It is a fairly established fact that while China has nothing against blockchain technology (on the contrary, as explained HERE), it is definitely not a fan of existing blockchain projects that it has no control over, such as bitcoin and the various altcoins that exist (as explained HERE). As such, many outside observers assume China doesn’t have much of a role as far as the bitcoin and crypto “ecosystems” are concerned.
That couldn’t be more wrong.
In fact, many of the most influential players in the world of bitcoin/crypto investors are either Chinese or have access to Chinese capital. While it is true that these entities sometimes ended up moving to other jurisdictions, this doesn’t mean the Chinese variable in the bitcoin/crypto investing equation has lost its luster. Not at all.
Nowhere is this more obvious than in the bitcoin and crypto mining space.
In fact, mining is such as China-dominated dimension of crypto that the very decentralized “core” of bitcoin and other projects is threatened. To be more precise, we need to make it clear that decentralization has always been the main selling point of bitcoin and many other cryptocurrencies: nobody “is in charge” of the project, there is no CEO that can be arrested or questioned or, to put it differently, nobody is in control.
That is definitely not the case when it comes to mining.
Cryptocurrency mining in general and bitcoin mining in particular are strongly dominated by Chinese companies, to the point that even to the most die-hard crypto enthusiasts, it has become obvious that mining has become… well, quintessentially centralized.
For a wide range of reasons such as:
- Companies being able to access energy at much cheaper rates in China, for example by reaching agreements with hydro plants to purchase their excess production. As such, energy costs are much more affordable in China, to the point of mining costs being essentially cut in half. This essentially means that the “breakeven” price is two times lower in China. In other words, while Western companies would most likely pull the proverbial plug at a let’s say bitcoin price of $x and below (with $x being the break-even price) because they’d be losing money, Chinese miners can afford to keep their operations up and running until $x/2
- Volume. Are there jurisdictions where even cheaper energy is available? Of course, for example the most risk-tolerant miners can even take advantage of free* energy in Venezuela, knowing that things would end poorly for them if they are to be caught by the authorities. The same way, there can be many individual case studies which involve people or entities accessing free energy using more or less legal methods, anything from illegitimately using the server farms of an employer to stealing energy. This makes the bitcoin network quite resilient in light of the fact that at pretty much any price, there will be entities capable of finding (again, more or less legitimate) ways to make it work. However, such operations are exceptions rather than the norm and can not come anywhere close to putting Chinese volume on the table. As such, from the perspective of the costs-volume ratio, it is pretty much impossible to top China at this point in time
- China being the type of jurisdiction where you can let’s say get away with running a mining operation without as much attention having to be placed on safety protocols, procedures, red tape and so on. There are indeed very restrictive laws in place when it comes to some aspects but on the other hand, even those laws aren’t necessarily enforced all that well, with the end result being that mining businesses can “make things work” in China more easily than in Western jurisdiction
Unfortunately, there are risks involved as well, especially risks pertaining to a crackdown of the government when it comes to the mining dimension of crypto. For example, in April of 2019, the National Development and Reform Commission made amendments on the list of industries that are to be encouraged, restricted or eliminated, a list published back in 2011 for the first time. In 2019, cryptocurrency mining was added to the list of activities that are to be phased out due to not properly adhering to Chinese regulation… and then, once again, removed.
While nothing has officially been done that can be considered an outright ban of crypto mining and things have not been taken further (yet), it should be clear that bitcoin/cryptocurrency mining is a textbook example of a profitable but highly volatile industry in China. Will the anti-mining trend in China fizzle out before legislative action is taken, making this entire situation nothing more than a false alarm? Or, on the contrary, will an actual mining ban be implemented, with perhaps even a ban on (non-Chinese controlled, of course) cryptocurrencies altogether being a possibility.
Time will ultimately tell. As far as the ChinaFund.com team is concerned, we consider this sector far too volatile to represent an attractive investment option. Yes, Chinese miners have an advantage over the proverbial West and perhaps in the absence of questionable developments, we would have been more open to exploring opportunities in this space. However, at this point in time, we consider that legislative threats outweigh potential rewards and as such, while recognizing the fact that opportunities undoubtedly exist in this space, choose to stay away from bitcoin and cryptocurrency mining-related projects.
Should more legislative clarity end up existing, we will happily re-consider our modus operandi. For the time being, however, that is most definitely not the case and should you or your organization require further clarifications on this topic, simply reach out by sending us a message with your question(s) and we will get back to you as soon as possible.