The Breakdown - New Data Shows Underground Bitcoin Mining Thriving in China

Starting point is 00:00:04 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.com, near NFTX, and produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, May 17th. And today we are talking about some interesting new Bitcoin mining research. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dig deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.lee slash breakdown

Starting point is 00:00:46 pod. Also a disclosure, as always, in addition to them being a sponsor of the show, I also work with FTX. Now today, we are finally going to shift away from Luna. The whole story around it is sort of splitting into two very different and distinct things. There is, of course, the inside Terra story, which is all about what comes next and under whose leadership and how will things be made right, and this is just going to be an absolute morass for a while. There seems to be a significant disinterest in the Fork slash Luna Classic plan that has been proposed by Doe Kwan, and there are questions of confidence in leadership in general and whether Doe needs to step aside. Those are, of course, important questions for that community, and the better they resolve, the better for everyone involved.

Starting point is 00:01:36 However, that's not really the piece to me which is most significant right now, and that, of course, is the larger regulatory implications. Those are going to be playing out over time in a matter of weeks, months, and even years now rather than days. And as it does, of course, we'll keep track of how this massive cataclysmic event shapes those discourses going forward. However, even as all of this has been happening, the rest of the crypto world hasn't slowed down. Today we get to spend some time focusing on Bitcoin Mining. The Cambridge Center for Alternative Finance, which is part of the Cambridge Digital Assets Program, has just released new updated data, the first time they've done so since October of last year. They titled the blog post, Bitcoin Mining, Unsurprising Resurgence?

Starting point is 00:02:22 The dates in question are from September of last year to January of this year, and one of the big themes is overall recovery. In that previous report of theirs from last October and covering the period up until August of 21, they focused on the huge impact of the China mining ban. In July 21, the network's aggregate computing power bottomed out at 57.47 XA hashes per second. However, there was a quick reversion to the mean as miners relocated abroad and by the end of 2021, the Bitcoin network had effectively rebounded to pre-ban hash rate levels of around 193.64 XAHashes. Most optimistically, that upward movement continued into this year, with the hash rate reaching a new all-time high of 248.11 XA hashes in February. So where is this recovery

Starting point is 00:03:12 coming from? Well, big bullet number one is that the United States has extended its leading position as the largest global mining hub. It's in central. It's in installed capacity jumped from 42.74 exahashes in August of 21 to 70.97 XA hashes in January of 2022. That means that the U.S.'s leading percentage of hash rate has also grown from 35.4% in August to 37.84% in January. Now, one important note is that this was continuing and accelerating a trend that had already started even before China decided to ban Bitcoin mining. In the first half of 2021, even before the ban, the U.S. had jumped from 10.55% of global hash rate to 21.81%. Of course, the Bitcoin mining ban changed the game fundamentally. Not only did you see relocations to

Starting point is 00:04:06 the United States, you also saw more investment among United States miners, a different political narrative, a different social narrative, an environmental opportunity as North American miners tried to take advantage of this unique moment to move into a leadership position. which clearly worked. For the first time, this survey also gets into state-by-state distribution in the U.S., and in that there was something really fascinating. If you had to guess, as an enfranchised listener, which state would you say had the majority of the U.S.'s hash rate? My guess is that most of us, and I include myself in this category, would have guessed Texas. There are so many factors you have the most vocal politicians being interested in Bitcoin mining in

Starting point is 00:04:51 Texas, you have big flat areas where Bitcoin miners can set up and tap otherwise hard-to-reach energy, et cetera, et cetera, et cetera. But if you were with me and you would have said Texas, you would also be wrong. The state that most contributes to global hash rate is Georgia, and it's not close. Texas came in second with 11.22%, but Georgia had a whopping 30.76% of U.S. hash power. Kentucky was in third with 10.93%. So why might these three states represent more than 50% of U.S. hash power? The Cambridge Center says access to comparatively low-cost electricity, available hosting capacity, and the enactment of favorable legislation could be factors explaining the influx of minors to those states.

Starting point is 00:05:38 After Kentucky, you have New York with 9.77%, California with 7.9%, North Carolina with 4.7% and Washington with 4.1%. New York and California being there show that it's not not. just a clean sweep of red states, although certainly there has been more government-led effort in those states like Kentucky and Texas to attract miners with favorable rules. Troy Cross dug a little bit deeper on Georgia's electricity composition overall. He tweets, Natural gas accounted for 49% of Georgia's net generation in 2020. The state's four operating nuclear reactors accounted for 27%. Renewable energy, including hydroelectric and small-scale solar,

Starting point is 00:06:18 accounted for 12% and coal contributed nearly 12% to the state's net generation. We of course don't know which of these sources of energy miners are using, but that's the picture overall. Yet still, this wasn't the thing that had most folks surprised from this report. That title goes to China's underground mining. Looking for ways to step up your crypto game? Then go with NXO. For starters, you get free crypto for each purchase or swap. How about earning guaranteed yields? up to 17% paid out daily.

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Starting point is 00:08:07 When you trade NFTs on FTCS, you pay no gas fees. Download the FTCX app today and use referral code breakdown to support the show. According to this survey, while the reported hash rate for China was effectively zero in July and August of last year, it surged back in September. The Cambridge survey finds China in second place in the global hash rate race representing 21.11% of global hash rate. Kazakhstan with 13.22%, Canada with 6.48%, and Russia with 466% have been relegated down the charts. Now, as you might imagine, there has been a lot of commentary on this, but I think Alex Gladstein from the Human Rights Foundation sums it up perfectly.

Starting point is 00:08:53 So it turns out, he writes, it's not just impossible for the world's most powerful police state to ban Bitcoin use. It's also impossible for it to ban Bitcoin mining. Life finds a way. Now, for many people, this confirmed what had been rumored, which was that there were many large underground mining operations still operating in China. But what about the places that had been growing and benefiting from the China ban? Kazakhstan, for one, had surged up, reaching 18.1% of global hash rate in August of 21. Kazakhstan's percentage peaked in September, but it has just been beleaguered by problems since then.

Starting point is 00:09:28 Power outages, internet shutdowns, followed by their government adopting a stricter stance on mining, increased taxation, and cracking down on non-registered miners. By January 22, Kazakhstan's share had declined to a little over 13%. Russia had also benefited from the China ban representing 11.23% of hash power in August of 21. By January of this year, that was down to 4.66%. Now here there's an important methodology thing to note, which is that for a country's share of hash rate to go down, it doesn't have to mean that the number of miners or the mining capacity has decreased. It just has to mean that that capacity hasn't grown at the

Starting point is 00:10:05 same rate as other parts of the world. In the case of Russia, however, we're not seeing just declining percentage of overall hash rate, but an actual decrease in installed capacity as well, from 13.56 exahashes to 8.74 exahashes. This is somewhat surprising, given that it seemed like an obvious place for Chinese miners to move operations. However, first, Russia's central bank has been vocally opposed to Bitcoin mining, even lobbying against it and trying to get it banned. Second, of course, more recently, there has been conflict-related instability. One last country of note, Iran had a significant drop. This was previously a top 10 Bitcoin mining nation, having, 3.75 exahashes or 3.11% of global capacity, and it's now down to 0.23 xahashes or

Starting point is 00:10:52 0.12% of global capacity. What about the environmental implications of all of this? When China vacated its position, it seemed an opportunity to have a greener Bitcoin network. However, the relocation to Kazakhstan and some other places seemed to interfere with that. A paper in February 2022 came out called revisiting Bitcoin's carbon footprint that argued that Bitcoin's environmental impact had actually increased, and this was largely because they were relying on that August 21st Kazakhstan number. As Nick Carter points out, numerous media publications use that August 21 number even six months later to say that a huge amount of hash power had flooded into the relatively dirty energy area of Kazakhstan. And this is just a reminder of why it's so important

Starting point is 00:11:34 to get better data, why something like the Bitcoin Mining Council, which gets actual reports from miners directly about the energy mix they use are so valuable. However, this is not the only interesting Bitcoin story going on right now. On Sunday, Naibu Kelle, the president of El Salvador, said tomorrow, 32 central banks and 12 financial authorities representing 44 countries, will meet in El Salvador to discuss financial inclusion, digital economy, banking the unbanked, the Bitcoin rollout, and its benefits in our country. Now, this got the Bitcoin Twitter community extremely excited.

Starting point is 00:12:09 The central banks and authorities that are participating are primarily from developing countries, including Nigeria, Egypt, Nepal, Pakistan, Bangladesh, Kenya, Uganda, Rwanda, Paraguay, Angola, Guinea, Madagascar, Morocco, Sierra Leone, Zambia, Liberia, Sondalia, Zambia, Palestine, and Malawi. Now, while the Bitcoin part of this has been getting the biggest billing in our part of the world, the discussion is actually a meeting of the Alliance for Financial Inclusion. Alex Gladstein again explains. According to local media, this gathering was actually planned and scheduled to take place in El Salvador two years ago before the country adopted Bitcoin. But now, attendees will get the surprising opportunity

Starting point is 00:12:47 to learn about the decentralized currency. AFI was founded by authorities from Mexico, Indonesia, the Philippines, Thailand, and Kenya. It was created in part by funding from the Gates Foundation and other philanthropic organizations in Germany and beyond. It is definitely not a pro-Bitcoin organization. But we will see what the impact is. Perhaps a few minds will be open to the power of Bitcoin as a tool for humanitarian aid, global commerce, and financial inclusion. Reports from the ground have been positive. Mike Peterson at Bitcoin Beach posted a photo from Elzante and said central bankers lining up to get help downloading and using Bitcoin Beach lightning wallet. Nicholas Bertie from Goloy Money says after spending a day with those

Starting point is 00:13:28 central bankers, I can say, still a lot of education to do. Vast majority have no idea of the potential of Bitcoin. But with El Salvador adopting Bitcoin, they now have a reason to dive into it. Dan Tapiero had in some ways an even simpler take. Bitcoin, the first truly global macro investment of all time with El Salvador leading? 32 central banks, 44 countries flying to El Salvador, emerging countries leading adoption. First time, U.S. not ahead in financial and technological innovation. Of course, for most of the global financial establishment, the biggest story around El Salvador is not Bitcoin per se, but the possibility of a default on debt. Last weekend, the Wall Street journal published El Salvador's president went all in on Bitcoin, then it tanked. In the article,

Starting point is 00:14:14 Frank Muchi, a fellow at the London School of Economics who does research on El Salvador was quoted, the president seems rudderless in terms of economic policymaking, and as a consequence, El Salvador is sleepwalking into a potential sovereign default crisis. The signal you are sending by embracing Bitcoin is that you have no idea what the country's priorities are and what to do to get out of the whole. I think this pretty well sums up the perspective of traditional financial institutions when it comes to Buckelé's plan. Markets aren't that enthused either. Al Salvador's sovereign bond, which comes due in 2032, is trading around 40 cents on the dollar. The bond that comes due in January, meanwhile, is trading

Starting point is 00:14:48 at under 80 cents on the dollar with a yield close to 50%, which the WSJ says indicates market concerns it may not be repaid. Earlier in the month, Moody's Investor Service reduced El Salvador's debt rating even farther, noting an increased probability of a credit event, restructuring, distressed exchange, or default, with relatively high severity. Still, of course, there are two very different ways to look at this. On the one hand is what the international establishment is doing, which says this appears to be erratic decision-making and thus increases the likelihood of default. Another way to look at it is that countries like El Salvador have been in this never-ending debt treadmill for years and years and years and years. At least

Starting point is 00:15:30 this move by El Salvador has created some new opportunities, such as increased tourism, the potential for a Bitcoin bond if it ever actually launches. It may be that what's irrational is to continue to do what the international finance community wants when that never actually changes the outcomes for countries in the developing world. In that light, El Salvador does represent a direct confrontation in a new approach to how small nations try to get out of their own debt cycle. That ultimately is the experiment that we're all watching. I don't know about you guys, but it feels good to not just focus on Luna for a minute.

Starting point is 00:16:04 I want to say thanks again to my sponsors, nexo.io, near and FtX.x. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace. Hey, breakdown listeners. Come join CoinDesks Consensus 2020, the festival for the decentralized world this June 9th through the 12th

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The Breakdown - New Data Shows Underground Bitcoin Mining Thriving in China

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