What Happens If China Bans Bitcoin Mining: 3 Scenarios

Akin to how metals and other commodities are extracted, digital currencies follow a similar pattern through an activity defined as “mining”. The process describes the efforts undertaken to unlock more units of a digital currency. These activities involve the solving of increasingly complex mathematical problems for which miners are compensated with a certain amount of the digital currency for their efforts.

Miners involved in the process must harness immense computing power to unravel these math problems that exhibit an increasing degree of difficulty in relation to the amount of Bitcoin already mined. In this specific case, a finite amount of coins numbering 21,000,000 are available within this closed network, yet only 16,585,563 have been extracted to-date. Currently, the largest source of mining efforts is based out of China. The reason Chinese miners have proliferated to such an extent that they account for a purported 71% of total Bitcoin mining pools is access to low-priced electricity. (See also: Bitcoin Cash Miners Took a Loss on Purpose)

Energy Plays a Pivotal Role in Mining Operations

The bitcoin mining process is fairly complicated and demands significant resources and an abundance of energy. China’s cheaper energy prices give local miners a distinct advantage over their counterparts thanks to comparably affordable costs. However, the growing Chinese crackdown on Bitcoin and other digital assets has raised concerns that the nation’s mining operations will be forced to disband, a development that could create a huge void in the mining sphere.

With the ban on ICOs already announced and local Bitcoin exchanges planning to shutter by the end of next month, three major scenarios are emerging:

Scenario 1: Miners Elect to Flout New Restrictions

While its decentralized nature has positioned Bitcoin as a relatively straightforward mechanism to overcome existing financial barriers, authorities could potentially use the newly issued crypto rulings to clamp down on mining. Due to the illegality of ICOs and other peer-to-peer activities, local authorities might seize equipment and related infrastructure. As a result, some miners may go underground to sustain activities during any such crackdown.

However, the problem that remains with this scenario is the money aspect. If miners have no way to convert mined crypto-currency into usable fiat currency to support their operations, they may have no choice but to close down. While there are strategies to circumvent such a scenario, it could potentially raise the costs past the point of profitability. In addition, if caught, the repercussions of carrying out these activities might be immense considering the level of scrutiny the local exchanges are currently facing. (See also: Why Bitcoin Could Fall By 30 Percent)

Scenario 2: A Change of Scenery for China’s Miners

Neighboring jurisdictions such as Mongolia and Hong Kong have emerged as notable alternatives to China for the nation’s existing Bitcoin miners, namely due to location. Hong Kong is already attempting to establish itself as a major global hub for crypto-assets and blockchain-related technology as Chinese policymakers continue their crackdown on Bitcoin. Nevertheless, relative to China, Hong Kong is notoriously expensive, with electricity costs running 3 to 6 times the rate of the mainland.

Another potential destination for miners may be China’s northern neighbor Mongolia. While operating costs may run a bit higher than China, it is much more budget-friendly than Hong Kong for miners that often time work on razor-thin budgets. Furthermore, it boasts fiber internet connections from China and Russia, ensuring miners have steady access to the network. Its proximity may mean that technical know-how migrates from China complete with hardware to ensure that Bitcoin can be exchanged for fiat currency to finance ongoing mining activity.

However, the scale of investment for some projects may prevent certain miners from effectively re-domiciling. Bryan Bishop, the developer behind LedgerX, has reportedly issued a warning to local miners to abandon their efforts and begin relocating all their equipment and operations. The crackdown may not leave these groups unscathed considering the sheer amount of physical assets that would need to be moved alongside the extensive investment that already has gone into existing mining facilities.

Scenario 3: Other Global Miners Scale Activities as Margins Grow

Some other popular mining jurisdictions may take advantage of any China ban to increase their own market share, with Georgia being one notable country that stands out from the pack. As the host of Bitfury, one of the five biggest global mining pools (China hosts the other four), the former Russian state has seen investment pour into the crypto arena. Benefiting from access to cheap power and labor, Georgia is positioned to continue gaining market share should Chinese miners be forced to abandon operations.

Apart from Georgia’s relative advantages, India and Iceland also stand out for their affordable energy costs and experience in the business. While other countries with a mining presence like the US and Japan have expanded their own efforts within the industry, these geographical locations do suffer from significantly higher input costs relative to other global competitors. Nonetheless, an exodus of mining operations from China could shift the balance, making these jurisdictions more profitable as they fill the gaps left behind by their Chinese peers.

The Most Likely Direction

Although some industry thought leaders believe that the Chinese central government is unlikely to crack down on the Bitcoin mining industry, the threat does remain real. The possibility of existing miners being forced to completely shutter operations means that other global mining pools outside the purview of Chinese authorities will pick up the slack. While there are concerns that the end of Bitcoin accessibility in China may translate to a huge selloff in the cryptocurrency, its bears mentioning that the asset has faced challenges before and managed to emerge stronger. Even if mining is banned, expect the industry to regroup, pivot, and recover within a short time frame as the margins for other mining pools temporarily improve.

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