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Up to 90 percent of bitcoin mining in China could go offline by the end of June following the Chinese government crackdown and ban of all things bitcoin, which could put the entire network at risk with slower processing power and slower transaction rates for the world’s No. 1 cryptocurrency.
So far in 2021, bitcoin has been mined mostly in China, where warehouses of miners use massive computer servers running code 24/7 on special hardware called rigs. China’s subsidized coal-fired power plants produce some of the cheapest energy in the world. The process consumes the same amount of energy per year as some countries.
However, the Chinese government has clamped down on mining amid concerns about energy use. On Monday, China intensified its ban on crypto, announcing that it has ordered banks to stop all virtual-currency transactions. The price of bitcoin fell to around $32,000 on the statement. It was trading at $33,637.53 as of this writing after reaching an all-time high near $65,000 in April.
“The reality is setting in that it’s GG for mining in China,” Kevin Zhang tweeted in an update from calls with bitcoin mining colleagues in China. Short for “good game,” the acronym GG is commonly used in online gaming at the end of matches as a gesture of good sportsmanship. Zhang is vice president of business development at Foundry, a New York City-based digital currency group company that provides North American bitcoin miners and global manufacturers with resources to build, maintain, and secure decentralized networks.
Zhang said that some of his mining friends “have stuck around Sichuan since the Bitmain conference to drink their sorrows away. Now… ‘not even in the mood to drink anymore’”.
He said his colleagues estimate that about 70 percent of the bitcoin mining capacity in China has already gone offline and by the end of June, it’ll be closer to 90 percent.
“Soooo that translates to a transient lower supply growth” Liberty Macro tweeted @TJPaine1.
Five of the six mining pools that perform more than 80 percent of Bitcoin mining have been located in China or managed by Chinese organizations, and this could threaten the world’s largest cryptocurrency, Princeton University researchers warned in 2018.
Researchers detailed how China’s increasing influence over bitcoin could be putting the network at severe risk in a paper titled “The Looming Threat of China: An Analysis of Chinese Influence on Bitcoin.”
“One broadly understood security property of Bitcoin is that no single party can control more than 50% of the hash rate, so this statistic is worrying,” the report said.
They warned that China’s massive control of the mining farms that serve Bitcoin performance could lead to what is known as the 51% attack, where a single entity or organization is able to control the majority of the hash rate, potentially causing a network disruption. Hash power is the computing power needed to secure the Bitcoin network or the amount of computing resources directed towards the cryptocurrency network in order to validate new blocks of transactions.
There are a “variety of salient motives for attacking the system and a number of mature capabilities” that China uniquely possesses, which threaten Bitcoin’s integrity and future as a world currency, the researchers said.
For example, China could launch a Goldfinger attack – where mining pools apply their combined hash power to control or, in a worst-case scenario, kill the bitcoin system. China could resort to this form of attack if it feels that bitcoin poses an “ideological opposition” to communist policy, and could “weaken or destroy it” to make a statement.
The Chinese central bank is reportedly close to developing a digital yuan that could be tracked and controlled by the government. More than 60 central banks are considering offering central bank digital currencies including the U.S., Russia, and the European Union.
Zhang tweeted that some of his colleagues have been instructed by the power plants that supply their mining electricity to remove all infrastructure — “(low-medium voltage, racks/shelving, containers, etc…) with 1-2 weeks notice”.
Most of the bitcoin mining operations in China (especially the larger ones) secured the required permits to run their operations, Zhang tweeted.
“Before resellers and opportunists get way too ahead of themselves for scooping up discounted electrical equipment, they should consider that most of the gear wont be up to code for established Western countries (not UL Listed or CE Certified, aluminum transformers vs copper),” Zhang tweeted.
He predicted that the “‘Great ASIC Exodus’ will be anything but seamless… Hosting capacity outside China was already oversubscribed and scarce prior to these regulatory announcements. Additionally, expectations for hosting terms are greatly MISALIGNED.”
Zhang provided examples of misaligned expectations including higher hosting costs, longer lead times to build and U.S.-China tarriffs.
Some Chinese miners were prepared for China’s crackdwon and have been gradually expanding their mining operations outside the country for some time now, Zhang said. They have been repackaging their operations for exportation.
Researchers warned years ago that China could use its influence on the mining farms in its jurisdiction to weaponize Bitcoin and attack enemy economies that increasingly see bitcoin and other crypto as safe havens due to the lack of financial infrastructure in their country, or due to the way their governments control traditional fiat currencies.
“To exert influence in a foreign country where bitcoin is in use, China may aim to weaken or even totally destroy bitcoin. This could be done by targeting specific users or miners for attack or by generally weakening consensus to increase volatility to a breaking point,” the report warned.
“This isn’t the end,” Zhang predicted. “Whatever doesn’t kill #bitcoin, will make it stronger.”
Listen to GHOGH with Jamarlin Martin | Episode 74: Jamarlin Martin Jamarlin returns for a new season of the GHOGH podcast to discuss Bitcoin, bubbles, and Biden. He talks about the risk factors for Bitcoin as an investment asset including origin risk, speculative market structure, regulatory, and environment. Are broader financial markets in a massive speculative bubble?
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