Bought any Bitcoin lately? Chances are it was made in China. That could be a problem for the burgeoning digital currency—and an opportunity for ambitious rival “miners” in the U.S. and elsewhere.
Bitcoin mining is virtual, but requires expensive real-world inputs. Simply put, miners compete to solve increasingly complex equations generated by the Bitcoin network. The first to solve one wins the right to process and confirm new Bitcoin transactions, and win newly minted coin as recompense. Being first requires massive computing power, which in turn requires huge amounts of electricity.
Chinese entrepreneurs jumped on this ecosystem in the early 2010s, while Westerners remained wary. Miners harnessed nearly-free hydropower near dams that the country had built with abandon. Beijing-based Bitmain got a lock on the specialized chips and machinery the miners needed (and is aiming for a blockbuster IPO this year). BTCC and other exchanges mushroomed to trade the products.
“You have these little cities in backcountry China where hundreds of millions have been invested,” says Taras Kulyk, head of blockchain business development at Core Scientific, which operates three competing mining sites in the U.S.
But Beijing authorities shuttered the exchanges in 2017, when a flurry of dubious “initial coin offerings” jacked up Bitcoin’s price sevenfold. A 70% crash followed in 2018. That left Chinese miners with a two-thirds global market share, but no dependable way to convert their Bitcoin into renminbi to pay non-virtual bills.
“They are reliant on over-the-counter brokers who are supposed to be banned but still operate,” says Simon Hawkins, a co-chair of law firm Latham & Watkins’ global blockchain and cryptocurrency task force. “The policy attitude is quite unclear.”
That lack of clarity opens a window for non-Chinese miners, as a near-quadrupling of Bitcoin prices since October promises fatter profits. Bitcoin topped $40,000 for the first time on Thursday.
Cheap electricity isn’t the only metric anymore. Investors are also weighing regulatory risk and management quality, says Michel Rauchs, who follows cryptocurrencies for the Cambridge Centre for Alternative Finance. “Better-capitalized firms are building out professionalized data centers,” he says. “China has lost some share, particularly to the U.S.”
Stockpickers are certainly enthusiastic about early movers like
Marathon Patent Group
(ticker: MARA), which mines in Montana and North Dakota. Its shares have exploded ninefold in the past two months. Competitor
(RIOT), out of upstate New York, is up a mere seven times.
A peek under Bitcoin’s hood might cool markets’ ardor a bit, says Daniel Doll-Steinberg, co-founder of Frontier Technology venture capitalist EdenBase. About 18.5 million of the statutory maximum 21 million bitcoins have already been created. As the remaining supply dwindles, so does the fraction of a coin earned by each successful “hash,” or solution. That will ultimately multiply miners’ break-even costs.
That process will take decades, though, says Whit Gibbs, CEO of HASHR8, which enables retail investors to contract a bit of their own Bitcoin mining. Meanwhile miners are sucking in windfall profits from Bitcoin’s boom.
For all that, China’s huge lead in Bitcoin mining will erode only gradually, while the next move of its regulatory apparatus remains as opaque as ever. One more factor to consider before jumping on the Bitcoin wave.
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