As China Cracks Down on Miners, Bitcoiners Expect a Hash Rate Shift

China's crackdown on Bitcoin mining is beginning to materialize as restrictions expand to the Sichuan province, one of the main regions used for Bitcoin mining in the country.

On Friday, the Sichuan Provincial Development and Reform Commission issued a joint notice with the Sichuan Energy Bureau demanding the shutdown of the mining operations in the region. The announcement followed rumours published by local outlet PANews that a move to "clean up and rectify" Bitcoin mining operations had resulted in a "one size fits all" policy requiring all miners in the region to shut down by June 25th.

Sichuan follows the Inner Mongolia, Qinghai, and Yunnan provinces, all of which have announced partial crackdowns or full-out mining bans.

The developments come after a series of announcements by Chinese authorities announcing moves to clamp down on the local mining operations, which accounted for over 65% of Bitcoin's global hash rate in late 2020.

While initially, it wasn't clear to which extent the country would take action, the first mining operators reacted soon after the initial announcement. At the time, BTC.TOP founder Jiang Zhouer wrote on Weibo that he believed the situation was "not as bad as everyone thinks." The original Weibo post is no longer available, presumably due to China's recent crackdown on Bitcoin-related accounts on the social media platform.

Regardless, Jiang announced that his firm would establish its mining farms in North America in the future and predicted that "eventually, China will lose crypto computing power to foreign markets."

The Sichuan Province was popular with miners due to its abundance of hydropower. The blanket ban despite major usage of hydro energy has led some to believe that climate concerns aren't the motive behind China's crackdown. Castle Island Ventures general partner Nic Carter commented on Twitter that the bans might rather be connected to anti-corruption campaigns, a hypothesis supported by Yunnan's formulation of a crackdown: the province hasn't actually outright banned Bitcoin mining at press time, but only announced it would shut down mining operations powered by illegally sources electricity.

Another hypothesis involves Chinese authorities potentially regarding Bitcoin's decentralized and uncontrollable nature as a potential threat for the country.

What China's Crackdown Means for Bitcoin

At the time of writing, the Bitcoin hash rate has dropped to around 115 exahashes per second, down from an all-time high of over 180 exahashes in early May.

A drop in hash rate has no immediate effect on Bitcoin itself. Lower hash rate results in slower block times until the next difficulty adjustment, which takes place approximately every two weeks. Although lower hash rate technically means that less hash rate is required to launch an attack on the network, such an attack is extremely unlikely, both due to economic incentives to mine with the network rather than against it, and a global shortage in mining hardware making it extremely complicated, costly, impractical, and essentially impossible to gain control over the mining power required to attack Bitcoin.

What China's crackdown and the resulting hash rate drop might do is accelerate the shift of hash rate away from China and towards other regions that are more welcoming to miners. In fact, even prior to China's crackdown, there was a clear trend of hash rate moving towards North America, Kazakhstan, and other countries.

Public companies such as Marathon Patent Group and Riot Blockchain are building out their mining operations in the U.S.; Bitcoin infrastructure firm Blockstream has been mining bitcoin in Canada and the U.S. since 2017 and recently announced an upcoming solar-powered Bitcoin mining project with Jack Dorsey's Square.

Meanwhile, El Salvador is elevating mining to nation state level, with president Nayib Bukele working on mining facilities powered by geothermal energy provided by the country's multiple volcanos.

Some expect the current developments to result in an overall higher proportional use of renewable energy sources for Bitcoin mining as Chinese miners move from a mix of coal and hydro power to hydro power only overseas.

For now, lower hash rate might be on the horizon while miners find new homes for their rigs. In the long run, the only one to take damage from the move will be China, according to MicroStrategy CEO Michael Saylor, who commented on Twitter:

"[China's crackdown on mining and trading] created a forced [and] rushed exodus of Chinese capital [and] mining from the Bitcoin network - a tragedy for China and a benefit for the Rest of the World over the long term."