Recently, there’s been a lot of discussions around the crackdown of Bitcoin by the Chinese central authority.
As the majority of the crypto-miners are in China, it is inevitable that China plays a central role in keeping the cryptocurrency system running.
Hence their new imposed restrictions can potentially cause Bitcoin’s price to collapse.
However, Leinvests believes that China’s restriction on Bitcoin will not affect Bitcoin’s potential growth.
Find out why by reading below!
What are the restrictions imposed by the Chinese government?
Back in 2017, China has banned all legal exchanges of cryptocurrency but not mining.
Recently, the Chinese government bans “any computer activity related to cryptocurrency” – specifically “mining”.
As China aspires to set an example to improve environmental sustainability, they are banning all crypto-mines that consume large amount of electricity.
Furthermore, the Chinese government doesn’t like volatile and speculative nature of the cryptocurrency market (Long, 2021).
What is a cryptocurrency “mine”?
Cryptocurrency “mines” are very different from gold mines.
In comparison to a gold mine, a cryptocurrency mine can be fully automated by computers and it can be built or rebuilt almost anywhere – as long as there’s space and electricity.
Cryptocurrency mines are essentially made up of thousands of computers running at the same time to solve complex math puzzles.
When a computer successfully solves a math puzzle, the computer has successfully “mined” some Bitcoin or any coin – this is how crypto-mines make money.
All cryptocurrency mines have one feature in common – they consume large amount of electricity to power these computers.
When hundreds of computers are running in the same space, the temperature of the space needs to be cooled down, which requires electricity to power cooling systems.
Hence, the increasing number of mines around the world is not environmentally sustainable.
How will China’s restriction affect Bitcoin’s price?
Leinvests believes that Bitcoin’s price will not be affected much because these Chinese miners intend to migrate to other countries and continue operation (University of Cambridge, 2021).
How substantial is the electricity consumption of mining?
The electricity consumption by Chinese mining companies is substantial, it is equivalent to the entire Chinese cement or steel production sector. (Britain’s Nature Communications, 2021).
What should we be aware of?
It is just as crucial to keep in mind what we’re doing to our planet while keeping up with financial innovations, we should keep a close watch on the electricity consumption growth rate from mining.
If the electricity consumption accelerates and gets out of hand, more countries may consider imposing restrictions on crypto-mines. Therefore, causing Bitcoin’s price to collapse.
What’s Leinvests definition of “out of hand”?
Currently, the electricity consumption is equivalent to the Chinese cement or steel production sector.
If the electricity consumption exceeds the sum of the Chinese cement “and” steel sector, I think it will be at the stage where its “getting out of control”.
When it’s out of control, it’s wise to liquidate 50% or more of all cryptocurrency holdings.
Until Bitcoin’s electricity consumption gets out of hand, Leinvests believes it’s reasonable to continue to invest in it due to its high potential.
Do you think China’s decision on this will affect other countries?
If so, do you think one should liquidate any cryptocurrencies now?
Let me know down in the blogpost comments.
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Read more about the workshop here.