Analyzing the Bitcoin Mining Migration — Featuring IntoTheBlock’s New Metrics
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The past few months have been filled with talks about China taking actions against Bitcoin and crypto in general. While those that have been in the space for long may recognize the similar news from 2013 and 2017, this time around the Chinese government has taken a stronger stance, specifically against cryptocurrency mining.
At IntoTheBlock we have had mining indicators in our backlog for a while — and what better time to release them than now amidst the largest Bitcoin mining migration ever?
Prior to diving into the data, it is worth stating the facts. On May 21, the Chinese Vice Premier Liu He first called for the banning of mining. Then on May 25, the coal-heavy Inner Mongolia region proposed eight measures to phase out crypto mining, with the measures taking effect on June 1st. Other Chinese regions followed suit with Xinjiang and Sichuan and more implementing similar bans within a few weeks. These measures have led to what many are referring to as the great mining migration.
Throughout this migration, Bitcoin has experienced major headwinds short-term, as we’ll cover shortly. However, these measures are likely to lead to a more decentralized and resilient Bitcoin long-term. Here is how the China mining ban has impacted Bitcoin:
- Bitcoin is less secure, but it is unlikely that will be the case for long
The Chinese government’s crackdown on mining had a direct impact on the aggregate computing power contributed by miners to secure Bitcoin’s blockchain. This is observed in the hash rate’s precipitous drop since the measures were first brought to light.
Bitcoin’s hash rate has decreased by 40% in June, making it one of the sharpest drops in its history. Since miners secure the network, the decline in their contributions to the blockchain makes it less costly to attempt to attack the blockchain.
However, Bitcoin has incentives in place to attract miners to return. Firstly, since Bitcoin’s price has dropped less than its hash rate, it is less competitive to mine although mining revenues remain relatively high. This makes mining more profitable on average, thus attracting more miners.
In addition, Bitcoin’s mining difficulty just dropped a record 28%. This lever adjusts dynamically and in this case is intended to make it easier to mine Bitcoin, thus decreasing the associated costs and again making it more attractive for new (or previous) miners to (re)enter.
2. Bitcoin miners appear to have been selling
The amount of Bitcoin in miners’ addresses has dropped considerably since mid-May. After increasing slightly throughout the spring, mining reserves appear to have peaked at 2.14 million BTC.
Since then, miners have decreased their Bitcoin holdings by 100,000, or 5%. This drop, while small in percentage terms, may be enough to create selling pressure on prices. The trend towards funds flowing out of miners’ addresses is also displayed in miners’ outflows and netflows.
As their names imply, miner outflows track the total amount leaving miners addresses, while netflows look at the net amount subtracting their inflows.
Since the measures from the Chinese government started to unfold, miners had two days with over 90,000 BTC leaving their addresses. This had only happened once before since May of 2020. In terms of the net impact on miners’ funds, netflows recorded two sharp drops of 30,000 BTC, meaning that 30,000 more Bitcoin left miners’ addresses than the amount they received from rewards or acquisitions. The high miner outflows and negative netflows strongly suggest that miner addresses had been selling throughout the mining migration.
3. Bitcoin mining is more decentralized and resilient
Mining pools aggregate hash power between various miners to provide them higher odds of obtaining block rewards and more predictable income. While mining pools had for the most part consistently been growing their hash rate, mining pools with a large presence in China have been negatively impacted by the migration.
The impact taken on Chinese miners is reflected in the sharp decrease in the number of blocks mined per day in the Binance and Huobi pools, dropping 35% and 63% respectively. At the same time, independent and unrecognized miners, labeled as “unknown” have grown remarkably over the past months from 0.03 blocks/day to over 10. Finally, as displayed on the Hash Rate Distribution indicator, the top mining pool spot has changed from Viabtc to Antpool to F2pool based on the time frame being considered.
These patterns point to Bitcoin mining becoming more decentralized and less reliant on Chinese miners. This had played a long-standing risk on the Bitcoin network as as much as 65% of the hash rate used to be located in China, leading to concerns over the power the Chinese government could exert upon the Bitcoin blockchain. Following the mining migration, this risk has been significantly reduced as hash rate redistributes in a more decentralized, global way. Ultimately, this leaves Bitcoin in a more resilient state than it was at the beginning of the year.
4. Bonus: Miners impact the market less than they used to
Even though miners are still crucial to assure the blockchain’s security, their significance over the amount of Bitcoin traded has decreased sharply. Miners’ total activity (total flows) as a percentage of the total trading volume has dropped from 20% in 2013 to just 3% in 2021.
This is mostly due to the decreasing rewards miners obtain as a result of the halving taking place every four years. Transaction fees have stayed relatively low, meaning that miners typically rely for block rewards for over 90% of their income. The result has been mining rewards dropping even further in percentage to the total amount of trading volume happening on-chain.
Overall, this suggests that miner selling pressure throughout the migration months may not have been as strong as initially thought. Since the Chinese government crackdown on cryptocurrency mining, Bitcoin’s base layer has shifted significantly. While this may have contributed some selling pressure, it is relatively small in comparison to the billions in volume trading on-chain on a daily basis. As the share miners make up out of the total volume continues to decrease, events like these are less likely to impact markets. Ultimately, although the great mining migration may have caused headwinds short-term, it is setting up Bitcoin for a more decentralized and resilient future.
