A month after China ordered its financial institutions and payment firms to not offer any services related to cryptocurrency transactions, and became the first major nation to caution traders against speculative crypto trading, it has now initiated a crackdown against bitcoin mining.
The move, following Elon Musk’s U-turn over bitcoin citing energy consumption concerns, has resulted in a freefall for the digital currency, now trading in the neighbourhood of $32,000, from a high of more than $63,000 in April.
The recent intensified crackdown against bitcoin miners stems from environmental concerns, as stated by China’s Vice Premier Liu He. Given China aims to be carbon neutral by 2060, intensive bitcoin mining which consumes high energy is a hindrance to Beijing’s ambitious goals. As per some reports, if the recent crackdown was not announced, China would have witnessed carbon emissions of around 130 million metric tonnes through mining alone by 2024.
China, in the last few years, has emerged as the biggest hub of bitcoin mining across the world. In 2020, two-thirds of the bitcoin mining happened in China.
At the end of the third quarter (Q3) of 2019, China constituted 75.62 per cent of the bitcoin mining across the world, 71.70 per cent by the end of Q4 2019, 67.26 per cent in March 2020, and 65.08 per cent in April 2020.
The decline in the global share of bitcoin mining for China can be attributed to the increase in mining in other countries like the United States and Russia, even though their share pales in comparison to China, falling between 6 to 7 per cent each.
The concerns around energy consumption are justified even though a $1,000 investment in bitcoin in 2010 would have amounted to more than $15.6 million today.
In 2017, the computing power of the bitcoin network was estimated to be 100,000 times greater than the combined power of 500 fastest supercomputers. A bank transaction suddenly looks trivial.
In Venezuela, around 2017, due to hyperinflation, the state had subsidised electricity, and this resulted in extensive bitcoin mining, so much so that it led to power outages across the nation. Interestingly, Venezuela, in April 2020, constituted for only 0.42 per cent of the bitcoin mining across the world.
Even in China, energy is sourced from huge dams to run mining operations. Turns out, most of it is mined in Xinjiang province where Beijing has been running a violent campaign against the Uyghur Muslim minorities.
Along with Xinjiang, Inner Mongolia has also emerged as one of the biggest hubs in the world for bitcoin mining in the world. In 2020 alone, 8 per cent of the world’s bitcoin mining happened in Inner Mongolia, thus inviting a crackdown from Beijing.
In China, Inner Mongolia and Xinjiang are where miners go in winters, making use of the coal-powered plants generating low-cost electricity. The low rents and favourable temperature add to the mining advantage. Xinjiang accounts for 36 per cent of the world’s bitcoin mining.
In summers, miners use the subsidised electricity generated from hydroelectric power, in areas around Sichuan and Yunnan.
However, the excessive coal demand in China has not been without consequences. Accidents in coal mines have been reported from Shanxi, Xinjiang and Guizhou provinces, resulting in the death of 12 workers. In Xinjian, 21 people were trapped inside a coal mine after an accident, raising questions about mines’ operations and permissions.
Earlier this month, the provincial government ordered the shutdown of 26 coal mines in Sichuan, following ban announcements from other provinces. Inner Mongolia went a step ahead and initiated a hotline for residents to complain in case they witness any illegal mining activity.
The complex and elaborate bitcoin mining process has a lot to do with energy consumption. The entire industry works on the ‘proof of work’ system where miners must run numbers to solve a series of mathematical problems using intricate devices called application-specific integrated circuits (ASIC). For miners, the incentive lies in earning some of the very currency they have mined.
However, to solve these problems, the energy required is quite high. Turns out, China may have all the coal and hydropower in the world, and yet it will struggle against the scale at which bitcoin mining works.
If one goes by the Bitcoin Energy Consumption Index, which provides insights on the bitcoin network, the estimated power consumption went from 9.586 TWh/year in 2017 to 115.846 TWh/year in 2021. To put things in perspective, 1 teraWatt equals 1,000,000,000,000 Wh (1 trillion).
For starters, the annual energy consumption of bitcoin is enough to power the Netherlands for the same duration, or 46.9 per cent of the energy needed in Australia, 36.8 per cent of that needed in Italy, 35.6 per cent of what is needed in the United Kingdom, 24.2 per cent of what is used in France, 20.5 per cent of what is used in Germany, 20.3 per cent of what is used in Canada, 11.6 per cent of what is used in Russia, and 2.7 per cent of what is used in the United States annually.
The carbon footprint of a single bitcoin transaction is as much as about 1.1 million Visa transactions or more than 88,000 hours of YouTube videos viewed. In terms of electrical energy, a single transaction uses 1,120.16 kWh of electricity, equivalent to an average US household consumption of over 39 days.
Every transaction also generates electronic waste worth more than 110 grams. Bitcoin would require 14 times the electricity used globally only to process 1 billion credit card transactions.
However, the environmental concerns only explain a minor part of the problem Beijing has with bitcoin. The Chinese Communist Party has already conducted successful experiments with the state-backed digital currency, and therefore, to allow a cryptocurrency network to flourish in a surveillance nation is an improbable idea.
Earlier this week, China again warned most of the state-owned banks including Jack Ma’s Alipay to investigate and identify any and every bank account facilitating cryptocurrency trading and block all transactions. The first attempt made by Beijing to block bitcoin transactions was made as early as 2013.
For the ones bullish on bitcoin, Beijing’s move will dent confidence, and if this is followed by action from the US Federal Reserve, the future of bitcoin as a currency is more or less done and dusted. As an asset, gambling in cryptocurrency, especially in bitcoin will continue, but China would have successfully burst the bubble.
Tushar is a senior-sub-editor at Swarajya. He tweets at @Tushar15_
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