The Breakdown - The Great Western Hashrate Migration Is Real

Episode Date: June 27, 2021

On this week’s “Long Reads Sunday,” NLW reads Nic Carter’s latest essay for CoinDesk “Go West, Bitcoin! Unpacking the Great Hashrate Migration.” -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at https://nexo.io/ -- Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com

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.io and circle, and produced and distributed by CoinDesk. What's going on, guys? It is Sunday, June 27th, and that means it's time for Long Reads Sunday. If you've been in the space for a while, you can be forgiven for having a bit of a groundhog day feeling anytime China bans Bitcoin. quote unquote. More often than not, it's some repeat of some old policy that has a ton of intricacies in practice and doesn't really represent anything new. That's why it was so surprising to many when a month ago or so, when the vice premier announced a Bitcoin mining ban, it was

taken as something extremely serious. Miners started liquidating their holdings to get to Fiat to make big moves and the rest of the world paid attention. Today, I'm reading a piece by the one and only Nick Carter written for CoinDesk about just how real the shift is. It's called go-west Bitcoin, unpacking the great hash rate migration. All signals indicate the greatest shake-up and the geographic makeup of Bitcoin mining since the start of the industrial mining era. By now, it should be clear that the hash rate migration is real. Miners are leaving China for good. As of April 2020, an estimated 65% of Bitcoin hash rate was domiciled in China. With confirmed bans across the country, that figure will be far lower 12 months from now. The precise magnitude

and schedule for the westward move is currently unknown. but all signals seem to be indicating the greatest shake-up in the geographic makeup of Bitcoin mining since the start of the industrial mining era. Hypotheses for the motivations behind China's move to eliminate mining abound, although no single explanation appears sufficient as of yet. One obvious explanation would be a desire to meet climate targets and reduce emissions, but this is contradicted by China's continued embrace of coal power. It added three times as much in 2020 as the rest of the world combined,

and that the crackdown extended to hydropowered regions like civil-powered regions like civilized, to Schwann. Officially, the justification for the crackdown on Bitcoin mining and trading behavior announced in the statement issued by the Vice Premier was to, quote, resolutely prevent the transmission of individual risks to the social field. If the objective is to curb speculation in cryptocurrency, exchanges would be the more obvious targets. Even though executives at the onshore exchanges Huobi and OKX do periodically get detained and harassed by the Chinese state, those exchanges are still up and running. And banning mining does little to inhibit Ponzi's like Plus token, which the Chinese state considers to be a source of social instability. Other analysts have said China

sees Bitcoin as a competitor against its own digital currency project, the DCEP. But again, Bitcoin mining is a largely self-contained industry. Banning mining does little to inhibit Bitcoin transactions or exchanges. They are totally distinct concerns. Transactions can be assembled and included in blocks anywhere. The Chinese crypto industry would work perfectly well even if all mining was domiciled offshore. Another popular plausible motive for the ban would be continued efforts to stem unmanaged capital outflows. R&B to USDT, markets are probably the most popular crypto-enabled means of offshoring wealth from the mainland. But mining could also be interpreted as a way to convert capital-controlled and cumbered local currency into highly mobile global

wealth. Buy electricity and A6, create hash rate, and receive know-your-customer-free tokens that can be circulated and sold worldwide. At 60% of global hash rate, that's a potential flow of $8.1 billion a year worth of Bitcoin into Chinese miner wallets. Looking for the best way to unlock your crypto's liquidity? Nexo.io is exactly what you need. Borrow against your digital assets at just 6.9% APR, earn passive income with yields of up to 12%, and swap between more than 100 market pairs with the instant Nexo exchange.

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to learn more. That's circle.com slash yield. One alternative explanation that bears noting but has received little discussion so far is the continued integration of the Chinese grid. As China developed its energy resources and became the largest builder of energy infrastructure over the last few decades, it developed an extremely unbalanced grid, with enormous mismatches between supply and demand. China's scale and varied geography and energy grid meant that extremely abundant energy resources were being produced in remote locations where there simply wasn't demand for

them. In northern provinces, huge amounts of power from coal, and wind and solar went unconsumed. In the southern provinces, abundant hydro resources far exceeded local demand. The major population centers in China are mostly along the southern and eastern coast, thousands of miles away from the most abundant and cheap sources of energy. As a consequence, China became the world's capital of energy curtailment. As described by Ome's law, electricity simply doesn't travel well at standard voltages, and so must be produced relatively close to load centers. When there isn't local demand for energy, it goes unused. So in 2016,

In 2017, China was curtailing, effectively wasting, extreme amounts of power. In 2017, Chinese curtailment from hydropower reached 55-towatt hours, a figure equivalent to the entire energy output of the country of Switzerland. In 2016, China curtailed another 52.2 terawatt hours of wind and solar. There simply was insufficient local demand to consume this abundance of energy, leading authorities to rethink the grid's design. Starting in 2010, China has been constructing an ambitious continent-spanning ultra-high voltage power transmission network to transmit power from remote regions with abundant energy to load centers balancing out the grid. Today, 40,000 kilometers of high voltage transmission exists, with the longest lines stretching

over 3,000 kilometers. Much has been made of the Chinese Communist Party's DeSep ambitions or general aversion to freedom tech like Bitcoin in justifying the mining ban. Less has been said about the fact that the presence of miners in China was always contingent on the availability of stranded energy. The central and regional government had hitherto tolerated the monetization of excess energy because it simply wasn't being put to all. alternative economic use. But as the grid integration and load balancing has improved in the last five years, Bitcoin miners have increasingly begun to compete with other industrial and commercial uses. And while sources are hard to find, some analysts have characterized the mining crackdown

as part of an anti-corruption campaign, targeting regional officials for selling electricity on the black market. The Inter-Mongolia regional guidance also seems to hint at this, making specific reference to, quote, public officials who use their positions to participate in virtual currency mining or provide convenience or protection for them. Through this lens, the CCP-level crackdown could be interpreted as a reassertion of power relative to officials in far-flung provinces, monetizing state resources without permission. The integration of the grid makes the central government much less willing to tolerate the regional monetization of energy now that miner-driven consumption increasingly rivals other load centers. By now, we know the crackdown is genuine.

Machines are being turned off and hash rate is dipping. It is still unclear where these newly mobile miners will end up. The U.S. has the second most capacious grid in the world, and some miners appear optimistic about the opportunities to migrate hash rate west without sustained interruption. Hardware manufacturer Bitmain advertised at a recent conference for its elite clients and abundance of hosting opportunities in the U.S. While their assumptions about the amount of available hosting power were definitely aggressive, it's clear Chinese miners are looking westward. Raw electricity cost is no longer the sole consideration. Today, political stability, regulatory clarity, and a respect for private property rights are paramount in minor decision-making.

Some hosted services will be able to accommodate the demand by rotating higher-end units from Chinese miners in for older units. Where shelf capacity doesn't exist, new infrastructure must be built. In the U.S., obtaining the necessary permits can take upwards of six months. Additionally, while some states like Texas, Governor Greg Abbott spoke at the Bittmain conference warmly welcoming miners to his state, and cities like Jackson, Tennessee, and Miami have indicated their openness to miners, others, like New York, have taken a decidedly hostile approach. Other more convenient near-term geographies include Kazakhstan, Central Asia, and Russia.

But whether it's the U.S. or other locales that grow their market share at the expense of China, it will be a significant win for Bitcoin's decentralization, the stability of mining, and Bitcoin's climate impact. At long last, Bitcoin's vulnerability to China and the CCP is melting away. So back to NLW here, I think the thing that I want to just play out is putting this in the context of the Bitcoin Mining Council and a larger geopolitical game theory. These anecdotes that Chinese miners are looking to the U.S. are real. Eric Meltzer, a Bitcoin investor who has many contacts in China, actually shared a picture of one of his Chinese mining contacts eating some Texas barbecue and talking about coming to the U.S.

Now imagine, if you will for a minute, that you're a U.S. legislator who, A, wants to see more businesses in general come back to the U.S., and B, wants to assert comparative economic power against the threat of China. This global industry around Bitcoin that just keeps growing, in spite of all the the fud and all the critique, is all of a sudden up for grabs because it's been kicked out of its historic homeland. What do you do? Do you try to attract those miners to your jurisdiction? Well, you kind of can't because of ESG concerns, right? Oh, but wait, there's a new mining council led by miners in North America that's starting to set not only disclosure standards,

but a target to reach some achievable amount of renewable energy use for Bitcoin mining. Maybe, just maybe, that's something you can get behind. Maybe you can try to introduce legislation that makes it a little easier, or just use PR to get your support for it. I don't know how this all plays out, but you start to see how these pieces might come together.

Whatever the case, if this is a show about shifts in power on both a very literal energy sense and a larger metaphorical sense, there is not much as interesting as where this hash rate is going to migrate next. Thanks to Nick for the great peace, and thanks to you guys for listening. I hope you're having an awesome summer weekend. Until tomorrow, be safe and take care of each other. Peace.