China is considering banning Bitcoin mining, a move that would affect some of the biggest Bitcoin players. While a ban could hurt the overall network, restrictions on mining in China could actually be a positive thing in the long run, as it would encourage more decentralization of the network.
So-called miners maintain the Bitcoin network by tracking all the transactions made on it, and they are paid for their work. Miners use specially designed computers, most of which are made in China, that can quickly tabulate transactions. The most important input cost for miners is the electricity used to run the machines, so they tend to set up shop in places like China, where they can find inexpensive power.
It’s important that mining power be spread out among many players, because of a rule governing Bitcoin that allows prior Bitcoin transactions to be reversed by one entity (or multiple entities acting together) that controls more than half the mining power.
When Bitcoin was near its highs, miners thought to be controlled by just a few Chinese companies ran a majority of the network, causing concern in the Bitcoin community that those operators had too much power. Among the biggest mining players in China is Bitmain, which makes the chips used in mining. By some estimates, Chinese companies and mining “pools” that combine their computing strength have controlled as much as half—or perhaps even more—of the mining power on the network.
But that centralization has waned in recent months, along with the price of Bitcoin. The network is “decentralizing naturally due to two forces at work,” wrote Fundstrat co-founder Thomas Lee in an email to Barron’s. Lee has previously raised concerns about mining concentration.
Mining hardware is “no longer controlled by Bitmain to the same extent as it was 18 months ago as other ASICS have become competitive,” Lee wrote. And electricity is cheap enough in other places that miners can set up shop in “multiple places in the world and [use] multiple types of power generation.”
A Bitcoin ban in China would create “a loss of hash power if the shutdown happens abruptly,” Lee writes. “And this lowers the theoretical cost of a 51% attack on the bitcoin blockchain. So that is a negative. But reducing concentration is important to bitcoin and this is what is the intermediate and long term implication.”
Bitcoin is trading at $5,241.02, down 0.45%, on Tuesday.
Source: The Barron’s