Hashing out a future: Is Bitcoin hash rate drop an opportunity in disguise?

China’s crackdown on Bitcoin (BTC) mining operations has led to a significant drop in the network’s hash rate, but industry participants believe it presents an incredible opportunity for the wider mining ecosystem.

China has long been a major contributor to the Bitcoin mining space, at times accounting for more than 70% of the global hash rate of the world’s preeminent cryptocurrency. That was up until June 2021, when the Chinese government moved to shutter a number of the world’s biggest mining centers.

The Chinese southwestern province of Sichuan has an abundance of hydroelectric power, which is fed by Asia’s largest river, Yangtze. The advent of ASIC mining saw the province become home to some of the biggest mining operations in the world over the past few years due to its favorable electricity rates. But that is now coming to an abrupt end, driven by the country’s hardening stance on cryptocurrency mining and the ecosystem in general.

Local media has reported that 26 major Bitcoin mining hubs were forced to shutter in Sichuan, which has had a dramatic effect on the global hash rate. The Bitcoin hash rate peaked mid-May at 171 terahashes per second (TH/s) but has dropped to a low of 83 TH/s on June 23 — marking a 50% drop in just over a month.

Industry analysts estimate that more than 70% of the total mining capacity in China has gone offline over the past week, and that could increase to more than 90% in the coming weeks.

Kevin Zhang, vice president of Foundry Services — a mining infrastructure company — provided an overview of the situation in China in a Twitter thread. The key takeaways were that operators were given minimal time to pack up shop, while much of their electrical infrastructure is not compatible with systems in other countries.

Bitmain, one of the world’s largest manufacturers of ASIC mining hardware, has temporarily postponed sales of new mining equipment in an effort to support miners who are looking to sell second-hand hardware.

The initial impact

At a glance, the situation looks troubling, but some believe that the resilience of the Bitcoin mining ecosystem will prevail. The regulatory clampdown in China presents a unique opportunity for miners in other countries to accumulate BTC holdings.

Daniel Frumkin, mining researcher at Braiins and Slush Pool, unpacked the initial impact of this latest drop in hash rate in his correspondence with Cointelegraph:

“Difficulty has gone down in three of the past four adjustments, and the next adjustment may be the largest downward adjustment in Bitcoin’s history. For miners outside of China who focus on maximizing their BTC accumulation, this is an incredible opportunity as the hash value (BTC/TH/day) is increasing rapidly during a time when everybody would have been expecting the opposite.”

The researcher also highlighted the fact that the security of the Bitcoin network has not been affected despite the scale of the hashing power that was taken offline in recent weeks, adding: “Chinese miners are relocating machines all over the world, so the geographic distribution of hash rate will likely be far better in 6–12 months than at any prior time period in the ASIC era.”

Nevertheless, the effects of the Chinese mining squeeze was felt across the cryptocurrency markets as Annabelle Huang, head of GlobalX at Amber Group, highlighted a recent sell-off and slump in various cryptocurrency prices:

“Following Inner Mongolia and Xinjiang, Sichuan province officially shut down BTC mining earlier this week despite hydro being a greener option than coal-based mining. Coupled with Fed’s hawkish sentiments, we saw a significant sell-off in the crypto markets. The shutdown in Sichuan came as a bit of a surprise and likely will cause medium-term selling pressure from miners who levered up to scale their operation during the bull run earlier this year.”

Rack space at a premium

There have been some interesting knock-on effects as Chinese-based miners go offline. First and foremost, these miners are now looking for new locales to reestablish their operations, while some have taken to selling their equipment.

Frumkin noted that the market for ASIC hardware would become saturated with a large amount of used hardware for sale, while third-party hosting service providers may very well find their excess space quickly filled up by miners looking to take ASICs online: “Existing mining facilities that offer hosting to third parties are filling up fast, and new mining infrastructure takes a lot of time to plan and build.” He added further, “Any companies and countries who are able to quickly build infrastructure to host thousands of ASICs can be the biggest winners from this situation.”

The advent of ASIC mining heavily disrupted the efficacy of small-scale, enthusiast Bitcoin miners that simply could not compete with the scale of economies of industrial-sized mining operations. For the first time in many years, smaller mining operators may have a chance to expand their operations, but some barriers still remaining as Frumkin explained further:

“Many smaller-scale miners use third-party hosting services that offer better electricity rates than typically found on regular energy grids. Since this hosting capacity is in high demand, it’s likely not very easy for those miners to scale right now. However, any miners with off-grid facilities (e.g. next to gas wells) or who otherwise have direct access to some source of surplus energy are in a better position to start mining or to scale up than at any time in the past year or so because hardware is cheaper and more accessible, and the hash value (BTC/TH/day) is unexpectedly high.”

The great migration?

The reality of this latest regulatory move in China is that the landscape and distribution of the Bitcoin mining ecosystem are changing dramatically and rapidly. Some Chinese firms have been proactively looking for new locations to set up mining centers over the past two years as rumblings of a wider crackdown bubbled under the surface.

The likes of Canaan, which branched out from hardware manufacturing to actual mining, have established a base of operation in Kazakhstan, making use of its own proprietary Avalon mining units. BTC.com, the world’s fifth-largest mining pool, has also relocated its first batch of miners to the country as well.

A move to neighboring Asian countries will no doubt be the easiest exportation option for Chinese miners, but space and power will come at a premium, and options further afield are being explored already.

As Foundry’s Chang summed up on Twitter, the so-called “great ASIC exodus” certainly won’t be as seamless, as firms grapple with logistical considerations, hosting terms and negotiations. Frumkin believes this has tipped the scales in favor of hosting companies: “This is a huge opportunity for mining infrastructure companies to capitalize on increasing demand for hosting capacity.”

Related: Death knell for Chinese crypto miners? Rigs on the move after gov’t crackdown

Indeed, it may be that the death knell has tolled for mining in China, and the great migration of mining equipment has begun. Frumkin believes that all these factors point to North America becoming the next hub of Bitcoin mining in the years to come. He claims that the close proximity to hardware suppliers have Chinese miners at an advantage, adding, “Meanwhile, many larger miners in North America have found sub-four and even sub-three cents per kWh electricity, which is on par or better than the prices Chinese miners have been paying in recent years.” He concluded:

“Now that they’re no longer facing a competitive disadvantage in hardware procurement, the stage is set for these North American mining companies to become dominant players in the next few years.”

As Darin Feinstein, founder of Core Scientific, aptly summed up on Twitter, the resilience of the Bitcoin mining network was evident in the fact that, despite a huge portion of the network’s hash rate being forced offline, firms quickly looked to relocate in an uncoordinated fashion while the end-user was largely unaffected.

As he stated: “China forced a shutdown of 60%+ of the Bitcoin network infrastructure. There were no lawsuits, no bankruptcies, no bailouts, no downtime. Network infrastructure just shrugged and relocated to countries with increased freedoms.”