Nikolas Sargeant
The cryptocurrency markets crashed following the news that China would be ramping up its regulatory standards for trading, which wiped out nearly $400 billion in market value. China has tightened regulations on a number of occasions so far in 2021. This started back in May when we saw Beijing banks ban payment firms from providing services to facilitate payments using crypto-currency.
Another major issue for the cryptocurrency industry that has been highlighted in recent months, is the fact 70% of the world’s Bitcoin mining capacity takes place in China with more than 100,000 miners residing there. With increasingly strict policies surrounding cryptocurrencies, some investors have scrambled to try and sell off their digital assets before an outright ban is introduced.
But, these traders are certainly jumping the gun. A number of leading crypto commentators have stated that the ban could be beneficial to the industry at large for a number of reasons.
What does the ban mean and could it be positive?
The ban has meant that a supposed 90% of miners are looking to migrate out of China in search of greener pastures. There are many neighbouring countries that also have strong crypto mining communities; the likes of Kazakhstan, Malaysia and Russia. The sheer scale of the effect on the Bitcoin network was clear when we saw the hash rate dive by 40% in the final week of June, with the biggest rival coin Ethereum seeing a 20% drop since the cryptocurrency markets’ hit an all-time high in April and May.
The stringent rules the Chinese government is enforcing are unlikely to be broken by mining communities, given the harsh penalties applied to laws in the republic. Chinese authorities are acutely vigilant of all aspects of governance and the ban will require China’s mining pools—AntPool, F2Pool, Huobi Pool, and Poolin—to move abroad.
The issue of energy usage has haunted Bitcoin fans since revelations came to light earlier this year. China has only recently become a nation that is chiefly concerned with climate change when they announced the goal of becoming fossil fuel-free by 2060. The country didn’t previously share this attitude towards clean energy, which is a big part of why criticisms came out about Bitcoin and energy usage.
With mining communities being forced to look elsewhere for countries to operate in, this presents the perfect opportunity to seek out countries that do offer green energy solutions. Reducing energy consumption is a crucial factor in the future of Bitcoin. Moreover, miners have the option to select a country that has low energy prices and a positive attitude towards the progression of cryptocurrency.
While it’s easy to suggest an international move of one of the biggest Bitcoin mining community in the world, unsurprisingly it’s not going to be quick, nor will it be an easy process. It will take time for miners to pick up their entire infrastructure and set it up in a new location.
The price of Bitcoin is rising for the first time in six weeks, but investors must learn to be patient. There will be a teething process for these communities. However, once operational, this could prove to resolve one of the biggest issues outstanding for Bitcoin.
Are there any other positives that could come from the change?
There are some that would argue the fact that many Chinese mining communities have been broken up is a good thing for Bitcoin. Holding such a large amount of crypto in one country, within one community, isn’t something that really ties in with the principles of DeFi and puts a lot of power in one place. Now that the Chinese mining groups have been forced to relocate it opens up an opportunity for others around the world to occupy this space.
Another danger that has been suggested is the possibility that the Chinese government could come in and sweep up mining operations and seize the funds. This could mean a big chunk of Bitcoin is lost—Coins becoming orphaned in the system. While it’s true this has little impact on the overall value of the market capitalization of Bitcoin, a huge loss of Bitcoin to the Chinese government is a situation best avoided.
Some will speculate that the main primary goal in outlawing DeFi cryptocurrencies is to push the digital Yuan. A plan to block access to DeFi currency, while promoting a native digital currency will certainly help to push its success. There are other concerns for China. The government's crypto suppression will put an end to major trading exchanges like OKCoin, BTCC, and Huobi. Though, in a globalized world, this won’t be a major problem, as much like the miners they will depart the country.
The very essence of DeFi contradicts that of the ambitions of China. The government has given all kinds of reasons for enforcing stricter laws. But, if we scratch the surface, it’s clear the aggressive regulatory changes relate to China’s own insecurities. A state-owned currency that can be tracked and traced at all times, with each individuals’ spending logged into the blockchain; this is everything that the vision of decentralized finance is not. Bitcoin and its ideals of private ownership and control stand as direct competition.
Given that, would it be so bad to see China shut the door on Bitcoin? This may be an unpopular opinion, but the idea of mining Bitcoin using clean energy outside of a nation that is under a dictatorship seems like a good outlook in general. The appeal of Bitcoin to other nations may increase now that they know China has distanced itself from the industry.
The short-term effect on price is unappealing and largely unpredictable. However, the long term looks very good. Keep an eye for how other countries react if and when Bitcoin is banned by China, as this will be important for crypto. Will other countries shun Bitcoin, or will they embrace it?
