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21 June 2021

Bitcoin Miners Are Moving Out Of China

Bitcoin Miners Are Moving Out Of China

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It started with rumors that miners in Sichuan had gone offline after the province limited energy-intensive industrial activities, such as Bitcoin mining.

But before we delve into the actual mining data, it’s important to do a quick recap of how miners interact with Bitcoin and how we can measure that.

One of the biggest misconceptions about Bitcoin mining is that it is, to quote Elon Musk, “highly centralized, with supermajority controlled by handful of big mining (aka hashing) companies.” This is objectively false.

This supports the hypothesis that the latest sell-off was by Chinese miners that have sold part of their holdings in order to escape the latest wave of enforcement actions by the Chinese Communist Party.

Although what they receive on a daily basis is small compared to global BTC volume, the data showcased above suggests that when miners are likely selling (an increase of “flows sent”), markets respond negatively.

However, if the CCP’s hawkish comments on mining in fact translate to enforcement actions, this seasonal migration might be impacted, and hash rate might see a drop from current levels.

If the CCP’s hawkish comments on mining in fact translate to enforcement actions that further motivate miners to emigrate from China, we might see a contraction in hash rate from current levels.

Another gigantic misconception about mining is that daily hash rate figures can provide an authoritative view of when miners are pulling the plug.

Another Muskquote illustrates this misconception well when he claimed that when “A single coal mine in Xinjiang flooded, almost killing miners, […] Bitcoin hash rate dropped 35%.”.

If you look at the average daily Bitcoin implied hash rate on Coin Metrics’ dashboard (what people usually just call hash rate), you will see that large (35%+) fluctuations occur frequently.

Crypto media outlets often take advantage of hash rate fluctuations with sensationalist “BTC HASH RATE DROPS X%” headlines, but daily implied hash rate is, by its very design, a volatile metric that is not suitable to track lasting changes in the mining landscape.

The reason for this volatility is that all daily hash rate formulas are highly sensitive to how long blocks have been taking to be mined over a given lookup window.

In the example above, a probable event would push daily hash rate estimates down considerably, even in the event that no changes in the mining landscape have actually occurred.

If you want to understand this more deeply, take a look at the formula we created at Coin Metrics to attempt to calculate daily implied hash rate figures, in the trillion of hashes per second (TH/s) unit.

As the name entails, this version of hash rate encompasses changes that might have taken place on a rolling 30-day window.

One-month implied hash rate is a better suited metric to track mid to long-term changes in Bitcoin’s hash rate because it filters out all of the noise that is naturally produced by large (but probable) variations in block creation time.

Make sure to forward this to the next crypto journalist that uses one-day hash rate changes as click-bait.

Going through this hash rate exercise is important because we might be heading into a drastic shift in the composition and geographic location of Bitcoin miners if additional crackdowns by the CCP take place.

This happens when the mining difficulty parameter is too hard relative to the number of miners online, which leads to blocks being mined at a slower rate.

On the other hand, if we don’t see a considerable decrease in monthly implied hash rate, but miners still geographically disperse, Bitcoin will have become substantially more decentralized at the expense of short-term price volatility.

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