On a windswept autumn morning near the entrance of the Santa Maria de Montserrat Abbey in Catalonia, a small crowd of tourists gathered around a nondescript bench selling Spanish cheeses and Iberico ham.
Catering to the throng of Chinese tourists, Mary Xu was struggling to cope with the mad push to buy her wares whilst not far off, another vendor selling a similar selection of wares looks on enviously.
A relatively new arrival to Catalonia, Mary spoke fluent Spanish despite having just arrived in Spain only 16 months ago.
Like so many other Chinese emigres to Europe, Mary carries with her the tenacity, determination and versatility needed to survive in challenging economic conditions.
Speaking in Mandarin, Mary notes,
“We need to survive and if that means I need to speak Spanish, then that is what I will do.”
An ethnic Han Chinese, Mary hails from one of China’s poorer inland provinces and it took years for her to save up enough money to join her other relatives in Catalonia, Spain to make a living working at restaurants and selling gifts and souvenirs to tourists.
For centuries, from revolution to civil war, pandemic to pandas, the Chinese have found a way.
Purge if You Must
Which is why the most recent purge of cryptocurrency mining facilities in China is an excellent stress test not just of the Bitcoin blockchain, but also the resilience of the Chinese to innovate in the cryptocurrency space offshore.
In September 2017, Chinese authorities nipped a booming initial coin offering or ICO market in the bud, sending cryptocurrency prices plummeting.
Yet despite some 85 per cent of ICOs being scams, and with Chinese investors estimated to have lost billions of dollars, neither the ban nor the losses killed Chinese appetite for cryptocurrencies and instead, spurred some of the biggest Chinese cryptocurrency exchanges to relocate offshore before the crackdown inevitably reached them.
“It was a taste of independence, of freedom,” claims one Chinese ICO investor in his early 20s.
Even though the young marketing executive lost an estimated US$5,000 through ICOs, a small fortune for him, his interest and love of cryptocurrencies did not wane and spurred him to learn even more about the space.
Today, he works as a senior manager in Huobi, one of the world’s largest cryptocurrency exchanges owned and run by, you guessed it, Chinese nationals.
Despite Beijing’s forceful crackdown of ICOs in 2017, many Chinese were still finding ways to invest in the nascent asset class, either through proxies if not vaulting the Great Firewall of China, then at least passing through cracks in the formidable barrier.
And as expected Chinese authorities didn’t stop with ICOs, going after the massive cryptocurrency exchanges that facilitated the lucrative trade in ICO tokens and other cryptocurrencies, raiding offices and questioning staff.
Whilst the Chinese purge of ICOs was somewhat successful, it also forced considerable innovation at cryptocurrency exchanges both in their setup and operations.
Beyond the constraints of the Middle Kingdom, cryptocurrency exchanges like OKEx, Huobi and Binance were cutting their teeth, free from reprisals by Chinese authorities.
Offering instruments unique to the cryptocurrency markets like perpetual futures, these Chinese-owned and run exchanges essentially became unregulated and in many ways unregulatable behemoths, innovating faster than regulators both in China and abroad could catch up with.
Binance would go on to become the world’s largest cryptocurrency exchange by trading volume — regulated everywhere and nowhere, and demonstrating how managing a massive centralized, decentralized exchange could work.
Even Binance’s founder and CEO Changpeng Zhao, better known as “CZ” walks the decentralised talk.
Eschewing many of the material trappings of the cryptocurrency space (never Lambo), CZ has shown little interest in real estate or automobiles, and leads an essentially decentralised life, moving (prior to the pandemic) seamlessly between countries and managing a global team without a local headquarters.
Even before the pandemic, the majority of Binance’s employees worked remotely.
Which brings us to the current Chinese purge of cryptocurrency mining.
For years, it’s been a well-known secret that the bulk of Bitcoin mining took place in China, with some estimates putting the hash rate churned out from within the Middle Kingdom as high as 75%.
But to understand the current cryptocurrency mining purge in China and decide if it’s a death knell for Bitcoin, it’s important to first understand the context of China and then delve a little bit deeper into how Bitcoin’s blockchain works.
1. It’s Political
Make no mistake about it, the timing of the most recent Chinese purge of cryptocurrency mining facilities is not a coincidence.
Barely a fortnight before the centenary celebrations of the founding of the Chinese Communist Party, mandarins across the provinces are eager to demonstrate their unfailing loyalty not just to the Party, but also its leader, Chinese President Xi Jinping.
Widely expected to continue an unprecedented third term as the nexus of power in China, President Xi, 68, is already at the traditional retirement age for Chinese leaders.
In the aftermath of China’s ruinous Cultural Revolution, during which time it’s estimated that as many as 20 million Chinese lost their lives through starvation or purges, Chinese Communist Party leaders sought to shift from one-man rule, lest history repeat itself.
Many Chinese saw the personality cult surrounding Chinse Communist Party founder Chairman Mao Zedong as having played a key role in the Cultural Revolution and the suffering that it wrought on the Chinese people.
Determined never to repeat the events of the Cultural Revolution, Chinese Communist Party leaders in the 1990s, a time when China was opening its economy up to the world, moved towards a collective leadership system, and term limits were introduced for Chinese presidents.
But in 2018, constitutional changes were passed by China’s parliament, the National People’s Congress.
In what was widely seen as a rubber-stamping exercise, China’s National People’s Congress voted overwhelmingly to remove term limits on its president, paving the way for President Xi to become President in Perpetuity.
But President Xi didn’t stop there, consolidating his political power, he enshrined his name and political ideology in the Party’s constitution, and elevated his status to the level of the Chinese Communist Party’s founder, Chairman Mao Zedong.
President Xi, who would otherwise have been expected to step down in 2023, has, since taking power in 2013, purged rivals (both actual and perceived) and demonstrated a willingness to move against China’s powerful state-owned enterprises and technology companies.
Over the past year, President Xi has moved to reign in China’s dominant technology giants, including Alibaba’s Ant Financial Group and Tencent’s WeChat.
And just this past week, authorities summoned the heads of Chinese financial institutions, including executives from both Ant Financial Group and Tencent to “remind” them not to process or facilitate cryptocurrency payments, not that they necessarily needed reminding.
Chinese authorities in provinces from Xinjiang to Liaoning, Guangxi to Heilongjiang have all been progressively clamping down on cryptocurrency mining within their borders, in an obsequious display of one-upsmanship to demonstrate their undying loyalty to the Chinese Communist Party, and by extension, President Xi himself.
According to one Chinese official who asked not to be named,
“This is obviously a “show”. The order to clamp down on crypto mining is said to have come down from Xi himself and ahead of the centenary, sycophants are falling over each other to curry favour with their higher ups.”
It’s been alleged that local and provincial officials have often profited from cryptocurrency mining themselves, whether through accepting bribes to look the other way on the banned practice, or themselves claiming a share from the proceeds of these activities.
For Chinese cryptocurrency miners however, the years of playing cat-and-mouse with authorities has finally come to a head.
While many Chinese cryptocurrency miners moved within China, from province to province, the nationwide crackdown has left them with few options other than to head offshore, just like the ICOs and cryptocurrency exchanges before them.
From Laos to the Central Asian Republics, Mongolia (not to be confused with Inner Mongolia) to the United States, Chinese cryptocurrency miners have liquidated their holdings and are hitting the road.
But moving requires money and it’s just not feasible for many Chinese cryptocurrency miners to bring their equipment with them, which is why there has been such a sharp drop in Bitcoin prices.
2. The 51% Elephant in the Room
Beijing’s crackdown on Bitcoin mining has helped to address a major the elephant in the room — the massive concentration of mining activities in a single country.
For a decentralised digital asset, that so much Bitcoin mining was conducted within the national borders of China has always posed a risk to the integrity of the Bitcoin blockchain.
To understand why having all that mining power in China is not a good idea, we first have to look at how Bitcoin works — through the power of consensus.
In order for the Bitcoin blockchain to work, cryptocurrency miners compete to solve computationally-intensive proof-of-work puzzles to validate transactions and to secure the blockchain.
The “winning” miner receives a set number of Bitcoin (plus network transaction fees) in what’s known as the “block reward” and the computing power to solve these proof-of-work puzzles is called the hash rate.
In order to determine which transactions are legitimate and which are fraudulent (e.g. trying to spend the same Bitcoin twice), a system of consensus is used to record transactions in chronological order on the Bitcoin blockchain.
For most blockchains, as long as a simple majority of miners agree on a set of transactions, these get validated by the blockchain.
But let’s say someone was able to gain control of a majority of Bitcoin miners, they could attack the blockchain by approving fraudulent transactions or allow themselves to “double spend” Bitcoin (i.e. sending the same Bitcoin twice) and validate these fraudulent transactions.
For a blockchain as established as Bitcoin, the costs of mounting such an attack, also known as a “51% attack” are extremely high, with estimates from crypto51.app putting the amount at US$588.6 billion.
Yet there would be little economic incentive for a would-be attacker to attack the Bitcoin blockchain unless the amount that they intended to steal through fraud far outweighed its cost.
Furthermore, once it became known that the Bitcoin blockchain was compromised and a malicious actor was undermining the integrity of transactions, the value of the stolen Bitcoin itself would plummet, potentially becoming worthless and negating the entire point of the attack.
These strong economic disincentives to attacking the Bitcoin blockchain were ingeniously baked into the cryptocurrency by its creator Satoshi Nakamoto, who surmised (correctly) that participants would always be better off by playing by the rules.
Except of course if such a malicious actor was not driven by pecuniary gain.
Whilst Nakamoto was right to assume that economic incentives would ensure fair play, the same considerations might not necessarily apply to a state actor, in particular an authoritarian one.
Which is why, as long as the majority of hash rate was situated in China, there was always the risk that Chinese authorities would round up the Bitcoin mines and mount a 51% attack on the cryptocurrency, without having to spend a single cent trying to build up hash rate organically.
Since a majority of computing power was already in China, all Beijing would have to do to destroy Bitcoin would be launch a massive and simultaneous dragnet to commandeer the majority of Bitcoin’s hash rate and use the consensus mechanism to kill the cryptocurrency.
Instead, by pushing miners offshore, Chinese authorities have inadvertently helped to ensure the longevity of Bitcoin by reinstituting decentralisation.
And just like how China’s ban on cryptocurrency exchanges helped them to succeed overseas, China’s ban on cryptocurrency mining could usher in a new golden age for the industry by addressing its alleged carbon footprint.
3. A Greener Bitcoin is Better for All
It’s no secret that part of the reason why so many Chinese Bitcoin miners situated themselves in China’s Xinjiang province was the abundance of cheap coal-fired energy.
With breakeven prices for Bitcoin mining estimated to be as low as US$2,500 in Xinjiang, Chinese cryptocurrency miners were making money hand-over-fist in the region.
But as Chinese authorities crackdown on Bitcoin mining, and with Bitcoin’s price nowhere close to its estimated mining breakeven price of US$4,000 to US$5,000, the profit motive to continue mining the cryptocurrency persists.
And that means that Chinese cryptocurrency miners who had shuttered their mines in China, will still be looking to set up shop elsewhere — for many, it’s the only industry they’ve ever known.
With miners being forced to move, it now becomes possible to shift to regions with an abundance of renewable and non-pollutive sources of energy.
Whereas much of Bitcoin’s hash rate may have been produced by burning pollutive fossil fuels, especially coal, Bitcoin mining now has the opportunity to start from a clean slate — literally.
Tesla CEO and prolific Bitcoin tweeter extraordinaire Elon Musk has said that the electric vehicle maker would consider accepting Bitcoin again if more than 50% was mined using renewable energy.
As long as the majority of Bitcoin mining occurred within China, there was almost no chance of that happening.
But now there is.
Bitcoin has been handed a rare, once-in-a-lifetime opportunity to clean up its act, and with miners now forced to relocate, they can make decisions with the future in mind. Setting up their mines near renewable energy sources puts to bed the idea that Bitcoin is pollutive once and for all.
All of which would not have been possible without Chinese authorities cracking down on Bitcoin mining within their borders.
- READ MORE: Cryptocurrencies Have Reached Exit Velocity
Bitcoin Works
And for all of the recent weakness both in Bitcoin’s price and the price of other cryptocurrencies, the important lesson from the entire Chinese crackdown has been that Bitcoin behaved exactly as it was intended — it worked!
Despite an estimated 29.6 per cent of Bitcoin’s hash rate being taken down in an instant, Bitcoin’s blockchain continued to validate transactions (albeit at a slower speed for a short period of time).
The difficulty of the mathematical puzzle which Bitcoin miners solved became easier as the hash rate fell (exactly as how it was designed) and the remaining Bitcoin mining nodes picked up the slack.
Bitcoin was designed so that the more miners compete to validate and secure the Bitcoin blockchain, the more difficult would be the mathematical puzzle to earn the block reward.
But the Bitcoin blockchain also provides for the mining difficulty to drop, when miners fall off the grid and by doing so, Bitcoin has its own decentralized, self-sorting, self-preservation mechanism.
True, Bitcoin transactions slowed momentarily, but importantly, they still went through.
If ever there was a more successful stress test of Bitcoin’s blockchain, this would have been it, and the cryptocurrency passed it flawlessly.
The same thing couldn’t have been said about the U.S. banking system on the eve of the 2008 Financial Crisis.
In the round, China’s crackdown on Bitcoin mining has been the greatest gift that the Middle Kingdom could have ever delivered to the cryptocurrency world and ensured the longevity of the very thing that it sought to destroy.
By Patrick Tan, CEO & General Counsel of Novum Alpha
Novum Alpha is the quantitative digital asset trading arm of the Novum Group, a vertically integrated group of blockchain development and digital asset companies. For more information about Novum Alpha and its products, please go to https://novumalpha.com/ or email: ask@novum.global
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