- China has cracked the whip on bitcoin miners, but it’s not all bad news.
- Riot Blockchain CEO Jason Les says the bitcoin mining difficulty rate adjustment is a good thing.
- Top crypto experts have three reasons why they are bullish on bitcoin despite the China mining exodus.
China’s tumultuous relationship with bitcoin and other cryptocurrencies is nothing new.
The country first banned financial institutions from handling bitcoin transactions in 2013, arguing the digital asset was merely a “virtual good” that had no legal status as a currency.
Then, in 2017, China made initial coin offerings (ICOs) illegal and enacted a ban on the trading of bitcoin and other digital currencies.
Despite these bans, bitcoin miners continued to operate in the nation (accounting for roughly 65% of global bitcoin hash rate production) until the summer of this year, when Chinese officials began shutting down bitcoin mining facilities around the country.
The new crackdown exacerbated an already bearish trend for bitcoin after the world’s leading digital asset hit a record high of over $65,000 in April, only to fall below $30,000 briefly on reports of ESG concerns and a Tesla U-turn on accepting payments in bitcoin.
Still, Jason Les, the CEO of Riot Blockchain, one of the largest public bitcoin miners in North America, told Insider there are some distinct benefits of bitcoin mining’s China exodus.
Perhaps the most important of these is the upcoming downward difficulty rate adjustment. Les said that as miners relocate from China fewer mining operators are competing to mint new bitcoin, leading the difficulty of mining each new coin to decrease significantly.
The CEO expects a roughly 20% decline in the difficulty to mint new bitcoin on July 1 when the new mining difficulty rate goes into effect. The decline should be a boon for public miners already in operation like Riot Blockchain, Hut 8 Mining Corp., and Marathon Digital Holdings.
Les also noted the beneficial effect that bitcoin mining’s China exodus will have on ESG concerns — and that’s good for both miners and investors.
“With so many miners being in those coal-fired regions of China, if they’re not mining anymore, it’s only going to further increase the global generation mix for bitcoin mining in the direction of renewables,” Les said.
Alexander Blum, the co-founder and managing partner of the digital asset investment products firm Two Prime Digital Assets, said that other countries will begin to “roll out the red carpet” for bitcoin miners as they leave China.
Blum said that miners are already moving to areas like Latin America, Kazakstan, and even Texas. His statements regarding what some are calling “the great mining migration” are backed up by new reports of Chinese bitcoin miners moving operations to Kazakhstan and even airlifting mining machines to the US.
Jack McDonald, the CEO of PolySign, a firm specializing in digital asset custody solutions for institutional investors, pointed out that the recent drop in bitcoin’s price has also led to a healthy unwinding of leverage for traders and investors.
While China’s bitcoin mining ban may have spooked newcomers in the crypto space, industry veterans are seeing the bright side and remain steadfast in their belief that bitcoin will find long-term success. Below, Insider detailed three of the many reasons why.
Institutional Investment
Institutional investment in digital currencies has long been seen as one of the keys to securing the asset class’s standing. While some market commentators worried that bitcoin’s decline from record prices would push institutional investors out the door, the experts still see strong demand for digital assets from institutions.
“We’ve had a lot of interaction with institutional investors over the last three weeks,” McDonald said in a Friday interview with Insider. “We’ve spoken to 35-40 institutional clients, and I can tell you that the interest level in investing into this space is extremely high. For many, the price drop is actually an opportunity to enter the market at a more attractive price point.”
Blum explained to Insider that institutions move slowly, and it takes time for their presence to be felt in the crypto space.
He also said greater integration of digital assets to small banks in the coming years will make it easier for consumers to buy, sell, and hold bitcoin through their bank accounts.
“There’s still a great deal of institutional money that intends to buy and hold bitcoin,” Blum added.
The Growing Derivatives Market
There has been meteoric growth in the derivatives market for cryptocurrencies of late. A first-of-its-kind study published this April out of Carnegie Mellon University revealed that, on a busy day, over $100 billion in cryptocurrency derivatives are traded — that rivals the daily volume traded on the New York Stock Exchange.
From leading derivatives exchanges like BitMex to more boutique options, the derivatives market for cryptocurrencies is exploding.
Alexander Blum’s Two Prime Digital Assets is a great example of that growth. His firm helps investors gain exposure to bitcoin and etheruem by leveraging volatility, capturing upside, and reducing downside risk using derivatives.
Blum said that he is seeing significant investor interest in the space, and in terms of derivative posture, call options around the $50,000 to $60,000 mark that expire in September are very popular, giving him a bullish view on the current trajectory for bitcoin.
Unsustainable Fiscal and Monetary Policy/Inflation
Supply constraints and a historic economic rebound have pushed common inflation gauges, like the Consumer Price Index (CPI) and Core Personal Consumption Expenditures (Core PCE), to multi-year highs.
With the
Federal Reserve
maintaining ultra-accommodative monetary policy and the Biden administration spending trillions on infrastructure and other programs, some market commentators are starting to fear the current path is unsustainable and may lead to a sustained rise in inflation.
Polysign’s McDonald says if inflation continues to rise, it could be a boost for cryptocurrencies — especially bitcoin.
“I think a lot of the market sentiment of late is concerned about inflation and, just like gold, I think cryptocurrencies, and particularly bitcoin, are being viewed as a hedge against inflation,” McDonald said.
Riot Blockchain’s CEO Jason Les also said we’re in an “unprecedented” era of government spending and money printing, and that he believes rising inflation will drive continued interest in bitcoin.