China's crackdown on bitcoin mining has probably already made the network greener — for now

China’s crackdown on bitcoin mining may already be making an impact on the environment — at least for now.

That is because bitcoin mining farms that until June 9 had been operating at a combined capacity of 1.9 gigawatts (GW) in a coal-dominated region of China’s Xinjiang province have been shut down, according to local bitcoin miners with knowledge of the situation. The miners spoke to The Block under the condition of anonymity given the sensitivity of the current regulatory environment.

To put the scale of the shutdown into context, one GW of capacity is enough to power between 400,000 to 900,000 U.S. homes.

Following the powerful Chinese State Council’s implication in May that a crackdown on bitcoin trading and mining was in the works, Xinjiang kicked things off earlier this month. On June 9, the Changji prefecture government in Xinjiang ordered officials in the Zhundong Economic Technological Development Zone to shut down bitcoin miners in the area. 

At the time, the scale of the shutdown could only be inferred from on-chain data. Shortly after the June 9 shutdown order, major Chinese bitcoin mining pools saw a sharp decline of their real-time hash rate of between 10% to 30%. 

The seven-day moving average of bitcoin’s hash rate recorded on June 16 was down to 125 exahashes per second (EH/s). Before June 9, it had been around 150 EH/s.

Even assuming all of the 25 EH/s of the hash rate that went offline was secured by the most efficient mining equipment, that much computing power would need a capacity of at least 900 megawatts. 

The dramatic shutdown in Xinjiang, and a more recent shutdown order in China’s hydropower hub of Sichuan, have shaken the Chinese Bitcoin mining industry to its core. Many miners are now weighing the possibility of relocating.

Miners on the move — but where?

Hundreds of thousands, if not millions of stray ASIC miners are now either in the process of changing hands, on their way to a new country, or both.

It has been reported that the reason behind China’s bitcoin mining crackdown direction was the concern that such activity has caused China’s coal-based electricity usage to spike. While the shutdowns may help China achieve its goals for carbon dioxide emissions, though, the move could make the Bitcoin network itself less green. 

In the near term, it seems safe to assume that at least some of the miners that Xinjiang just powered down could wind up in other regions of China that are rich with hydroelectricity. But recent events suggest that may not be so safe to assume. 

On Friday, the Chinese hydro-hub Sichuan ordered the state-owned power grid to cut the hydroelectricity supply for 26 local bitcoin mining farms. The implications of this order for the larger mining industry in Sichuan are not yet clear. 

Most of the 26 entities were previously granted permission to operate at the Hydroelectricity Consumption Industrial Demonstration Zones in Sichuan, to help consume the excessive hydroelectricity in the region that would otherwise be wasted. That means they were on the government’s radar.

But there are still a significant number of bitcoin mining facilities in Sichuan that work with smaller power plants that directly supply them. This so-called direct-supply model, which is common even though it occupies a legal grey area, makes these facilities less visible to the government and state-owned power grid operators. 

That explains why on Friday the Sichuan government also called for state-owned power entities to expand their inspections and immediately cut supply to additional mining facilities they find.

It remains to be seen to what extent subordinate state-owned power plants will work to root out bitcoin mining farms using privately generated hydroelectricity. But sourcing energy in this method is likely to become more difficult and costly.

In fact, two local Sichuan miners told The Block that some mining farms with this direct-supply model have already increased their hosting fees by a whopping 0.1 yuan, or $0.0157, per kilowatt-hour. 

Given all the regulatory moves in Xinjiang and now Sichuan — China’s top two mining hubs, depending on the season — there is now a growing sense of pessimism about the future of the bitcoin mining industry in the country. 

That could be a problem for the network. Industry experts have said that currently there’s not enough energy capacity available in mining facilities outside of China to meet the demand from all of the miners in China that may migrate abroad.

Also, given that questions about Bitcoin’s carbon footprint have top-of-mind for some investors, it should be noted that a mass migration of miners from China could cause the network to become even more dependent on fossil fuel than before. 

Popular destinations so far for Chinese miners’ on the move include Kazakhstan, Russia, the U.S. and Canada. Of those regions, only Canada and Russia have a higher percentage of hydroelectricity in their overall energy mix compared to that in China (16.8%) as of 2020, but they have lower installed capacity as a whole.

The U.S. is second to China in terms of the total installed energy capacity in 2020 but only 7% of its power grid’s capacity comes from hydropower. That said, it does have 8.4% of the capacity that is based on wind power.