How China’s crypto-mining ban could affect crypto prices
In an attempt to cut energy consumption, China’s Inner Mongolia region plans to ban new cryptocurrency mining projects and close down existing activity. Here we look at how this crypto-mining ban might affect crypto prices.
The Bitcoin cryptocurrency is recorded on a blockchain, a public ledger on a decentralised network, unlike traditional currencies issued by a central bank. All transactions are verified by miners that run the purpose-built computers which allow individuals to play craps online using cryptocurrencies even if they are in a region where casinos are banned. This is because blockchain technology allows people to play safely and anonymously.
Energy use in crypto-mining
In 2020, China’s President Xi Jinping announced that the country wants to restrict growth in energy consumption to about 1.9 per cent in 2021 and is aiming for carbon neutrality by the year 2060, which also involves looking at energy-intensive industries like steel and coal to assess where energy savings can be made.
The government’s energy goals impact mining computers which are extremely powerful and require a lot of energy, particularly since China mines 65 per cent of all bitcoin globally, with Inner Mongolia accounting for about 8 per cent, due to its cheap energy. To compare, the US accounts for 7.2 per cent of global bitcoin mining. The University of Cambridge’s Cambridge Bitcoin Electricity Consumption Index has estimated that Bitcoin mining consumes roughly 128.84 terawatt-hours per year of energy, which is more energy than is used throughout the whole of Ukraine or Argentina.
The Chinese government has ordered cryptocurrency mining projects in the autonomous region are to be closed by April 2021. Also banned are new digital coin projects, according to a draft plan posted on the Inner Mongolia Development and Reform Commission’s website on 25 February 2021. The draft policy was released weeks after China’s top economic planner blasted Inner Mongolia for being the only province to fail to control energy consumption in 2019.
Chinese government cracks down on digital currencies
The Chinese government has backed the development of blockchain technology but has not supported digital currencies. Before 2017, China was home to about 90 per cent of virtual currency trading, until it banned initial coin offerings and also come down hard on cryptocurrency exchanges and other businesses involved in cryptocurrency operations due to concerns about speculative bubbles, fraud and energy waste. The abolition of initial coin offerings virtual currency trading within its borders forced many exchanges overseas. This was followed in 2018 by proposals to discourage crypto-mining.
After news broke that Inner Mongolia was to ban new cryptocurrency mining projects and close down existing activity, Bitcoin extended gains, increasing as much as 6 per cent in the session to USD47,970 on 1 March. This is because the Central Bank in China is creating its own version of centralised blockchain currency and has already completed a blockchain along with several other major commercial banks and is at the forefront of monetary authorities studying blockchain due to its political usefulness, though it wants to keep the domestic currency (the Yuan) within the country and domestic stock indexes stable.
The ban could strengthen blockchains
Paradoxically, with the centralisation of mining pools in China becoming a concern when it came to the consolidation of network hash rate (60-70 per cent of Bitcoin’s network hash power was contained in China, the country’s proposed ban on cryptocurrency miners, should it happen, may actually strengthen blockchains, Bitcoin and other cryptocurrencies over the long term.
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