Dispatch #21 -2021
July 2nd, 2021
This week, the Dispatch will focus on China’s “crypto ban” body-blow that Bitcoin absorbed, and how it kept on chugging. China’s “crypto crackdown,” which included stopping bitcoin mining ahead of the Communist Party’s 100th anniversary celebrations, was a significant stress test of the Bitcoin network. Despite a more than 50% drop in computing power securing the network, the protocol operated smoothly, just as it was designed. Yes, price did drop initially, but it never fell below recent lows. We may not be out of the woods yet as miner-selling could accelerate in the coming months, but the de-risking of Bitcoin has accelerated because of China’s action. Hash power moving out of China should reduce Bitcoin’s carbon footprint in the coming years. Furthermore, having 65% of hash power in China was a geographic/national risk, which will also be alleviated.
- China stops Bitcoin mining & cracks down on crypto
- China crackdown will aid decentralization & carbon foot print reduction
- BITCOIN SCHOOL – We are off this week!
China’s “crypto crackdown”
As usual the Dispatch turns to Twitter for insights on what took place in China. First off, China “banning crypto” is not a new theme, as the below media headlines from 2013, 2017 and 2021 highlight.
Source: Ark Invest crypto analyst via Twitter
China reiterated existing rules
As with prior “crack downs”, this episode also included the PBOC, China’s central bank, issuing guidance to tighten currency flows into crypto markets. This Coindesk opinion article provides a good background to the machination in China. The author goes through the many theories of why China might have stopped Bitcoin mining at this particular time.
China’s various actions on crypto in 2nd quarter of 2021 are shown in this Galaxy Digital Research timeline. This was a slow, evolving “crackdown”. If China wanted to more severely restrict or disrupt crypto, it could have banned crypto currencies outright. China has not done so despite repeatedly tightening rules on moving domestic currency into crypto trading venues. This is not a surprise to the Dispatch as some of the wealthy that have been utilizing crypto to move money out of China are likely members of the CCP!
The Bitcoin network adjusts smoothly to a precipitous drop in hashrate
Regardless of China’s motivations, it is a fact that 65% of Bitcoin network hashrate (hashrate is the computing power securing the network) was in China. The chart below is from Cambridge Centre for Alternative Finance, which is seen is the most reputable authority on the Bitcoin network and energy usage.
Most of this hash power has gone offline, which can be seen in the hashrate chart from blockchain.com. It’s worth asking, would any other industrial system absorb an interruption of this magnitude with minimal impact on the network operation?
Despite the underlying stress on the network, the average bitcoin user may have only noticed that it took longer than usual to confirm a transaction last week. With the hashrate down sharply, but difficult yet to adjust, the network had the slowest ever block confirmation.
The tweets above from this thread shows the outlier nature of the 23-minute block confirmation. The thread also provides a good summary of block times, and the difficult adjustment mechanism that’s a core function of the network. It is well worth a read if you are unfamiliar with how the protocol is designed to operate. That design was tested last week and it came through with flying colors. Several additional tweets from the Twitter-thread provided useful insights.
The China crypto crackdown will aid decentralization & reduce carbon footprint
The dominance of China based computers securing the network has been seen as a risk to Bitcoin. The slide below is from RockDen Advisor’s September 2020 “The Investment Case for Bitcoin” presentation. China related risk featured prominently.
Computer power securing Bitcoin, aka bitcoin miners, is leaving China. These mining machines will seek homes in other geographies with better regulatory regimes and cheap, stranded energy. The Bitcoin network will become more decentralized in the coming months as a result. It’s unlikely that these miners will return to China, a location where an autocratic government shut down their business overnight. The tweet below from this thread by the CEO of SBI Crypto provides a glimpse of the speed of change.
Conclusion
While much of the traditional media narrative has highlighted the risks to Bitcoin exposed last week, the Dispatch believes the “China crackdown” is a notable de-risking moment. It showed the resiliency of the Bitcoin network in the face of a Nation State-mandated deterrence of the network. In the coming months and years, Bitcoin will become more decentralized (better security) and lower its carbon footprint as miners leave China. The Dispatch previously viewed the environmental narrative as the biggest risk to continued bitcoin adoption. The Dispatch now believes this concern will be alleviated thanks to China’s actions last week.
What, then, is the most notable risk to Bitcoin? It’s probably a systemic issue emanating from the Tether stable currency, which has come to dominate bitcoin and crypto trading. That’s a discussion for another Dispatch. Dispatch #6 and Dispatch #16 touched on the Tether issues, which were related to a lack of audited reserves.
BITCOIN SCHOOL – We are off this week!
Stay safe, but do enjoy life returning to normal. Do reach out if you have any questions or comments about the material in this Dispatch.
Asi
Important Disclosures
| This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of RockDen Advisors LLC and are subject to change at any time based on market and other conditions. Past performance may not be indicative of future results. |