Could the Chinese Government Cripple the Bitcoin (BTC) Network at a Time of Its Choosing Now That Sichuan Province Alone Has 54% of the Global Mining Hash Rate?

December 17, 2019 / by Zachary Mashiach

An in-depth Bitcoin (BTC) mining analysis from CoinShares Research reveals that 54% of the global Bitcoin (BTC) mining hash rate is located in a single Chinese province, Sichuan and that this is mostly from only seven major mining farms. This seems like an unacceptable level of centralization for Bitcoin (BTC) and begs the question: Can the Chinese government cripple the Bitcoin (BTC) network at a time of their choosing? The answer is yes, as detailed in this article.

There are at least a couple of factors that explain why Sichuan is such a Bitcoin (BTC) mining powerhouse. According to CoinShares Research, the lion’s share of new mining technology is deployed in China since the biggest mining manufacturers, Bitmain and Canaan, are located in China. This gives Chinese mining farms preferential and discounted access to top of the line mining technology.

The second factor is that China has a glut of hydropower in Sichuan province, due to the Yangtze, Yalong, Dadu, and Min rivers which cut across the majority of the province. Hydroelectric dams are generating so much power in Sichuan that it would be wasted if it wasn’t for Bitcoin (BTC) mining farms buying up excess power.

As if these factors were not favorable enough, there are apparently calls for Sichuan to subsidize the Bitcoin (BTC) mining industry to increase its hold on global dominance. That being said, China has technically subsidized Bitcoin (BTC) mining for years with extremely cheap electricity from hydropower since China could build transmission lines to more evenly spread out the electricity but instead chooses to let mining farms have all of the excess power.

Further, Sichuan is not the only region in China that has the potential to become a Bitcoin (BTC) mining powerhouse. Neighboring Yunnan province has just as much hydropower potential as Sichuan, with the Yangtze, Honghe, Salween, and Mekong rivers crossing through the province. Xinjiang and Inner Mongolia have significant mining operations as well due to abundant coal energy combined with some hydropower and solar power.

All in all, 11% of the global Bitcoin (BTC) mining hash rate is located within China outside of Sichuan, but this percentage has the chance to substantially increase.

Ultimately, 70% of the Bitcoin (BTC) mining hash rate increase observed over the last six months has been deployed in China, and it appears this rate has the potential to increase further. Already, China has a majority of the global hash rate at 65%.

This brings up the chilling question: what if the Chinese government seizes control of enough Bitcoin (BTC) mining farms to account for greater than 50% of the global hash rate? Even worse, what if the Chinese government already has control of all major mining operations in the country? This is not too far fetched, considering the strong control that the Chinese government has over every aspect of its economy.

The science behind Bitcoin (BTC) is quite clear. If any entity controls more than 50% of the global hash rate, they can then fork the blockchain and institute their own set of rules. For example, the Chinese government could decide to cripple the Bitcoin (BTC) network completely if it ever perceives Bitcoin (BTC) to be a significant threat to its power. This could specifically happen in the event that the Chinese Yuan (CNY) hyperinflates due to a global recession, and Chinese citizens flock to Bitcoin (BTC) as a safe haven. At that point ruining Bitcoin (BTC) could be justified as a measure to protect the CNY.

Also, the Chinese government could institute a centralized blockchain that it controls in order to make Bitcoin (BTC) compliant with its regulations, and such a move would ruin Bitcoin’s (BTC) immutability.

Such overt Chinese government attacks on Bitcoin (BTC) could come about via a government-mandated software upgrade for all mining farm operators in China, and mining farm operators could be threatened with prison if they do not comply.

While these scenarios may seem unthinkable, the crypto space is pretty much rolling the dice at this point and betting that the Chinese government will not do something like this, even though 54% of the global hash rate seems to be located across seven mining farms in a single Chinese province. These mining operators completely depend on cheap electricity from the government, and if it came down to it, mining operators would have to listen to any demands the government makes.

The global Bitcoin (BTC) community needs to recognize this serious threat to the decentralization of the Bitcoin (BTC) network. There is a chance that one day China will pull the plug on Bitcoin (BTC), and at that point, it will be too late to do anything to salvage the situation since the economy of the crypto space would likely be ruined overnight.

One of the simplest solutions would be to change the Bitcoin (BTC) proof of work (PoW) algorithm periodically, although this would never be supported by miners and therefore would not be possible. Also, this solution would not change the fact that the biggest mining manufacturers and the cheapest electricity are in China.

There may be a viable solution, but it will require a long-term effort. Crypto companies in other countries can build bigger and better mining farms so that the rest of the world has a hash rate share greater than 51%. At this point, mining farms are created mostly for profits, but perhaps another primary reason to create mining farms should be to decentralize the network so that no single government has the power to ruin Bitcoin (BTC).

For example, Coinbase is not known for being in the mining business, but Coinbase could launch a massive farm in the United States and continuously expand it from trading fees in order to keep the global balance of mining power decentralized.

Mining concentraion in China may be the greatest threat to Bitcoin (BTC) and should not be taken lightly. Hopefully the crypto space can come together to protect Bitcoin (BTC) since practically every company in the crypto space could one day face extinction if nothing is done to decentralize the global Bitcoin (BTC) mining hash rate.