Bitcoin Mining Industry Prepares for Geographic Shakeup as Era of Cheap Power in China May Be Over

Bitcoin Mining Industry Prepares for Geographic Shakeup as Era of Cheap Power in China May Be Over

Jan 6, 2018

The bitcoin mining industry is bracing for what may be the greatest geographic shakeup it has ever encountered.

Bitcoin Mining Industry Prepares for Geographic Shakeup

Chinese regulators have instructed local governments and utility providers to eliminate policies that provide bitcoin mining operations with favorable electricity rates and tax deductions, according to regional business outlet Caixin.

At present, Chinese miners account for approximately 70 percent of the bitcoin network’s global hash power, a measurement of the computing processing power that is used to validate transactions and secure the network. In exchange for performing these vital functions, miners are rewarded with both new units of currency and transaction fees.

bitcoin mining
Chinese mining pools, which include AntPool, ViaBTC, BTC.Top, BTC.com, and F2Pool, account for approximately 7o percent of all bitcoin hash power. Source: Blockchain.Info

Mining is an economy of scale because larger operations have increased ability to negotiate favorable electricity prices and discounts from hardware manufacturers.

As bitcoin mining became more competitive, it gradually became centralized in regions that provided miners with competitive advantages, such as cheap electricity or favorable tax policies.

China emerged as the world leader in this industry, largely because its hydropower plants often produced excess electricity and the country’s grid was not set up to efficiently transfer that energy to other regions where it was needed. These power plants often allowed miners to purchase this excess electricity at virtually no cost, and local governments offered large-scale miners tax incentives to set up shop in their areas.

Now, though, the government appears determined to remove those incentives for bitcoin miners, reducing profitability and potentially limiting the amount of electricity each business is allowed to consume.

Reports of a Ban Are Inaccurate

Earlier reports suggested that China’s central bank was determined to stamp out bitcoin mining altogether, but the Caixin report rebuffed that claim and said that regulators rather simply wanted to eliminate any policies that would appear to encourage an industry they do not support.

According to a Bloomberg, however, some Chinese miners view the policy change as a portent of things to come and are choosing to head for the exits now — or at least establish operations elsewhere in case a ban emerges down the road.

Bitcoin mining insiders have named Canada, Ireland, Iran, and the US as potential sites to establish new operations, and moves to these locations would potentially allow Bitmain and other dominant firms to retain their status as market leaders against competition from upstart companies.

At the very least though, China’s new policy will level the playing field between Chinese miners and those located elsewhere, which could decentralize bitcoin’s hash power — an event that would be welcomed by many within the industry.

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Featured Image from Qilai Shen/Bloomberg