The Tribune

ACTIVTRADES WEEKLY

By Chris Illing

www.activtrades.bs

THE cryptocurrency Bitcoin has gained around 70 percent in value within five weeks – although China is regulating the cyber currency ever more closely. In the long term, the ban from Beijing could even stabilize the crypto market.

It’s a rapid comeback. In mid-July, the world’s most important cryptocurrency, Bitcoin, temporarily fell below the $30,000 mark and its value had more than halved since the record high in mid-April. Reports that China would tighten regulation of the crypto market and ban Bitcoin mining accelerated the price slide at the time. Bitcoin disrupts the economic order and makes money laundering easier, the Chinese authorities said. As early as the end of June, Beijing pulled the plug on many server farms in the country and hit the centre of Bitcoin mining hard: almost 70 percent of all Bitcoin miners worldwide have been in China to date, but now almost all Bitcoin mining pools in China are closed.

But Bitcoin has recovered surprisingly quickly from this blow. Since mid- July, the cryptocurrency has increased in value by around 70 percent and passed $50,000 at the end of August. The ever-tighter regulation of various economic sectors has brought the Chinese stock market to its knees – China’s tech giants such as Alibaba, Tencent or Didi have lost billions in market value due to tough control from Beijing. But the valuations on the crypto market have risen significantly since mid-July. How can that be?

There are three arguments why the Beijing ban should be viewed as positive overall for Bitcoin and the crypto market: more security through decentralization, less volatility in the long term and, in the foreseeable future, probably less use of climate-damaging energies when mining Bitcoin.

“Many had feared that Bitcoin would fail if the Chinese miners closed,” said crypto entrepreneur and known Bitcoin fan Marc Friedrich: “Now we’ve seen the opposite.”

Decentralization: Bitcoin miners are currently increasingly migrating to Kazakhstan or the USA. Texas, Wyoming and the Miami region are currently creating incentives for the immigration of Bitcoin miners.

“In the future, the mining locations will be distributed much more globally than before,” says CoinIX CEO Fromm. Decentralization is one of the core ideas of blockchain technology. If the influence of a single country decreases significantly, the security of the Bitcoin network increases too.

Background: The computers represented in the network must confirm the transactions in the Bitcoin network and ensure that, for example, Bitcoin amounts cannot be spent twice. Decentralization plays an important role here: Whoever controls the majority of the network could theoretically also influence the security of Bitcoin. The dwindling mining concentration in China has a positive effect on the security of the cryptocurrency.

Take volatility, for example: The recent strong fluctuations in the price of Bitcoin could decrease with the dwindling influence of China – and investor confidence in the cryptocurrency could increase. In the past, regulatory interventions by China had regularly led to extreme price fluctuations for Bitcoin and Co: When the Chinese central bank banned Bitcoin transfers to banks at the end of 2013, the price plummeted by 50 percent within three weeks. When Beijing closed local crypto exchanges in autumn 2017, prices fell by around 30 percent within a few days.

The hope of many crypto investors: if China hardly plays a role in Bitcoin mining any more and as long as Beijing’s central bank tolerates the unpopular Bitcoin currency at least as an “investment alternative” (as the deputy governor of the Chinese central bank, Li Bo recently put it), then one could expect the disruptive fire from China to subside. A more stable and less volatile Bitcoin course could be the result.

Take energy consumption, for example: Bitcoin’s high energy consumption, which in China is still mainly fed from fossil fuels such as coal, could possibly be reduced by the departure of Bitcoin miners from China. When mining Bitcoin, large computer systems must solve extremely complicated arithmetic tasks by merging their performance. Bitcoin miners provide enormous computing power to generate the next block on the blockchain. In this process, new Bitcoin coins are created – but this process also devours vast amounts of energy. Bitcoin mining has grown into a significant industry that requires a lot of energy, electronic equipment and space, and creates many jobs.

The latest price rally in recent weeks has shown that the end of the mining farms in China did not inflict a fatal blow on Bitcoin, on the contrary, it made the digital currency more attractive to investors. They expect more stability, both in terms of the security of the Bitcoin network and the volatility of the Bitcoin exchange rate. Bitcoin’s carbon footprint is of course still too big but at least the miner exodus from China has strengthened the trend towards a more sustainable electricity mix.