Bitcoin Miners Reap the Benefits of China’s Crypto Crackdown

As competition eases, it has become considerably more profitable to solve puzzles in an attempt to gain Bitcoin. The ban placed on Bitcoin mining by Chinese authorities has resulted in higher profits by others who are filling the shoes left behind by former mining rivals in China.

In June, provinces, where the largest miners were set up, launched a clampdown on computerized crypto mining. The ban is seen as part of a broader attempt to cut down on carbon emissions on the part of the authorities. It is also thought the ban may be a push against private crypto as China closes in on launching its digital coin, the Digital Renminbi.

Up until the crackdown, China had been the largest producer, bar none, of Bitcoins. Bitcoin production in China accounted for at least half the global output. Miners in other parts of the world view the reduction in Chinese coin production as opening the market for equitable competition.

Shane Downey, CFO of Hut 8 Mining in Toronto, Ontario suggests the average daily production of Bitcoin can be looked at as “the pie”. With China leaving its seat at the table, existing mining operations are well-positioned to help themselves of a far larger piece.

New Bitcoins are created by utilizing powerful computers to solve complex mathematical puzzles. The daily coin volume is fixed. With fewer rivals after the same limited volume, it becomes considerably easier and less expensive to mint new currency.

As a result of the new economics, entrepreneurs are launching new mining operations in the United States and elsewhere.

Mining Recovers after China Exits the Market

Three issues impact the profitability of Bitcoin miners:

  • The market price of Bitcoin
  • The cost of electricity needed to run servers, and
  • The rate at which coins can be mined

The recovery this week to $46,700 plus from a low of about $30,000 may add considerable incentive to miners.

The founder of Lian Group, a private equity firm, said, “It is like having double the machines we have.” Lian Group is the owner of one of Europe’s largest Bitcoin mining companies.

It is not only the Lian Group that has benefitted. Hut 8 Mining has notched over 240 percent year-on-year increase in revenues in Q2. With the absence of Chinese miners, both June and July were bumper months. Over the period, Hut 8 Mining profits rose from C$697,000 to C$19.3 million.

As a result of China’s ban on domestic Bitcoin miners, global production fell by almost half. This fall in production allowed Hut 8 and others to mine upwards of 50 percent more Bitcoin with little or no direct cost increase.

Argo Blockchain, a U.K.-based miner, reported a 180 percent revenue increase in the first six months of 2021. The company suggested the increase resulted from a change in conditions, allowing them to mine more digital coins with no increase in the number of machines online. Compared to the same period in 2020, pre-tax profits rose from £523 thousand to £10.7 million.

It has been estimated that it may take as long as 18 months for mining capacity to return to the “pre-ban” level. It will take some time to replace the lost resources as it involves building new facilities and upgrading the power infrastructure.

The Environmental Impact of Bitcoin Mining

Mining Bitcoin has a detrimental impact on the environment. According to the Cambridge Bitcoin Electricity Index, the process uses more electricity than does either Finland or Belgium.

Bitcoin mining in China had a severe impact on the environment as the country relies heavily on coal-fired generating plants.

Outside of China, considerable Bitcoin mining is moving towards places such as Norway and Canada, both of which have abundant renewable energy sources. Although this is the case, site operators are finding it challenging to construct facilities fast enough to take advantage of the situation.

Kjetil Pettersen, CEO of Norwegian miner Kryptovault, suggests it might take at least a year for mining capacity to recover. Although there is a lot of new equipment being sent to Canada rather than China, data center capacity is a bottleneck yet to be overcome.

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Author: Jason Donaldson