- China has forced countless Bitcoin miners to cease operations, along with some of the largest operators.
- The Bitcoin hash rate declined to levels not seen since last summer, but it appears likely to rebound in Q3.
- The removal of such substantial productive capacity benefits all continuing operations.
- Suppliers of Bitcoin hardware should suffer from reduced demand for miners; a robust used market, both of which shall include pressure margins.
- Large North American miners with access to clean energy continue to appear to be the best-in-class investments through this cycle.
Numerous investors in Bitcoin (BTC-USD) and related crypto-assets entered Q2 feeling like market sharks; at least a few probably feel like buddy at its end, or perhaps dummies.
The cooling of the market for Bitcoin and related assets appears due to many factors; but most notably due to the Chinese government’s meaningful measures to stop Bitcoin mining activities in multiple preferred regions within China. These forces miners located in those regions either liquidate their mining assets or relocate their operations to a friendlier jurisdiction.
The Bitcoin hash rate’s recent and potentially ongoing dramatic decline is due to these actions. China registers for a substantial portion of the total power dedicated to performing Bitcoin computations.
3-year chart of the Bitcoin hash rate:
As the offline mining hardware is redeployed, this decline should mitigate and reverse. Much of that capacity is likely to be absorbed by existing jurisdictions and companies already exposed to Bitcoin mining. Further, this displacement creates a reduction in the demand for mining hardware within China; a spike in the available supply of recently purchased hardware available at a discount. This isn’t good for manufacturers.
It is not clear how long it will take for this process to resolve. Moreover, the Chinese government is likely to either continue their current policy of restricting operations by region or to provide an update on what might be permissible. While it appears to be the case that most of the miners were located around clean and cheap hydroelectric power, it is also often the case that a reasonable amount of Bitcoin mining is done using other people’s power (“OPP”). Thus, it is reasonably likely that many corporate supplies of power and IT resources are being exploited by the savvy and unethical. The Chinese government would take an insult like that more personally than most other jurisdictions because that is their power and their hardware that is not so clear and direct under many systems.
Power, power everywhere – But, is it renewable?
Some jurisdictions are friendlier than others when it comes to Bitcoin and related mining operations. In the United States, various states with cheap and renewable energy have attracted Bitcoin mining. In Canada, Quebec has access to cheap hydroelectric power, and several miners have flocked there. Argentina and its cheap natural gas are also attracting Bitcoin mining. There is the potential that these jurisdictions could change their attitudes towards Bitcoin and its mining. Property rights and the rule of law should become recognized as essential factors going forward.
A significant portion of the displaced Chinese Bitcoin miners shall eventually move to Kazakhstan, which has access to cheap power; has become one of the largest Bitcoin mining jurisdictions, behind China, the United States, and Russia. Kazakhstan is also a relatively convenient move from China. Other possible close jurisdictional beneficiaries from this migration could include Malaysia and Iran, both of which host Bitcoin miners.
As of now, existing operators stand to benefit from a literal power vacuum. As a result, their current performance is likely to be better than expected; the cost of ramping up capacity should go down. Many are also attempting carbon-neutral growth strategies to avoid future environmental scrutiny; the continuing pursuit of the best locations to tap power.
Bitcoin miners with existing operations that were not just displaced. They will now control a more significant share of the network – resulting in more coins mined. The increase in production capacity is likely to be greater than the recent decline in Bitcoin price; which means Bitcoin miners can still either hold or immediately sell newly mined Bitcoins with a better margin than would have been the case. The situation is likely to rebalance within a few months, but that difference could be meaningful.
Bitcoin Hash – The Global Winners
The most apparent near-term winners from this situation, and which are also publicly traded in the U.S. stock market; including Riot Blockchain (RIOT), Marathon Digital Holdings (MARA), and Bitfarms (BITF). RIOT and MARA have domestic operations. BITF’s mining operations are located in Quebec, and the company recently announced plans to diversify into Argentina. Perhaps they will outfit that operation with some of the displaced hardware.
An excellent example of a large unknown at the moment would be Bit Digital (BTBT); where it appears about three-quarters of the company’s mining capacity was in affected Chinese regions. It is expected that some of that displaced capacity shall move to Texas. BTBT recently tweeted that it mined 588.71 bitcoin in June, indicating solid and improved monthly productivity. Unfortunately, there is little insight into their network’s current production capacity.
BTBT must now quickly move those miners out of the restricted regions within China. As a result, the company is likely to sustain a significant decline in productivity in July. More importantly, any significant delay to the arrival of those machines in a new jurisdiction; could raise questions about their possession and control. The same is true for any other affected Chinese Bitcoin miners that do not swiftly redeploy their equipment.
China’s takedown of a significant portion of total Bitcoin mining capacity is an important occurrence that may be ongoing. However, until its conclusion, mining hardware suppliers are likely to sustain reduced demand and weaker pricing power. Similarly, this displacement may expose latent issues within some of the affected Chinese mining entities.
This shakeout also highlights the importance of diversification of jurisdiction. Several nations around the globe are developing Bitcoin and crypto-related operations; their attitudes towards the new asset class are not identical. Similarly, property rights will vary, and where such requests are lacking, an attitude change could become material in a hurry.
This most recent attack on Bitcoin’s network is a significant one, but it does not appear in any way lethal. The network is likely to rebound more durably, as it tends to do. Publicly traded miners with a substantial portion of their capacity in North America and Bitcoin-friendly jurisdictions are potential beneficiaries.
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