Thursday, June 24, 2021

China's Cryptocurrency Crackdown

BTC "price"
Cryptocurrency mining in Sichuan, especially in the rainy season, is hydro-powered, so miners thought they'd be spared the Chinese government's crackdown, for example in Qinghai, Xinjiang and Yunnan. But they were rapidly disabused of this idea, as Matt Novak reports in Bitcoin Plunges as China's Sichuan Province Pulls Plug on Crypto Mining:
BTC miners' revenue
Bitcoin continued its dramatic plunge to $32,281 Monday morning, down 17.65% from a week earlier as some of China’s largest bitcoin mining farms were shut down over the weekend. The bitcoin mining facilities of Sichuan Province received an order on Friday to stop doing business by Sunday, according to Chinese state media outlet the Global Times.

The Sichuan Provincial Development and Reform Commission and the Sichuan Energy Bureau issued an order to all electricity companies in the region on Friday to stop supplying electricity to any known crypto mining organizations, including 26 firms that had already been publicly identified,
BTC Hash Rate
As the "price" chart shows, the crackdown is having an impact. The result of this is that miners' revenue has taken a hit. The result of this is to squeeze uneconomic mining out of the mining pools, decreasing the hash rate. The result of that is that the network has to adapt, by reducing the difficulty of mining the next block in order to maintain the six blocks an hour target for the Bitcoin blockchain, averaged over time. Below the fold, more details and graphs.

BTC Difficulty

Clearly, the decline of miners' revenue, and thus the hash rate, and thus the difficulty of mining blocks, has a long way to go before it significantly decreases the security of the Bitcoin blockchain. But this could be the start of a self-reinforcing cycle leading in that direction as the current uncertainty and the decline in the "price" as the dump follows the pump cause HODL-ers to HODL.

Avg Transaction Fee
This decrease in the demand for transactions can be seen from the collapse in average fee per transaction since the peak around $60 to under $5. This in itself contributes to the drop in miners' revenue, and thus to the drop in the hash rate, and so on.

Miners desperate to recoup some of their investment in hardware are shipping it to destinations outside China:
Videos on social media sites purported to show miners in Sichuan turning off their mining machines and packing up their businesses.

Miners in China are now looking to sell their equipment overseas, and it appears many have already found buyers. CNBC’s Eunice Yoon tweeted early Monday that a Chinese logistics firm was shipping 6,600 lbs (3,000 kilograms) of crypto mining equipment to an unnamed buyer in Maryland for just $9.37 per kilogram.
The more of the hash rate that is located in Western countries, using power that is much more expensive than under-the-counter hydro-power in China, the worse the economics of mining. The more of the hash rate that is located in countries that follow FinCEN's guidance, the more effective Nicholas Weaver's suggestion:
It is time to seriously disrupt the cryptocurrency ecology. Directly attacking mining as incompatible with the Bank Secrecy Act is one potentially powerful tool.
Weaver means that classifying mining as money transmission would force miners in countries that follow FinCEN to adhere to the Anti-Money Laundering/Know Your Customer (AML/KYC) rules. This would make mining in these countries effectively illegal, as being either legally risky or impossibly expensive, and thereby help to suppress ransomware.

Postscript: If you think that Bitcoin makes sense as a currency used to buy and sell you need to justify the graph below, which shows the total cost of making a single transaction, the average value transferred to the miners for each transaction, has been over $100 for a year and peaked at $300.

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