The Impact of China’s Bitcoin Mining Ban
On April 9th Reuters reported that China’s state planner wants to eliminate bitcoin mining in the country, according to a draft list of industrial activities the National Development and Reform Commission (NDRC) is seeking to stop in a sign of growing government pressure on the cryptocurrency sector. The document did not stipulate a target date or plan for how to eliminate bitcoin mining, meaning that such activities should be phased out immediately. In this article we try to predict the impact of such an instantaneous ban, if it happens.
Short-term Impact
Bitcoin Proof-of-Work Consensus Algorithm Difficulty is adjusted every 2016 blocks to match the current Bitcoin Mining Network capacity (Hashrate). Currently the Bitcoin Network has an (effective) Hashrate of 45 EH/s (45 followed by 18 zeros). Four out of the top five mining pools operate out of China: BTC.com (15%), F2Pool (13%), Poolin(12%), and AntPool(8%). The total amount of Bitcoin Hashing power coming out of China is estimated to be between 50–80%. The Network Hashrate can drop instantaneously from 45 EH/s to 10 to 20 EH/s on the day of the ban. With a sudden huge drop in Network Hashrate, it will take two adjustments to Difficulty to match the post-ban Network Hashrate. Each adjustment or 2016 blocks, is expected to take 2 weeks. However, due to the huge discrepancy between the Difficulty and the actual Network Hashrate, these two adjustments will take 6 to 12 weeks — instead of the expected 4 weeks. During this time period the average delay in finding a new block will go from 10 min to 20–50 mins. The transaction confirmation delays will be especially bad during the first adjustment period. After two adjustments, the Difficulty will be in-line with Network Hashrate and new blocks can be expected every 10 min, on the average.
The Network Hashrate tries to adapt to profitability of mining, which depends on the Price of the Bitcoin, Network Difficulty and Miner Operational Expenses. One of the biggest expenses of a mining operation is the cost of electricity. The mining equipment power efficiency is nearly doubling every 12 months, and is currently obeying a version of the Moore’s Law. The power efficiency gains alone can double Network Hashrate every year, with a stable Bitcoin price. Thus, Network Hashrate can return to pre-ban levels in a short period of time, assuming the price doesn’t drop drastically.
Transactions will take 2 to 5 times longer for confirmation, for about 6 to 12 weeks. People need to pay higher transaction fees to get a faster confirmation. Total block transaction fees can approach the fixed block reward (12.5 BTC), similar to what happened during the height of the 2017 bubble. Small transactions will temporarily avoid the Bitcoin Network. This impact should be only temporary; transaction confirmations will be back to normal, once Difficulty gets adjusted to match the lower Network Hashrate.
Miners outside China can certainly benefit from the ban. The number of bitcoins mined everyday by them will not change during the first adjustment period. They will start mining 2 to 5 times more bitcoins once the Difficulty is properly adjusted. Their Mining profitability will likely improve. So far, the Network Hashrate adapted to changes in Bitcoin price and not the other way around. But, if the Bitcoin price drops proportional to the Network Hashrate, the miners may not see much improvement in their earnings.
Medium-term Impact
BTC price will be affected negatively by the ban. The amount of impact depends on several factors such as negative press coverage, potential attacks on the ledger, … etc. The price recovery depends on how quickly the Bitcoin
Network returns to normal conditions. This ban will be a huge blow to mining equipment manufacturers. They will instantaneously lose majority of their buyers. The used mining equipment from China will be sold at scrap prices. Manufacturers may have to compete with large quantities of used equipment sold at deep discounts in secondary markets. It will take several months for them to get their sales back to pre-ban levels.
Long-term Impact
The 51% attacks are, by far, the biggest risk from this ban. During October 2018 the Network was mining at 53 EH/s. Apparently, some miners dropped out as mining was no longer profitable to them and the Network Hashrate dropped to 36 EH/s. It recovered to 45 EH/s recently, inspired by the BTC rally from $3600 to $5200. If the Network Hashrate drops to 10–20 EH/s suddenly, we need to be concerned about the outstanding mining equipment capable of 35–45 EH/s. If this Hash power gets into the wrong hands, it makes a 51% attack quite possible. This can lead to Double-spending and some cryptocurrency exchanges may stop trading in BTC as the blockchain is compromised. People may lose trust in cryptocurrencies. Although ledger-attack is a big risk, it’s unlikely to happen. On the bright side, this ban will help decentralize mining power.
Bottom Line
Although this ban has the potential to be an extinction-level event, the likely impact will be a lot less dire. The Bitcoin Network will certainly experience some issues in the first two months. It’s also likely that Bitcoin price drops quickly followed by slow recovery. In the long run, this ban will help strengthen the Bitcoin Blockchain by decentralizing mining.
