Why China's bitcoin mining dominance is fading

For years China-based bitcoin miners have held the vast majority of the bitcoin network’s mining capacity. Lately, that dominance has been fading.

Some local bitcoin miners even think that China’s portion of the total bitcoin hash rate may already be less than half — down from 75% just a year ago.

During a panel discussion last week at an event in Chengdu hosted by mining pool Poolin and crypto media outlet 8BTC and moderated by The Block, several mining executives acknowledged that the geographic decentralization of bitcoin’s hash rate is not just inevitable — it is already happening. 

“I think China already has less than 50% of the bitcoin hash rate,” Liu Fei, who heads the mining business at Bixin, one of the longest-running bitcoin wallet startups and mining operators in China, told the audience.

Mustafa Yilham, who oversees Bixin’s overseas business, shared a similar conclusion on Twitter, based on an analysis of on-chain data that shows coal-mine accidents in China’s Xinjiang region have caused bitcoin’s hash rate drop by about 20% since April 16. 

“Right now in China, it’s still [the] dry season, so the majority of the mining operations (>80%) are still taking place in Xinjiang region,” Yilham said on Twitter. “So if estimated 80% of the mining in China was located in Xinjiang as of last week, and 80% of them were shut down and it only affected 20-25% of the network, that means hashrate in China is currently around 32-40% at most.”

What’s behind the decline? A global chip shortage and a recent change in the market for mining hardware have been major factors.

Regardless, some of the mining executives said it may be a good thing for the industry that China’s bitcoin mining dominance is fading.

A shift in the hardware market

One factor behind the movement of hash rate away from China is the ongoing global chip shortage. Because of this, Chinese manufacturers like Bitmain, MicroBT and Canaan have had very limited capacity in producing the most advanced mining equipment.

The shortage has coincided with the rise of institutionalized bitcoin mining investors in Europe and North America who have spent hundreds of millions of dollars since the fourth quarter of 2020 scooping up what’s available from these manufacturers.

“Bitmain gets preorders for 60,000 to 80,000 units of bitcoin ASIC miners a month but they come from overseas,” Liu said during the panel. “Same with MicroBT. So these orders don’t have anything to do with China’s hash rate growth.” 

The disruption of the mining hardware market has had consequences for a government program recently launched in Sichuan, China’s bitcoin mining hub during the rainy season.

Last year, the provincial government of Sichuan opened several “Hydro-electricity Consumption Industrial Demonstration Zones” meant to entice energy-intensive industries, including bitcoin mining farms, to consume surplus hydropower in the region.

Max Hu, general manager assistant at 360Power, a mining firm catering to retail investors, said the operating capacity at the industrial parks was about 800 megawatts last year, and it is expected to go as high as 2.5 gigawatts in 2021.

Zhou Yi, CEO of Chengdu Wujilian, a mining colocation firm that participated in the program last year, said this year the local government has loosened its entrance criteria. “That means as long as you meet the requirements of electricity consumption and go apply for it at government agencies, you will be allowed to enjoy the cheap energy rate in the hydropower demonstration zones,” he said.

This level of government support has arguably led to an oversupply of capacity at a time when the entire integrated circuit industry is dealing with the chip shortage.

“Overall, there’s a surplus of mining farms this year so attracting miner customers would be a problem if you don’t have self-owned machines, given that people may not want to migrate their equipment from Xinjiang during the bull market while there’s a chip shortage,” said Li Peicai, founder and CEO of Shanghai-based mining firm Wayi. 

During the dry season, a significant number of miners in China’s southwestern provinces of Sichuan and Yunnan migrate north to Xinjiang or Inner Mongolia, where the electricity is more typically generated from coal. Upon the return of the rainy season, which spans from May to September, these miners typically move back to the south because hydroelectricity is cheaper to access than fossil fuel power.

But the migration process involves overhead and high opportunity costs because it can take weeks to unplug the machines, load them to trucks, travel across provinces, offload the machines and power them back up.

The upside of decentralization

Feng Chong, head of cloud mining at Poolin, said data the firm has collected backs up the observations by other panelists that China’s share of the total hash rate is declining. But he said the geographic decentralization is ultimately a good thing for the industry. 

“The geographic decentralization eventually makes bitcoin’s network and ecosystem safer and more stable, which is a good thing,” he said. “Even if the hash rate percentage inside China is declining, we are still actively engaged with overseas mining farms.” 

He added that the global bitcoin hash rate will continue to grow — and through collateralized cloud mining or hashrate-backed tokens, there are still plenty of ways for investors in China and elsewhere to gain exposure.

Some panelists raised the recent coal mine accidents as an example of unexpected consequences of geographic centralization. Although the mining farms in Xinjiang didn’t have security issues themselves, they had to shut down because local coal-based power plants were ordered to conduct self-inspections and thus temporarily cut power to big data centers.

Li from Wayi said such regional uncertainties make Chinese investors reluctant to make long-term bets on mining companies. 

“The advantage of compliance in the U.S. brings investors with deeper pockets through the public markets and hence they are capable of making longer-term investments like buying pre-orders of machines that won’t ship until next year or even the year after,” Li said, adding:

“But in China, we are constantly dealing with local uncertainties so people demand a higher and quicker return to make up for the risk. If you tell me it takes two years to make the money back, I may not dare to go all in because what if this thing goes down next year."

Li referred to a recent policy change in Inner Mongolia as an example of regional uncertainty. The government there said in March that it will close down bitcoin mining farms in the region by the end of April with a window of just weeks.

Wujilian’s Zhou echoed such views but said that even though overseas investors have bought out the most advanced mining models, there is still a significant percentage of second-hand older equipment in operation today.

“To me, the biggest concern is whether my site will have enough machines to fulfill the capacity,” Zhou said. “There’s less pressure on that this year because with the bull market, a lot of the older models, which were thought to be obsolete, have become profitable again.”

Still, Zhou acknowledged: “I do agree our hash rate dominance will be eclipsed by overseas forces.”