China is the second largest bitcoin mining hub because miners go underground

According to research from Cambridge University, by September 2021, China accounted for only 22% of the total bitcoin mining market.

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Bitcoin miners are not giving up in China, despite Beijing’s ban on the practice.

China was once the world’s largest crypto mining hub, accounting for between 65% and 75% of the total bitcoin network’s “hash rate” – or processing power.

But according to Cambridge University data, the country’s share of global bitcoin mining power fell to zero in July and August 2021, after a fresh crackdown on cryptocurrencies began.

Among the steps taken by China was the abolition of crypto mining, an energy-intensive process that led to the creation of new digital currencies. As a result, many miners have fled to other countries bordering China, including the United States and Kazakhstan.

But, as CNBC has previously reported, many underground mining activities have begun in China, where miners are taking care to work in the vicinity of the Beijing embargo.

Now, new research from the Cambridge Center for Alternative Finance shows that Chinese bitcoin mining activity has recovered quickly. As of September 2021, China accounted for more than 22% of the total bitcoin mining market, according to data from Cambridge researchers.

This means that China is once again the world’s leading player in bitcoin mining – second only to the United States, which last year surpassed China as the largest destination for the sector.

There’s a caveat: the research methodology relies on the overall geolocation from the huge bitcoin mining “pool” – which more effectively integrates computing resources into new token mines – to determine where activity is concentrated in different countries.

The method could be risky for “intentional ambiguity” by some Bitcoin miners using a virtual private network (VPN) to hide their location, the researchers said. VPNs allow users to route their traffic through a server in another country, making it easier for people in countries like China, where Internet access is severely restricted.

However, they added that this limitation would “only moderately affect” the accuracy of the analysis.

What is Bitcoin Mining?

Unlike conventional currencies, cryptocurrencies are decentralized. This means that the task of processing transactions and creating new units of currency is handled by a distribution network of computers rather than banks and other intermediaries.

In order to facilitate bitcoin payments, so-called miners must agree that the transaction is valid. This process forces complex calculations to work out a puzzle that adds to the difficulty by joining a larger number of miners joining a network known as blockchain.

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The person who solves the first puzzle will be able to add a new batch of transactions to the blockchain and will be rewarded with some bitcoin for their efforts.

Why Beijing worried?

This method of reaching consensus, known as “proof of work”, consumes a lot of energy – much like the whole country, such as Sweden and Norway.

China has often issued warnings about crypto. But its most recent crackdown was arguably the most serious.

The world’s second-largest economy struggled with months of power shortages last year, leading to power outages.

China is still increasingly dependent on coal, and is increasing its investment in renewable energy to become carbon neutral by 2060. Authorities see crypto mining as a potential obstacle to that plan.

Now, the resurgence of bitcoin production in China has made the country the second largest destination for those hoping to find new digital currencies – 2 million bitcoins still to be mined. This may be a less lucrative endeavor now, though, as bitcoin prices have fallen by more than 50% since the November high.

China’s National Development and Reform Commission and the People’s Bank of China – both of which have issued stern warnings against crypto mining and trading – were not immediately available for comment when contacted by CNBC.

– CNBC’s Mackenzie Sigallos and Evelyn Cheng contribute to this report.

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