Features of mining in China

In April 2021, the price of bitcoin reached $62 thousand. However, in May, the asset lost 50% of its value. The reason was the ban on cryptocurrency mining by Chinese regulators. Regional authorities ordered to close enterprises in 5 provinces rich in coal or hydropower. Mining became illegal in China. Users started looking for alternatives.

Banning mining in China

The PRC was the leader in global cryptocurrency mining. However, in 2021, the government of the largest country by population stepped in to combat the mining of digital coins.

This is not the first time China has tried to control the cryptocurrency sector. In late 2013, regulators banned banks from accepting and trading bitcoins. In 2019, the People’s Bank of China (PBOC) announced that it would crack down on digital assets.

The main reason for banning coin mining is massive energy consumption. Chinese miners use large amounts of coal. This contributes to global warming. In addition, the country is facing a serious crisis. The demand for electricity began to outpace the development of renewable sources. Some industries have experienced power outages and others have been restricted from using electricity. This has had an impact on manufacturing.

Regulatory policies

The crackdown on digital assets intensified in May 2021. Regulators’ policies have been tough. Government agencies (Central Bank, Ministry of Finance, Tax Administration and others) started working together to stamp out “illegal” cryptocurrency activities.

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The People’s Bank of China stated that digital assets should not circulate in the markets as traditional currencies. The State Development and Reform Committee of the People’s Republic of China (NDRC) then published a draft law making mining an illegal activity in China. It also states that local authorities must identify digital asset transactions and stop government and tax support for coin mining projects. This decision is based on the following factors:

• China is striving to become an environmentally friendly country. Mining poses a serious threat by increasing energy consumption. Experts estimate that it could lead to 130 million tons of carbon emissions by 2024.
• Transactions with digital assets contribute to the withdrawal of money from the country. In addition, fraudsters are actively using cryptocurrency to launder money, which disrupts the financial system.

Impact of the ban on the crypto industry

Large-scale restrictions on Chinese mining have caused Bitcoin hashing rates to hit a six-month low. The PRC has long been the epicenter of the industry, accounting for 65-75% of Bitcoin mining capacity. After the ban, China’s share fell to 55% as miners shut down their equipment.

The harsh crackdown on cryptocurrencies affected the entire industry and gave the U.S. the opportunity to forge ahead, becoming the world’s largest Bitcoin miner. Kazakhstan also proved to be one of the top regions in terms of equipment capacity.

However, the figures quickly returned to May levels. The total hashrate increased by about 113% in 5 months. The network fully compensated for the losses. Miners who did not have the resources to move started mining cryptocurrency underground.

Bitcoin price

Despite the fact that miners are the most affected party, they are not the only ones who suffer losses. Traders and investors have also suffered losses. After the cryptocurrency ban, the price of bitcoin fell by almost 50% from its peak.

Clandestine Chinese mining farms

The Chinese government banned bitcoin mining in May 2021. Many miners fled China, taking their farms with them. In July 2021, the hashrate dropped to zero. However, users who did not have the opportunity to leave the country remained. The rates quickly recovered to 22.3%.

According to the Cambridge Center for Alternative Finance (CCAF), underground mining has formed in the country. Experts believe that the temporary lull during the summer represented the period it took for miners to prepare farms and build hosting facilities.

Some users began taking power from sources such as hydroelectric plants in the southern province of Sichuan. Others have divided their mining operations into smaller farms across the country that authorities are less likely to notice.

How miners are tracked in China

Special organizations have begun monitoring control systems for irregular electricity use. The authorities are especially checking research institutes and data collection centers. This is due to the fact that such organizations enjoy reduced electricity rates.

Most institutions are deliberately opened to disguise illegal mining.

Qihoo 360, a major antivirus vendor, has developed software to track the IP addresses of miners. Through this software, the location of users can be determined.

How miners avoid detection

The miners who remained in the country started looking for ways to connect their equipment to mining assets. To avoid detection, they had to use hydroelectric power plants as a source of energy. Miners shut off electricity from dams scattered across Sichuan and Yunnan provinces. These dams are inconspicuous and less likely to attract government attention.

The rainy season in the PRC lasts from May to late fall. This is a particularly convenient period for mining.

To prevent monitoring from detecting increased power consumption, when mining cryptocurrencies, users distribute equipment across multiple sites. They also regularly switch to new sites to accommodate their farms. The main rule is no more than 100 machines in one location.

To hide the IP address, users install special software. The ban is also circumvented with the help of mining pools. Some foreign platforms include private proxies with encryption technology. This allows you to hide the number of unique Chinese IP addresses.

Underground mining during the winter period

During the summer months, cryptocurrency mining participants placed farms in Sichuan province. There, they were able to utilize hydroelectric power thanks to heavy rains. However, winters in the country are dry. This means that users had to look for an alternative.

Another option is solar and wind farms. However, they are unable to produce a stable enough supply of energy for 24/7 mining.

During the dry season, users turn to the only option available. Installations are transported thousands of miles across China to major coal-fired power producers. The most popular regions are Inner Mongolia and Xinjiang province.

The future of the crypto industry in China

After banning mining, Chinese authorities issued their own currency. The digital yuan is designed to improve the efficiency of China’s financial system. Although the country is moving forward in its efforts to implement CBDC, bans on cryptocurrency are still in place.

Huang Yiping, a former central bank adviser, suggests that the Beijing government should reconsider its strict embargo on digital assets. He believes that banning cryptocurrency-related activities could lead to missed opportunities for blockchain adoption in advanced technology. Huang also expressed concern about the state of fintech in the PRC. He acknowledged the short-term viability of the ban, but emphasized the importance of long-term consideration. Perhaps the country’s authorities will change their policies on digital assets in the future.

Frequently Asked Questions

✨ How has the cost of mining equipment changed since the bans?

There has been a decrease in demand for GPUs in the country. GPU prices have dropped. For example, NVIDIA RTX 3080 before the introduction of restrictions could be bought for 8 thousand yuan. After the ban – for 5 thousand.

📌 Which countries did miners move to?

In addition to the US, Canada, CIS countries (Kazakhstan, Kyrgyzstan, Russia, Ukraine, and Uzbekistan), Iceland, and Mongolia were in the spotlight.

⚡ Which countries also imposed restrictions on mining digital assets in 2021?

The fight against mining was started by Iran. In June, police seized 7,000 computers involved in mining coins on an illegal cryptocurrency farm.

📢 What losses did miners suffer due to the crackdown?

Every day they lost potential income of about 170 yuan (~1800 rubles). Large operators lost millions of dollars.

🔔 Are there any positives?

The ban removed a serious investment and operational risk for Bitcoin – a 51% attack potential.

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Author: Saifedean Ammous, an expert in cryptocurrency economics.