The crypto markets have been in a clear downtrend in the past three months. Ever since the price of Bitcoin crashed by almost 50% at the beginning of May 2021, the otherwise bullish trend flipped into a full-fledged bear market. 

One of the main reasons for this price drop was the amount of negative market sentiment propagated by the Chinese government. First, they advised banks to stop serving clients that wished to buy bitcoin through their bank accounts. But this was just the beginning. 

It was the crackdown on the crypto mining facilities in the country that acted as the real catalyst for the bitcoin price crash. Just after Elon Musk was spreading negativity over Bitcoin’s sustainability, the ban on crypto mining facilities pushed prices down even further. 

In this article, we take a look at the reasons for this ban and whether it will have a long-term impact on the Bitcoin ecosystem.

Why is mining in China so important for the Bitcoin network?

Until recently, China used to be the biggest hash power contributor for the Bitcoin network. More than 65% of all Bitcoin mining facilities used to be located in mainland China. These were mainly using dirty energy as their source of power, usually exploiting old or abandoned coal plants.

Because electricity is cheap in China, some of the largest mining farms chose to locate in China, using some of the recently upgraded grids to power their activities. This allowed the Bitcoin hashrate to rise considerably in the past few years, ensuring quick transactions and a 100% secure network. 

However, since June 2021, the Chinese government has proceeded to ban this highly lucrative venture on its soil. Farms were given the notice to cease their activities or face fines or jail sentences. What followed was a complete exodus of mining facilities, rigs being dismantled and sold to the highest bidder or relocated in neighboring countries like Kazakhstan. 

This resulted in a significant drop in the Bitcoin hashrate and the network slowed down considerably in the weeks that followed the crackdown. 

What are the reasons China mined cryptocurrency mining?

It’s no secret that China doesn’t like Bitcoin. Even though mining is a profitable venture for many entrepreneurs in this country, the fact that the government cannot control what people do with their Bitcoin has always rubbed them in the wrong way. 

In the past, we’ve seen China ban cryptocurrency trading in 2018. This also contributed to the bear market of 2018, where the Bitcoin price dropped more than 30% in a short amount of time and couldn’t recover afterward. 

Another reason for this mining ban is that the Chinese central bank is preparing the grounds for their government-issued digital yuan. This programmable currency has already gone through multiple stages of testing and is approaching public release. Consequently, by banning Bitcoin and other crypto mining, they are forcing the public to accept the usage of their CBDC. 

Many analysts predicted that China would ban Bitcoin mining sooner or later. The ban came at the worst moment possible, as the original crypto was recovering from the FUD around its power usage and sustainability. 

What’s next?

While the relocation of miners to other countries had a significant impact on the efficiency of the Bitcoin network, this was only a short-term hindrance. The Bitcoin mining algorithm is designed to adapt its difficulty as miners join or leave the network. While hashrate hasn’t recovered to previous levels, the speed of the network is back to its pre-ban performance. 

Moreover, this means that the huge centralization of the mining power in China will no longer be an issue in the future. Bitcoin mining is a free market and many companies from all around the world jumped on this occasion to invest in mining rigs. 

The U.S was already at the second spot for providing hash power to Bitcoin with 17% market share, and we can expect these numbers to increase considerably in the future. Just recently Gryphon Digital Mining announced that it was purchasing no less than 7200 mining rigs. 

This also means that Bitcoin mining is slowly moving to more sustainable energy. Because mining facilities are migrating to more developed countries, hydro, wind, and solar will become preferred sources of electricity for Bitcoin mining. Consequently, the initial issue of Bitcoin’s carbon print should be considerably alleviated. 

Conclusion

The crypto mining crackdown from the Chinese government contributed to the crash of the crypto market this summer. Many believe that one of the main reasons for this ban is the promotion of the Chinese digital yuan that should be released in the near future. With that said, while the short-term consequences of this ban are unpleasant for crypto investors, the future looks brighter than ever. China’s domination in the mining sector will slowly dissapear, providing a more decentralized network, independent from geopolitical events.