compared to C $ 697,000 in the same period last year.

“Following the ban imposed by China on national minors, [production] dropped about 40-50%, and at Hut 8 we started mining about 40-50% more bitcoin, with no directly attributable cost increases, ”said Downey of Hut 8.

British mining company Argo Blockchain also reported a 180% increase in revenue in the first half of 2021, citing a change in global mining conditions that allowed it to produce more digital coins without increasing the number of machines it was using. Pre-tax profit climbed to £ 10.7million from £ 523,074 in the first half of 2020.

Sam Doctor, chief strategy officer at US digital asset specialist BitOoda, estimated that it would take around 18 months for capacity to return to pre-ban levels. Replacing lost resources will take time as this involved upgrading the power infrastructure and building facilities.

Miners from China attempted to migrate to neighboring countries such as Mongolia and Kazakhstan, but many were unable to transport the equipment across borders. There were also concerns about the position local authorities would take on bitcoin mining.

Bitcoin mining has a severe environmental impact. It accounts for 0.4% of global energy consumption, using more electricity each year than Finland or Belgium, according to the Cambridge Bitcoin Electricity Consumption Index. Miners in China have had a particularly strong effect due to their reliance on coal-fired energy.

“As it stands, we believe cryptocurrencies have a long way to go to meet ESG criteria,” analysts at French asset manager Candriam said, referring to investment standards for environmental, social and governance issues.

Mining activity outside of China gravitates to places rich in renewable energy sources like Norway and Canada. But faced with the explosion in demand, operators of specialized sites have found it difficult to build facilities quickly enough.

“It will take about a year or more for mining capacity to recover. A lot of new mining equipment is sent to the United States and Canada instead of China, but the capacity of the data center is a bottleneck, ”said Kjetil Hove Pettersen, general manager of the Norwegian miner and center operator. of Kryptovault data.

In the United States, Texas has been one of the big beneficiaries of the new mining landscape, while specialist sites in Norway and other European countries are creaking under demand.

“We have people calling us and begging us to accept their machines. Some have offered 50% of their future profits if we give them space in our data centers, ”said Manganiello of Lian Group.

The price and quality of the computers required for mining crypto units have also declined. Before the crackdown in China, miners had to pay increasing prices for their computers as they searched for more efficient ways to acquire bitcoin. Due to the glut of dust-collecting servers in China, the price of computers – and with it a hindrance to profitability – has plummeted.

“Right now, the profitability of mining bitcoin is so high that even the oldest and least efficient machine can be profitable,” said Hove Pettersen of Kryptovault.