China clamps down heavily on cryptocurrency, but why?

Cryptocurrencies seem to have an intrinsic feature of being vulnerable to multiple factors but China’s recent announcement of potential restrictions has been triggering drops in the price of the virtual currency. Why is the digital currency industry reacting to China’s latest restraints with so much vigour?

The world’s biggest Bitcoin miner

The process of mining or generating Bitcoin requires specialised computers called mining rigs, which take up immense amounts of electricity.

Bitcoin consumes about 0.55 per cent of global energy production according to the Cambridge Centre for Alternative Finance, an international interdisciplinary academic research institute based in England. The Inner Mongolia region in China offers one of the cheapest electricity prices in the world and houses Bitmain, the biggest producer of mining rigs in the world.

In other parts of China, excess alternative energy was directed at Bitcoin mining, like the hydropower rich Sichuan which started off that way and became one of the biggest data mining centres in the country. China has large groups of data miners who pool their resources together to conduct Bitcoin mining, known as mining pools.

With numerous mining pools and in house equipment, China hosts around 70 per cent of the world’s Bitcoin mining capacity. But the country’s moves in the recent past have evidently diluted the global figure.

Turning away from Bitcoin

Chinese authorities held back their interests in Bitcoin as early as 2013 through curbs on select parts of the cryptocurrency trading process. In 2013, the Chinese government asked its banks to bar transactions in cryptocurrencies.

Crypto enthusiasts continued with their businesses though, through long winded channels. They used online payment services like Alipay and WeChatpay to make direct conversions of yuan to cryptocurrency and continued trading without reliance on banks. In 2017, companies looking for funding to develop new coins were stopped.

However, in the past few months regulators started imposing tougher rules to eliminate Bitcoin related services. Last week, cryptocurrency miners in the country shut-down their mines and payment providers like AliPay were prevented from providing services related to cryptocurrencies.

Local electricity companies were asked to stop the supply of electricity to mining companies and local authorities were held back from approving new data mining projects. The provinces of Inner Mongolia and Sichuan had energy cuts and many data mining pools around the country were disbanded.

Several cryptocurrency miners left the country or abandoned their mining operations and used data mining rigs flooded the market, and analysts evaluate that this is what pushed Bitcoin prices down. The new rules and low prices forced Bitmain to halt sale of top tier data mining rigs.

As big players shut down their operations, about 90 per cent of mining activities in the country are estimated to be shut down in the short term, according to the Global Times, an English-language Chinese newspaper under the state-run official newspaper – the People's Daily.

Why is China implementing such curbs?

As economies around the world place more focus on sustainable initiatives to reduce their carbon footprint, popular consensus shows that China is removing the energy-heavy cryptocurrency mining activity from its portfolio in order to meet its pledge to be carbon neutral by the year 2060.

The Chinese government highlighted the increasing volatility of cryptocurrencies and implied fears over the eventual negative impact on its financial system. Bitcoin’s rampant use for illegal dealings and overt criminal activities were also cited as a serious concern. The country is also ramping up its efforts to release a state owned cryptocurrency called e-yuan.

Is this the end for Bitcoin in China?

The Chinese government’s crackdown last week pushed Bitcoin prices down to its lowest since January 2021. It warded off investors over concerns with the future of Bitcoin production. CNBC host Jim Cramer announced that he offloaded most of his Bitcoin holdings last week.

Although, as miners in China take a step back, the process of mining becomes easier. When Bitcoin is being mined, the system is programmed to increase the difficulty of the process as more contributors join in. Regardless of the number of miners joining in, it takes about an average of 10 minutes to mine a Bitcoin and a drop in contributors decreases its energy consumption and increases ease.

Bitcoin was created with a cap on production. Its production is set to stop at 21 million to ensure that its price remains stable. To keep a hold on this process, when 210,000 Bitcoins are mined, the reward its generators receive are halved. A slower production growth could turn out to be beneficial for people involved in the mining business in the long run.

Bitcoin currently trades around $33,000 (Dh121,207), almost half of its peak of $65,000 (Dh238,742) in April but experts believe that the currency is destined for greatness.

“The bust cycle [the contraction stage of Bitcoin price] ‘crypto winters’ are going to pass by more quickly than in the past,” said Nick Spanos, the founder of the first ever physical crypto exchange in New York, Bitcoin Center NYC.

Spanos adds that this is because once-scared newcomers realise that Bitcoin is bigger than recent weakness seen in the market and added that his analysts predict the price “could very well breach the $90,000 (Dh330,566) mark by the end of the year”.