Chinese Bitcoin Mining Rebounds Despite 2021 Prohibition

(Reuters) - Bitcoin mining is making a surprising resurgence in China, four years after the government imposed a ban, as individual and corporate miners take advantage of low electricity costs and a surge in data center developments in certain energy-rich regions, according to miners and industry sources. Prior to the ban, China was the leading country for cryptocurrency mining until Beijing prohibited all trading and mining activities in 2021, citing concerns for financial stability and energy conservation. Following a complete drop to zero of its global bitcoin mining market share due to the ban, China has partially recovered to claim a 14% share by the end of October, according to Hashrate Index data. This revival of bitcoin mining has also been evidenced by a significant increase in sales from rig manufacturer Canaan Inc. in China, potentially providing support for demand and prices in the global cryptocurrency market. A private miner in Xinjiang mentioned that he began mining late last year due to the region's abundant energy resources. 'Much of the energy can't be transmitted out of Xinjiang, so it's consumed through crypto mining,' said the miner, who requested to remain anonymous. 'New mining projects are currently being developed. What I can say is that people are mining where electricity is affordable.' Neither the National Development and Reform Commission, which enforced the ban, nor the Xinjiang provincial government responded to Reuters' requests for comments. After the crackdown in 2021, miners left China to operate in overseas markets, including North America and Central Asia. The bitcoin mining rebound corresponds with the cryptocurrency reaching record highs in October, fueled by former U.S. President Donald Trump's supportive policies on crypto and increasing skepticism towards the dollar, enhancing mining profitability. However, bitcoin has since fallen approximately one-third from its October peak amidst shrinking global risk appetite. 'Flexibility in Chinese policy emerges when there are strong economic incentives in specific regions,' commented Patrick Gruhn, CEO of Perpetuals.com, a provider of crypto market infrastructure. 'The revival of mining activity in China is a significant indicator for the market, reflecting the most important trend we've seen in years.' Although China's government has not officially eased restrictions on bitcoin mining, any softening of policy could bolster bitcoin's position as a globally resilient asset, especially as industry data indicates renewed growth in mining activities. Bitcoin mining—an energy-intensive operation that involves specialized computers solving complex algorithms for rewards—is notably thriving in energy-rich areas like Xinjiang, according to miners and rig manufacturers. Duke Huang, who stepped back from bitcoin mining a few years ago due to regulatory pressures, noted that some acquaintances have returned to the industry recently. 'It's a delicate subject ... But those with access to cheap electricity are continuing to mine.' Additionally, a surplus of electricity and computing resources stemming from excessive investments in data centers by financially constrained local governments has contributed to this resurgence, according to an anonymous source from a bitcoin mining rig manufacturer. This trend is further reflected in sales figures from mining rig producers. Canaan, the second-largest bitcoin mining machine manufacturer globally, reported that 30.3% of its revenue came from China in the previous year, a stark contrast to just 2.8% in 2022 following the crackdown. This share has now climbed to over 50% during the second quarter of this year, as per a source with direct knowledge of the matter, who remained anonymous due to the sensitivity of the information. Canaan has attributed its increasing sales to uncertainties regarding U.S. tariffs disrupting their U.S. operations, the rising price of bitcoin enhancing mining profitability, and a subtle shift in China's stance towards digital assets. In a statement, the Singapore-based company emphasized that its operations comply fully with Chinese regulations but declined to comment on mining policies in China. 'In China, R&D, manufacturing, and sales of mining machinery are allowed,' Canaan stated. The increase in bitcoin mining activity in China coincides with hints that Beijing may be reconsidering its hardline stance on digital currencies, which were historically viewed as a challenge to the integrity of the national currency and potential facilitators of capital flight. Notably, Hong Kong's stablecoin legislation took effect in August, enabling the city to compete with the U.S. in establishing a regulated market for fiat-backed cryptocurrencies. Moreover, China is contemplating the introduction of yuan-backed stablecoins to augment the global acceptance of its currency and to align with the U.S.'s advancements in stablecoin developments, as reported by Reuters in August. 'While bitcoin mining remains officially banned in China, there is still a substantial amount of operational capacity,' stated Julio Moreno, head of research at CryptoQuant, a data analytics firm specializing in blockchain. CryptoQuant estimates that approximately 15%-20% of the global bitcoin mining capacity is currently operational in China. Liu Honglin, founder of Man Kun Law Firm, expressed skepticism about the possibility of eliminating a lucrative sector entirely. 'I believe government policies on mining will gradually relax, as it's almost impossible to completely eradicate such activities.' (Reporting by Reuters staff; Editing by Muralikumar Anantharaman)