China’s National Development and Reform Commission (NDRC) released guidance (PDF in Chinese) on Monday that includes shutting down Bitcoin mining — and even the manufacture of mining hardware. From the South China Morning Post:
Industries in the eliminated category include those seen as wasting energy or polluting the environment, according to rules enacted by China’s cabinet in 2005. Investment and loans in those industries are banned. During the elimination period, authorities are allowed to raise electricity prices for relevant businesses to force them to close. The manufacturing, sale, and use of products in the eliminated categories are also prohibited.
Bitcoin mining is one of the sectors to be eliminated immediately.
This isn’t new — China started pushing the miners out over a year ago.
Why China hates Bitcoin
China has been slowly pushing Bitcoin out for a while now, particularly since the People’s Bank of China (PBOC) shut down the exchanges — they were worried that foolish crypto speculators might somehow mess up badly enough to affect the real economy.
Bitcoin mining moved to China because it had some of the cheapest commercial electricity in the world — 2.9 to 4.3 cents per kilowatt-hour. But quite a lot of Bitcoin mining in China ran off stranded surplus generation capacity, both hydroelectric and coal — power plants that weren’t well-connected to the national grid, or were in already-oversupplied areas, so the electricity wasn’t useful for anything else.
The national grid is much better connected now, and they don’t have so much stranded capacity. So the PBOC started pushing miners out in January last year.
Some are already saying the Bitcoin shutdown is meant to stop capital flight in the form of bitcoins — where you buy electricity for mining in yuan, then sell the bitcoins for dollars. But this seems to have been negligible — the Council on Foreign Relations says that “Bitcoin may have been a proxy for downward pressure on the yuan, but bitcoin outflows only ever made up a very very small amount of Chinese capital outflows.” Local analysts were also sceptical that this was ever much of a thing.
Buy one orange get one old miner free lol #BTC pic.twitter.com/NUDmMN4MAz
— Mia Tam (@blockandchain) November 26, 2018
Dark hashpower?
The way Bitcoin mining works is: you guess numbers as fast as you can to try to win this 10-minute period’s lottery. If you guess right, then you mine a block of transactions, and get bitcoins as the reward. 28 sextillion lottery tickets every ten minutes, one winner!
The entire process is to burn as much electricity as you can afford to. This slowly equalises to 1 bitcoin costing 1 bitcoin to mine — but during a bubble, you can make lots of money.
The Bitcoin price crashed in November last year, and a pile of suddenly-uneconomical mining capacity went offline.
If any miner gets over 51% of the hashing power, they can mount a “51% attack” — block others’ transactions, and exploit the system in all sorts of ways. There are various attacks you can mount from 16% of the hashpower up.
Nicholas Weaver mentions the possibility of a 51% attack on the blockchain using “dark hashpower” — all the mining hardware that had gone offline, but could still be switched back on. (I mentioned this in Decrypt’s article on this new ban.)
I think this is unlikely to happen to Bitcoin — the Proof of Work threat model is head-on attacks from other bitcoiners. Everyone else has other ways to scam bitcoins — with hacks, or social engineering — because the Bitcoin system as a whole is inept and amateurish. Only bitcoiners seem to think that attacking a cryptographic system at its strongest point makes any sense as a threat model.
There are other versions of Bitcoin, which use the same mining hardware. An attack using repurposed Bitcoin miners could be mounted against those, because they have much less active hashpower. This has happened to other cryptocurrencies, particularly small variants of large cryptos — the Ethereum Classic 51% attack seems to have been surplus Ethereum mining capacity. 51% attacks are just a thing that happens these days.
Effects: not much in the short term, possibly in the longer term
A sudden disappearance of hashing power shouldn’t have much visible effect on Bitcoin itself — all the action is on the exchanges. In late 2017, a pile of Bitcoin (BTC) mining capacity disappeared, because it was moved to Bitcoin Cash (BCH) — and the time between mined blocks went to an hour, rather than the nominal 10 minutes. The bubble economy barely even noticed.
Mati Greenspan, a completely disinterested salesman analyst at eToro, thinks that a large national government deciding it hates Bitcoin is clearly good news for Bitcoin, because decentralisation maybe. He thinks the ban will send the price up, because bitcoins will cost more to mine — and never mind the actual effects we saw last time mining became uneconomical, when the price stayed down and hashpower just went offline. Greenspan emphasises that all the news really is good, because this is apparently a “bullish market.”
Pretty much! In a bullish market all news is good, just like in the bear market all news was bad.
— Mati Greenspan (tweets ≠ financial advice) (@MatiGreenspan) April 9, 2019
The manufacturers of mining hardware are also hit by this ban — but they don’t have to build the machines in China. I expect they’ll move without too many issues.
The risk to Bitcoin in the longer term is other governments taking their cue from China — and taking Proof of Work more seriously as a problem that needs to be dealt with.
The hashpower that went offline in November shows how to mitigate Proof of Work’s reprehensible effects — make Bitcoin mining uneconomical.
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