The Coming Bitcoin Hash Wars Will Be the New Space Race
How far we’ve come.
In a little over a decade, Bitcoin has gone from being a little club of geeks sending “magic internet money” to each other to a truly global money phenomenon held by individuals, funds and even publicly listed companies. Like it or loathe it, Bitcoin is almost certainly here to stay.
The main focus, of course, is almost always on price, but this is often just a function of market forces rather than a true indicator of what’s really going on. For that you need to look behind the curtain and, in Bitcoin’s case, that means looking at the underlying network.
And, in the same way that hash rate and difficulty are quite often correlated with upcoming price movements in fiat terms, the network itself can paint a clear picture of what may well be coming next.
And it’s quite the story.
If you’re not familiar with what happens “under the hood” with Bitcoin, I can tell you it’s a fascinating place.
I don’t pretend to be code-level expert, but as a veteran miner you get to understand a lot about how blocks are processed, what equipment you need and the importance of a well-priced electricity supply, preferably from a green and renewable source.
However, for the purposes of this article, all we really need to understand is the “brute force” of the Bitcoin network in terms of processing power — something we refer to as “hash-rate.”
When you and I send bitcoin to each other, that transaction is bundled together with a bunch of other transactions from everyone else in a “block” and sent to a global network of machines to verify and confirm. These machines basically compete with each other to process those transactions first and when they do, the winning machines are rewarded with both new Bitcoin AND the fees included in the block they’ve processed as a way of being compensated for contributing to the network.
These machines are referred to as “miners” and the bottom line is, the more of them you have, the more power — or “hash rate” — you are able to contribute to the network. To simplify even further, more hash rate = more Bitcoin.
This is a simplification, as there are other factors involved, but it’s enough to make the point.
This has lead to a multibillion-dollar industry making mining equipment that is better, faster and more efficient than its predecessors.
Miners, either working on their own or collaborating in groups, try to get the highest hash rate they can with the lowest power consumption units and energy cost possible. It really is as simple as that.
Since anyone can join or leave the network at any time, big businesses have sprung up with hundreds, sometimes thousands, of machines, generating enormous hash power to secure that prized bitcoin.
All these companies, at least on the surface, appear to be in the private sector, which is hardly surprising given they are approaching it from a purely commercial perspective.
Recently, however, I’ve begun to wonder if the line between private sector and state-sponsored mining power is now beginning to blur.
In other words, are we about to see actual countries, rather than just companies, enter the hash wars?
It seems there may be some evidence this is already happening and, if so, there will be attempts to secure hash rate on a scale that would put the Space Race to shame.
There’s a little-known — but fascinating — chart that shows how hash rate is changing by country over time located on the University of Cambridge’s website at cbeci.org.
While this data comes with some caveats — most notably that only around 37% of the total hash rate is included — it does nevertheless paint a consistent picture of where hash rate is currently originating, and which countries are working to boost their contribution.
For example, in the chart above, it can be seen that China was the biggest player in the game in September 2019 which doesn’t come as a surprise given the availability of cheap power and the ability to source mining equipment quickly and easily.
Fast forward six months to April 2020 (the last point at which data is available), and the charts have begun to change noticeably, although it may not seem obvious at first:
China’s share has dropped noticeably — by 10.58% to be precise — over that six-month period. Those percentage points have found themselves within the borders of the United States, Russia, Kazakhstan, Malaysia and Iran, and we further note that Venezuela has also made it on the map.
It’s logical to conclude that these countries have increased their mining capabilities, but it may actually be more impressive than it first appears when accounting for the global picture.
During the same period, according to data taken directly from the blockchain, the Bitcoin hash rate increased from 86 Eh/s to 110 Eh/s, an impressive gain of 78.18%.
This means that just to stay at the same level, countries would have had to have increased their hash rate share by that amount during the period. To achieve it means significant investment, and there are four countries that stand out for specific mention:
- Venezuela, for managing to achieve 0.42% of the global hash rate within six months from a standing start in an expanding hash rate universe
- The United States, for jumping 78.33% in global hash rate share
- Iran, for increasing their hash rate by 119.54%
- Kazakhstan, for increasing their hash rate share by 334.51%
Looking at each of these countries in turn, however, reveals surprising differences in approaches and possible motives that may act as a precursor for the next stage in the war for hash rate supremacy.
The United States
Only the United States would be considered a true “first world” country by most people’s definition in this list, and while the U.S. isn’t anti-bitcoin, it’s not exactly encouraging it on a federal level either.
That said, certain states have been welcoming large-scale operations, including Georgia, Kentucky, North Carolina, and upstate New York. Companies such as Core Scientific, Northern Data AG and Blockstream all have mining farms there or nearby, and more are under construction.
However, all are entirely investor-led, and don’t appear to benefit from any significant government incentives, except possibly those achieved by local authorities over local power rates. This assertion may not be so clear cut elsewhere, however.
Iran is a country subject to sanctions that directly affect its economy, so it makes perfect sense that it would look at all opportunities to find profits where it can.
Interestingly, mining was very much an underground activity in the country until August 2019, when it appears the Ministry of Industry, Mine and Trade finally spotted the opportunities it creates.
Now, not only has this ministry created a revenue stream via licensing (over 1,000 have been issued so far according to Amir Hossein Saeedi Naeini, an official with Iran’s ICT Guild Organization), it has also realized that selling power within the country’s borders is a lucrative proposition.
Therefore, it has made it easier for mining operations to access it, thereby encouraging outside capital to enter the country via a route that isn’t covered by sanction.
Then, in late September 2020, The Tehran Times reported that three power plants had been licensed to mine Bitcoin directly using the power they generate themselves.
There are specific conditions attached — such as using dedicated equipment not connected to the national grid — and there will certainly be some sort of government levy for doing so, but even so, this act shows how much the government stance has changed in a few short years.
This was succinctly explained in a comment from the same official in Iran’s Guild Organization late in 2019, when he said:
Our studies show that the crypto mining industry has the potential to add $8.5 billion to the economy
What I find interesting is that the country is “chasing the dollar” rather than accumulating Bitcoin itself, at least for the moment and at least in terms of the public message.
However, that may not necessarily be the case for other countries that are now directly competing with Iran for that all important hash rate.
Venezuela’s economy is a mess for a whole load of reasons linked to high-level corruption and sanctions, but it has now made a concerted effort to increase its presence on the global mining stage.
However, like Iran, mining was very much an underground and unregulated activity until very recently, meaning that the figures provided by Cambridge University are also from mining that falls under that category.
Suddenly, however, the government department responsible for regulating cryptocurrencies legalized the mining industry by decree in the Official Gazette on Monday, September 21.
It was authorized by Joselit Ramirez, head of National Superintendency of Crypto Assets and Related Activities (SUNACRIP). This is the same Joselit Ramirez, incidentally, who is wanted by the USA on charges linked to corruption and narcotics.
However, the decree makes for interesting reading. Not only do applicants have to go through a complicated process to apply for a license, be listed on a government register, keep records for 10 years and import equipment only with approval of authorities, all mining activity must go through a centralized government-controlled mining pool, known as the National Digital Mining Pool.
Apart from obvious control, this last part creates the intriguing possibility that the country’s government may well be looking to amass bitcoin directly, presumably through “pool fees” or a similar levy.
Given the level of sanctions it is under, the country’s unsuccessful attempts to reclaim its gold from the Bank of England and need for hard assets to bolster a ruinous balance sheet, this makes sense.
However, although Venezuela may well be gearing itself up for such a possibility, it is purely conjecture on my part that this is, in fact, happening.
But with increasing hash power, a formal and legalized structure for mining and a clear incentive to do so, I am fully expecting Venezuela’s hash rate to continue to rise in the near future in absolute terms, although it’s global share is not likely to increase much further due to the speed of progress elsewhere.
Like other countries, Kazakhstan’s legal position on mining has only recently been clarified and, once again, almost certainly only because the dollar signs are simply too appealing.
It’s all rather different from where it was. In 2018, the National Bank of Kazakhstan proposed outlawing cryptocurrencies altogether, but a u-turn from the Kazakh government several months later instead pushed for regulation.
In fact, it was only in June of this year that mining was made properly legal, implying, yet again, that the numbers collected by Cambridge University were from underground or unregulated mining operations.
Since then, Kazakhstan’s digital development minister, Bagdat Mussin, has announced a $715 million investment in the crypto mining sector to reinforce the country’s economy.
It’s not surprising, as Kazakhstan has some of the cheapest electricity in the world thanks to an abundance of coal. While this probably makes the country’s Bitcoin hash rate contribution one of the dirtiest on the plant, it also provides an appealing $0.04 per kilowatt-hour for miners.
However, once again, mining itself falls into the private sector, with no more than incentives and enablers by central government to secure income in dollars. It’s not clear whether the country plans to accumulate Bitcoin itself in the process.
The Rest of the World
Mining, of course, is happening everywhere under different rules, incentives and objectives, and the only constant across all states is that it is growing in almost all cases.
Even in countries of extreme sanctions, such as North Korea, where access to the required mining equipment for Bitcoin is very restricted, the state has recognized that this is a way to beat those sanctions.
Back in February 2020, for example, U.S. cybersecurity firm Recorded Future reported that network traffic for monero (XMR) mining that had originated from North Korean IP ranges had increased by “at least tenfold” since May 2019.
Not only can monero be mined on standard computer equipment, it is anonymous, allowing the secretive state to transact globally without detection. The advantages to a rogue state are obvious.
Of course, there are many more examples that could be cited to show that mining as a industry is being increasingly recognized and endorsed by central bodies, but at this stage this is really incidental to the bigger question … what happens next?
Hash Rate Supremacy
Although it may not seem like it (especially if you're in the industry and work with Bitcoin all the time), Bitcoin mining on a large scale is, by definition, a very young industry.
The cryptocurrency itself is only 11 years old, and really only gained international attention a few years ago. These really are very early days, as can be seen by how recently the countries mentioned above have moved to formalize their operations.
But, in my view, they won’t be the last to do so. I fully expect more countries to expand and clarify the legality around their operations, as it becomes clear to them that this is an effective way to increase their GDP.
Even better, for those countries who are still unsure what to actually do with Bitcoin, it’s a way of providing revenue in a traditional sense without being directly involved in the cryptocurrency space.
However, as more countries become friendlier to investors, mining companies will have more choice over where to put their capital and equipment. This, inevitably, will lead to incentives being offered by those countries who want to secure the deal.
This will be the next stage of development and today’s early movers will have the advantage.
But it won’t be the last step in the journey.
As far as we know, no country is, as yet, officially stockpiling bitcoin as part of their national reserves. It’s true some countries have found themselves inadvertently holding some, usually as part of a criminal asset seizure, but that’s not quite the same thing.
When bitcoin’s real value as a true international asset and store of value is recognized at a governmental level, the game will change again. At that point, the race for Bitcoin hash rate supremacy really begins.
There is no way that any country will want to be left behind once this happens — it would be akin to not stockpiling gold and letting competing economies do so instead.
Further, those countries under sanctions or with developing economies have greater incentive to get involved sooner, since the playing field is levelled to an extent that is simply not possible with any other global asset.
Governments will scramble to authorize state-sponsored operations, even directing funds and development away from existing projects where necessary.
Private operations will either be acquired or put to work on behalf of the state with a suitable arrangement in place. “National Hash Rate” will be a matter of pride and a measure of economic success listed on economic web sites next to “gold reserves.”
And, just like the title at the beginning of the article suggests, the coming hash rate wars will likely be similar to the Space Race all those decades ago, a point beautifully and succinctly made by renown Bitcoin advocate Max Keiser in this International Business Times article in June 2020.
After all, is it really that far fetched to say there will be official government agencies tasked with maintaining and increasing hash rate through developing new tech, and buying in expertise through the private sector?
In other words, using the same structure that NASA used to get man to the moon?
Of course not.
In my view, it’s just a question of time.
Recommended further reading: Global hash war ‘will send bitcoin to $500K’
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Disclosure: The author of this opinion piece has been heavily involved with bitcoin for several years and holds a substantial cryptocurrency portfolio, including bitcoin. He also has a mining operation running the SHA-256 algorithm based in Siberia and is a published author on the subject of promoting the understanding of cryptocurrency. Jason is an analyst at Quantum Economics. This story was first published on Voice.com
Disclaimer: Investing in any asset class is risky. The above should not be taken as financial advice, nor construed as so. Always do your own research before investing or consult with a professional financial planner.