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9 Months After the China Crackdown
Crypto markets have experienced highly volatile months, even by cryptoâs standards. The year began with rising inflation shortly followed by the Russian and Ukraine war, causing Bitcoinâs price to retrace significantly from the $50k level at which it stood by the end of 2021. This recent series of events have impacted the mining industry in a negative way.
The industry has grown tremendously boosting competition and elevating hash rate to sustained levels not seen before. Additionally, low Bitcoin prices have affected the mining industryâs profitability and as a consequence miner reserves have decreased, likely to cover companies day to day costs. Furthermore we will explore the long term effect of Chinaâs crackdown on mining by analyzing the current Hash Rate Distribution.
Quick refresherâââthe hash rate is the aggregate power contributed by miners to secure a proof of work blockchain. This computing power is used to solve cryptographic algorithms (SHA-256 in Bitcoinâs case) to process transactions and reach consensus in proof of work blockchains. This indicator serves to measure how strong a networkâs security is, since the greater the hash rate the more difficult it becomes for an attacker to try to overtake 51% of the mining control.
Source: IntoTheBlock Mining Indicators
As can be seen above, Bitcoinâs hash rate has soared over the past few years, currently setting new highs at the 200m TH/s level . This is in part due to the growing industry popularity and institutions wanting to participate in the evolving market. As the hash rate increases competition for mining increases as well as the amount of Bitcoin issued is the same regardless of the number of miners, thus making the industry less profitable to existing miners.
Miner Reserves track the balance of addresses belonging to mining pools. Bitcoin miners appear to have been selling and decreasing the amount of Bitcoin in their addresses, which has dropped considerably from the beginning of 2022. Currently at the lowest since 2011, minersâ total amount of Bitcoin sits at 1.95m BTC.
Source: IntoTheBlock Mining Indicators
As clearly shown above Bitcoin miner reserves have decreased significantly, probably in direct relation to the Hash Rateâs robust growth. An increase in hash rate means a more competitive environment, lowering profits for miners. Similarly, Bitcoinâs decreasing price puts further pressure on miner margins. Due to these reasons it is likely that miners are decreasing their Bitcoin holdings in order to cover their short-term operational costs.
There may be concerns of this selling activity causing downward pressure on Bitcoinâs price. The reality is, though, that while some miners do have decently-sized Bitcoin holdings, the amount they trade on a daily basis is negligible relative to the total amount of Bitcoin volume.
Source: IntoTheBlock Mining Indicators
The graph above displays the percentage that daily volume coming from minersâ addresses represents out of the total on-chain volume. As evidenced from this graph, the volume share pertaining to miners has constantly declined, sitting currently around 0.66% out of the total Bitcoin blockchain volume. While miners that have held Bitcoin for years may still be able to impact Bitcoinâs price, the data shows that the marginal effect that they can have by selling has decreased significantly.
Asides from decreasing margins, Bitcoin mining also underwent a major change in its structure following the Chinese ban last summer. This significantly altered the distribution of mining pools and their hash rate.
Mining pools aggregate hash power between various miners to provide them higher odds of obtaining block rewards and more predictable income. IntoTheBlock measures the concentration of hash rate by mining pool.
Source: IntoTheBlock Mining Indicators
The indicator above shows mining pools hash rate distribution over time. Having passed 9 months since Chinaâs mining crackdown, effects are being felt. Once important, Binanceâs and Huobiâs Bitcoin mining pools have completely disappeared, currently both having 0% of the total mining hash rate distribution. The fall of Bitcoin mining pools associated with China gave room for new pools to grow. In between them Foundry USA Pool, which has dominated the industry throughout the last 90 days having mined 2267Â blocks.
This change is clearly illustrated on the table below, 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, both dropping 100%. At the same time, Foundry USA Pool and independent miners not associated with any pools, labeled as âunknownâ have grown remarkably over the past year both from 1 block/day to over 28.
Source: IntoTheBlock Mining Indicators
Chinaâs Inner Mongolia region used to be home to a large part of the digital assets mining industry. Soon after the crackdown, companies fled China and settled new permanent operations; Texas was a major beneficiary of this migration. Towns like Denton Texas, which after a devastating winter storm left the town in debt, have felt the positive impact. Core Scientific, a publicly traded company, closed on a deal with the town to establish operations on their natural gas power plant and in return help secure the repayment of their loan.
In conclusion, despite miner reserves having significantly dropped throughout the years, they are not creating a significant selling pressure that could negatively affect price. The most probable cause for this decrease in holdings is their need to cover operational costs, which due to the high hash rate and low price may cause a greater impact on them. Furthermore, 9 months after the Chinese crackdown, strong ripple effects were felt throughout the mining industry. Foundry USA Pool, a United States associated pool, has dominated the space throughout the past 90 days for their first time. Finally, the United States seems to be on a road to become leaders in the mining industry with new policies being embraced.
Analyzing the Bitcoin Mining Industry was originally published in IntoTheBlock on Medium, where people are continuing the conversation by highlighting and responding to this story.
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