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Nic Carter: Unpacking Bitcoin’s Great Hashpower Migration

By now, it should be clear the “hashrate migration” is real: Miners are leaving China for good. As of April 2020, an estimated 65% of bitcoin hashrate was domiciled in China; with confirmed bans across the country, that figure will be far lower 12 months from now. The precise magnitude and schedule for the westward move is currently unknown, but all signals seem to be indicating the greatest shakeup in the geographic makeup of bitcoin mining since the start of the industrial mining era. Hypotheses for the motivations behind China’s move to eliminate mining abound, although no single explanation appears sufficient as of yet. One obvious explanation would be a desire to meet climate targets and reduce emissions. But this is contradicted by China’s continued embrace of coal power (it added three times as much in 2020 as the rest of the world combined) and that the crackdown extended to hydro-powered regions like Sichuan. Officially, the justification for the crackdown on “Bitcoin mining and trading behavior” announced in the statement issued by Vice Premier Liu He was to “resolutely prevent the transmission of individual risks to the social field.” If the objective is to curb speculation in cryptocurrency, exchanges would be the more obvious targets. Even though executives at the onshore exchanges Huobi and OKEx do periodically get detained and harassed by the Chinese state, those exchanges are still up and running. And banning mining does little to inhibit Ponzis like PlusToken, which the Chinese state considers to be a source of social instability. Subscribe to , Other analysts have said China sees bitcoin as a competitor to its own digital currency project, the DCEP. But again, bitcoin mining is a largely self-contained industry. Banning mining does little to inhibit bitcoin transactions or exchanges – they are totally distinct concerns. Transactions can be assembled and included in blocks anywhere. The Chinese crypto industry would work perfectly well even if all mining was domiciled offshore. Another popular plausible motive for the ban would be continued efforts to stem unmanaged capital outflows. RMB–USDT (tether) markets are probably the most popular crypto-enabled means of offshoring wealth from the mainland. But mining could also be interpreted as a way to convert (capital-control encumbered) local currency into highly mobile global wealth. Buy electricity and ASICs, create hashrate, and receive know your customer (KYC)-free tokens that can be circulated and sold worldwide. At 60% of global hashrate, that’s a potential flow of $8.1 billion a year worth of bitcoin into Chinese miner wallets. One alternative explanation that bears noting but has received little discussion so far is the continued integration of the Chinese grid. As China developed its energy resources and became the largest builder of energy infrastructure over the last few decades, it developed an extremely unbalanced grid, with enormous mismatches between supply and demand. China’s scale and varied geography and energy grid meant that extremely abundant energy resources were being produced in remote locations where there simply wasn’t demand for them. In northern provinces like Xinjiang and Inner Mongolia, huge amounts of power from coal and wind/solar went unconsumed; and in the southern provinces of Sichuan and Yunnan abundant hydro resources far exceeded local demand. The major population centers in China are mostly along the southern and eastern coast, thousands of miles away from the most abundant and cheap sources of energy. As a consequence, China became the world’s capital of energy curtailment. As described by Ohm’s law, electricity simply doesn’t travel well at standard voltages and so must be produced relatively close to load centers. When there isn’t local demand for energy, it goes unused.So in 2016-2017, China was “curtailing” (effectively wasting) extreme amounts of power. In 2017, Chinese curtailment from hydropower reached 55 TWh, a figure equivalent to the entire energy output to the country of Switzerland. In 2016, China curtailed another 52.2 TerraWatt-hour (TWh) of wind and solar. There simply was insufficient local demand to consume this abundance of energy, leading authorities to rethink the grid’s design.Starting in 2010, China has been constructing an ambitious, continent-spanning ultra-high-voltage power transmission network to transmit power from remote regions with abundant energy to load centers, balancing out the grid. Today, 40,000 kilometers of high-voltage transmission exists, with the longest lines stretching over 3,000 km. Much has been made of the Chinese Communist Party’s (CCP) DCEP ambitions or general aversion to freedom tech like bitcoin in justifying the mining ban. Less has been said about the fact that the presence of miners in China was always contingent on the availability of stranded energy. The central and regional government had hitherto tolerated the monetization of excess energy because it simply wasn’t being put to alternative economic use. But as the grid integration and load balancing has improved in the last five years, bitcoin miners have increasingly begun to compete with other industrial and commercial uses. And while sources are hard to find, some analysts have characterized the mining crackdown as part of an anti-corruption campaign targeting regional officials for selling electricity on the black market. The Inner Mongolia regional guidance also seems to hint at this, making specific reference to “public officials who use their positions to participate in virtual currency ‘mining’ or provide convenience and protection for them.” Through this lens, the CCP-level crackdown could be interpreted as a reassertion of power relative to officials in far-flung provinces monetizing state resources without permission. The integration of the grid makes the central government much less willing to tolerate the regional monetization of energy, now that miner-driven consumption increasingly rivals other load centers. By now, we know the crackdown is genuine. Machines are being turned off and hashrate is dipping. It is still unclear where these newly mobile miners will end up. The U.S. has the second-most capacious grid in the world, and some miners appear optimistic about the opportunities to migrate hashrate west without sustained interruption. Hardware manufacturer Bitmain advertised at a recent conference for its elite clients an abundance of hosting opportunities in the U.S. While their assumptions about the amount of available hosting power were definitely aggressive, it’s clear Chinese miners are looking westward. Raw electricity cost is no longer the sole consideration. Today, political stability, regulatory clarity and a respect for private property rights are paramount in miner decision-making. Some hosting services will be able to accommodate the demand by rotating higher-end units from Chinese miners in for older units. Where shelf capacity doesn’t exist, new infrastructure must be built. In the U.S., obtaining the necessary permits can take upwards of six months. Additionally, while some states like Texas (Governor Greg Abbott spoke at the Bitmain conference, warmly welcoming miners to his state) and cities like Jackson, Tennessee and Miami have indicated their openness to miners, others like New York have taken a decidedly hostile approach. Other more convenient near-term geographies include Kazakhstan, Central Asia and Russia. But whether it’s the U.S. or other locales that grow their market share at the expense of China, it will be a significant win for bitcoin’s decentralization, the stability of mining and bitcoin’s climate impact. At long last, bitcoin’s vulnerability to China and the CCP is melting away.The author would like to thank David Fishman for his feedback. 

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