A bitcoin mining ban in China will more like drive the asset’s price higher, according to Mati Greenspan.
The UK-based financial analyst said the Chinese were mining bitcoins at a much cheaper rate than the rest of the world. It prompted more prominent mining corporations to set up their base in the Chinese regions. As a result, the country at one point hosted more than 50-percent of all the bitcoin mining pools. It also enjoyed a monopoly in manufacturing bitcoin mining equipment. Such statistics led many skeptics to believe that the Chinese mining companies, such as Bitmain, had centralized bitcoin’s production by taking control over half its network.
But with rumors that the Chinese government was planning to ban all kinds of crypto mining activities, the hegemony is about to shake. Greenspan stressed that the displacement of big mining pools operating out of China could end up losing a big part of the bitcoin mining network to other global pools. Those pools will work in countries where the cost of mining bitcoin would be higher.
“If this ban does end up happening, it’s more likely to push BTC prices up than down,” tweeted Greenspan. “The loss of cheap Chinese electricity would raise the mining cost, which is net positive on price. It would also serve to kill the FUD that Bitcoin mining is centralized.”
If this ban does end up happening its more likely to push BTC prices up than down.
The loss of cheap Chinese electricity would raise the mining cost, which is net positive on price.
It would also serve to kill the FUD that Bitcoin mining is centralized.https://t.co/OhVh8fUaXv
— Mati Greenspan (tweets are not trading advice) (@MatiGreenspan) April 9, 2019
The Mining Crisis
China’s announcement of a potential mining ban follows an already-bad year for miners. The 2018 cryptocurrency plunge pushed the bitcoin mining sector in losses, leading thousands of small and medium-sized mining pools to sell their machines at a cheaper rate and close down their operations. Twitterati cnLedger even posted pictures of those miners throwing away their graphics card units after suffering terrible losses in the market.
"The time to buy is when there're miners in the streets." pic.twitter.com/3fshPcANDF
— cnLedger (@cnLedger) November 20, 2018
In retrospective, the aim of bitcoin is to enable a financial system which allows the exchange of value online without having to rely on centralized organizations, such as banks. The system replaces a centralized body into a distributed network of computers whose sole jobs are to validate online transactions and add their details to a public ledger called the blockchain.
Validating transactions require an ample amount of computing power, i.e., electricity. And in return, miners receive a block reward in the form of bitcoin tokens. The dollar-equivalent of those bitcoin units should be higher than the cost of production to indicate profits. That is also how bitcoin attains a market rate.
Mining is also a kind of rat race in which one miner wants to compute more data than the other. As a result, these rats start buying expensive racing cars, i.e., Application Specific Integrated Circuits (ASIC) to mine faster than one another. The same happened during the 2017 crypto boom. Miners saw profitable potential, increased their stakes by purchasing ASIC machines at prime rates, and eventually went bankrupt when their bitcoin rewards crashed against the dollar.
The Bitcoin Recovery
The bitcoin’s most extended bearish market eventually located a dependable bottom at $3,100 in December 2018. It has since recovered 30 percent of its lost value, now priced at a decent $5,200. Nevertheless, the market rate is still below the cost of mining, as pointed out by Fundstrat’s Managing Partner, Thomas Lee, in his latest CNBC’s Squawk Box interview.
— Thomas Lee (@fundstrat) April 4, 2019
“The breakeven cost to mine a bitcoin is between $5,000 and $6,000,” said Lee. “The commodity generally trades 2-2.5-times higher than its breakeven rate.”
WIth bitcoin mining firms going out of business, it would be ideal for bitcoin to maintain its rate above $5,000 at least. Any signal of demand-drop could be very bearish for the industry since higher mining costs would make it impossible for farms to continue operations. Conversely, even a sustained demand could ensure that bitcoin rate picks up momentum in the near future – a thing which is already taking place.
Featured Image by Hanson Lu on Unsplash