Bitcoin Hash Rate Drop
For the past month and a half, the Bitcoin hash rate has been dropping at an alarming rate as Chinese miners have been forced to shut down operations following a government crackdown. It is widely known that the Chinese government has always had a negative view on crypto trading but the recent focus on mining specifically has been a cause for concern in the country.
The chart below from blockchain.com shows the estimated number of terahashes per second that the Bitcoin network is performing in the last 24 hours. Or simply, the amount of computer power that is dedicated to running the bitcoin consensus algorithm at any one time. From 14 May to 28 June, the hash rate has dropped from 180.66 TH/s to 101.91 TH/s, representing a decline of 43.59%. The hash rate has not been this low since May 2020.
The effect that this has on the network is relatively simple, block times have significantly slowed from the target of every 10 minutes to around 23 minutes and the network becomes slightly more vulnerable to a 50% attack. Block times will speed up again once the network undergoes the next difficulty adjustment, with adjustments occurring every 2 weeks.
Worst fears realised
In early June the investment team at Apollo had the chance to meet a Chinese based financial NFT project who were raising capital. At the end of the call, we asked what the crypto community in China were thinking about the recent comments from the government on crypto mining. The team explained that there was a strong sense of uncertainty and ‘fear’ surrounding the announcement as it was the first time the government had specifically talked about crypto mining. Following last week’s announcement that the Sichuan regional government ordered hydroelectric power plants to shut off power supply to 26 Bitcoin mining operations, it is not surprising that this news sent the market further in the red as the worst fears from the Chinese community were realised.
The future of mining
Chinese miners are now being forced to move out of the country in an attempt to continue operations, although it is not yet clear where these miners intend to move. It is also likely that a large number of miners will look to sell their mining rigs, pushing down prices for the otherwise in demand computing equipment. While both of these consequences are likely to have a negative impact on the short term attitudes towards the crypto asset market, we think that this dispersion of miners will be positive for the long term decentralisation of the Bitcoin mining network. Bitcoin will survive these Chinese crackdowns and be stronger and more resilient for it.
What are China’s motives?
China’s central bank digital currency (CBDC), the Digital Yuan, has been under development for several years and is now being rolled out to the public. China’s nationwide attack on public blockchain crypto assets such as Bitcoin can be seen as an attempt to push citizens towards the Digital Yuan. China is winning the global CBDC ‘race’ and will continue to do all they can to gain the most possible control through adoption of their currency. Bitcoin & Bitcoin mining also presents a threat to the strict capital controls in the country as newly mined Bitcoin can be freely sent to all corners of the globe.