William John Market Report 15-10-21
William John takes a look at the current issues facing the Bitcoin mining industry since the crackdown in China.
William John, Bitcoin, Cryptocurrency, Blockchain, Mining, Financial Markets

William John Market Report 15-10-21

William John Market Report 15-10-21

Category: Reports

In recent months, China has cracked down on blockchain bitcoin activities. According to the Cambridge Bitcoin Electricity Consumption Index, Chinese mining activity has fallen from 34.21% of the total global hash rate (computational power per second used to mine cryptocurrency) in June to 0% in August:

Source: William John Analytics, Cambridge Bitcoin Electricity Consumption Index

Observing the chart, since the crackdown in China which was discussed in Market Report 25/08/21, the US has taken over as the world leader in Bitcoin mining, followed by Kazakhstan, Russia, Canada, and Ireland. Commentators have remarked that shutting down Chinese operations has had a positive impact on the mining industry.

The process of Bitcoin mining, and blockchain mining in general, is to solve complex computational problems that secure and verify decentralised transactions. However, the values that make blockchain technology so appealing including “decentralisation”, “anonymity” and “democratic market forces” have come under scrutiny as the mechanism that validates and secures it was becoming more and more centralised. In other words, the auditing process of Bitcoin in particular, was overwhelmingly dominated and controlled by Chinese operators and therefore was effectively centralised. 

Post-crackdown, however, the dispersion of blockchain mining to countries across the world will ensure a more competitive, fair audit process – there are less incentives to collude and more nodes of the Bitcoin network involved in upholding its integrity. 

Nevertheless, issues surrounding mining remain. For example, in Kazakhstan, the surge in its hashing rate has been attributed to exiled sophisticated Chinese mining companies, in essence transferring a centralisation problem from one country to another. Additionally, Kazakhstan’s electricity grid is 90% reliant on fossil fuels. An increasing need for electricity is propelling and sustaining power plants that rely on the combustion of fossil fuels – those that were planned for decommission or were lossmaking prior to the mining boom now have a customer base willing to pay. 

With the environmental and centralisation concerns mounting for blockchain mining, this is likely to provoke further sovereign legislation and regulation on mining processes, such as Kazakhstan’s cryptocurrency mining tax that is expected to come into force in 2022, according to the Financial Times. 

These proof-of-work mining operations, which has been the original blockchain audit protocol since Bitcoin’s inception, has always been notoriously energy intensive. Whilst its typical electricity consumption is equivalent to approximately 70 terawatt hours per year (a little over the electricity consumption of Austria) it has been reported to rise as high as 130-140 terawatt hours (annualised) when the price of Bitcoin has peaked:

Source: William John Analytics, Financial Times

The top line represents the upper bound of the estimation, the middle represents the average estimate, and the bottom line represents the lower bound of the estimation. Clearly, electricity consumption has increased as Bitcoin prices have increased and if Bitcoin prices continue to increase, the demand on domestic electricity grids and carbon emissions will increase also. 

Any opinions expressed in these documents are those of William John and are provided for information only. E&OE.