Bitcoin (BTC/USD) made a low of around $29927.00, below $30000 on June 22, for the 1st time since January of 2021 amid a growing globally synchronized regulatory crackdown on Cryptos especially in China, where authorities in certain provinces ordered Bitcoin mining projects to close. As a recapitulation, back in May of 2021, the Chinese State Council (China’s cabinet) vowed to clamp down on crypto-mining and trading as part of a series of regulatory measures to control growing financial as well as outflow risks.
The Chinese Central Bank (PBOC) also summoned some regular state banks and also private payment banks, ordering them to take stern action on unregulated Crypto trading and mining. As a pointer, companies and miners that mine Bitcoin typically hold large inventories of Cryptos, and the crackdown on Chinese miners caused offloading those Crypto holdings, causing price crashes.
Crypto mining is essentially a process whereby Bitcoin, Ether, Tether, or Dogecoin are given to users to solve complex computational puzzles to verify and validate ‘blocks’ of transactions. A bitcoin miner runs a program (algo) on a high-end computer to try to solve a complex puzzle that completes a block, a process that both creates new BTC and updates the digital ledger (network) which tracks all BTC transactions.
What caused the increase in production in Bitcoin in June, and going forward, how can it affect the prices?
The simple answer may be less network congestion to mine Bitcoins after almost half of China’s Bitcoin/Crypto miners go offline due to the government crackdown.
After the Chinese Crypto crackdown on mining, Bitcoin mining is now a lot easier and profitable as the algo adjusts after the China crackdown. The Bitcoin algo code has been re-calibrated to make it 28% less difficult to mine. Bitcoin miners who can still plug into the network stand to make greater profits while most of the network’s miners remain offline after the Chinese crackdown. Fewer miners mean that fewer blocks are solved each day. Normally, it takes about 10 minutes to complete a block, but the Bitcoin network has slowed down to 14-19 minute block times in the May peak. This is precisely why Bitcoin re-calibrates around every 2016 block every two weeks, resulting in fewer Bitcoins before June.
Now essentially, Bitcoin’s mining difficulty (network congestion) rate has dropped by nearly 28% after a significant drop in hash rate after China’s crackdown on Crypto mining, the largest decrease since its 2009 inception. As China’s crackdown on mining continued, eventually, the block times turned to the optimal 10-minute window. Fewer mining players (after the Chinese crackdown) and less difficult algo mean that any miner with a machine (high-end PC) plugged in (with the network) is going to see a higher production of Bitcoins and a significant increase in earnings.
U.S.-based Marathon Digital Holdings mined (produced) 265.6 new Bitcoins (BTC) in June of 2021, a sequential (m/m) increase of 17%. In Q2CY21, Marathon produced a total of 654.3 BTCs, over a +241% increase from the Q1CY21 production (mining) figure of 191.7. The ramp-up in production occurred amid China’s crackdown on Bitcoin mining, affecting almost 50% of global supplies; China alone accounted for almost 70% of global Bitcoin mining on average for the last few years. Marathon Digital is trying to capture some BTC mining market share voided by Chinese miners and installed 1740 additional miners in June, bringing the total capacity to 19395 miners.
In brief, Marathon is planning to upgrade and expand its BTC mining capacity almost 5 five times to take advantage of expected favorable and profitable mining conditions due to the Chinese exit. After 50% of China’s 50% BTC/Crypto miners had been forced to go offline in May due to growing regulatory, environmental and financial stability concerns, U.S. mining is now more profitable as the demand for Bitcoins is more than the supply.
At present, the demand for new Bitcoins is higher than the supplies, which is supporting its price to some extent despite increasing U.S. production and the Chinese clampdown. But this situation may change by the next few quarters (6-15 months) if the U.S. does not follow China in banning Bitcoin mining and Chinese miners migrate to the U.S. directly or indirectly, or China blinks on its Bitcoin mining clampdown and again allows some form of mining. As the U.S. is a democracy, unlike the Chinese autocracy, a complete ban of Bitcoin mining may be tough for the U.S., where mining is now taking the shape of the cottage/home/garage industry (apart from big commercial miners).
Bitcoin price plunged more than 50% from its all-time high of around $64374.00 to almost $30000 in May:
Bitcoin, the ‘digital Gold,’ tumbled amid Elon Musk’s crypto flip-flops and Chinese crackdown on crypto mining and trading. BTC/USD also reflected volatility due to institutional/corporate unwillingness, various adverse regulatory remarks, and lack of confidence.
Over the last few years, BTC/USD was seen as a volatile digital alternative to Gold (XAU/USD), especially after CME introduced the future contract of BTC/USD, paving the way for more speculation, hedging, and trading. There was also a trend of increasing regulatory and institutional willingness to accept BTC/Crypto as a digital asset rather than legal/any form of tender/currency.
Although Bitcoin mining levels are higher, the resulting higher supplies can affect its price. Under the current circumstances of the Chinese mining prohibition, the supply fell almost 50% after May, and that is supporting the price despite the recent surge in U.S. miners (like Marathon Digital). Apart from the Chinese mining crackdown, Bitcoin is also under stress on regulatory uncertainty. It now seems that G20 central banks/countries, including the Fed, ECB, and BOE, are taking some gradual steps for an orderly regulatory environment rather than an outright ban.
There will be no blanket ban on Bitcoins/Cryptos as such a ban may cause a spillover effect on other asset classes like equities due to huge margin calls, with everything being equal. Cryptos/BTC will coexist as an alternative digital/intangible asset with orderly price movement (volatility) and not any form of tender/currency. Various countries/central banks, including U.S. /Fed, may use Crypto as techs for their planned CBDC to enhance financial inclusion and efficiency of the payment ecosystem with minimal cost.