Bitcoin crashed by 10% earlier today after China’s announcement of officially cracking down on Bitcoin mining within the nation.
China announced this policy last month as the nation, as well as major Bitcoin holder, Tesla, Elon Musk’s electric car manufacturer, pulled out of the currency.
This caused all momentum which the cryptocurrency gained since the start of 2021 to be erased as Bitcoins price dropped to £24,030, a massive blow from the currencies peak where it reached values of up to £40,000.
This decision by the Chinese government is also aligned with other nations such as Iran who recently have also cracked down on Bitcoin mining operations within their nations.
However, this crypto scepticism is largely contrasted by El Salvador’s decision of welcoming Bitcoin with open arms by attempting to declare it as legal tender.
So, why are nations such as China and Iran clamping down on Bitcoin mining operations?
Bitcoin mining is not like traditional mining. Mining Bitcoin is done through a process where a computer runs a mining program, a program that runs faster and more effectively with more computing power.
This difficult process makes mining Bitcoin very time consuming, especially if the system itself is not very powerful, because of this, cryptocurrencies like Bitcoin are scarce as due to the time-consuming nature of mining, their supply is limited.
At the same time, there can only be a maximum amount of Bitcoins within the circulation, the maximum being 21 million, because of this, Bitcoin’s supply perfectly price inelastic.
Consequently, cryptocurrencies gain the majority of their value from shifts in demand as when tastes and fashions change towards favouring cryptos, a phenomenon which occurred during the lockdown as bored, amateur traders and young people began dipping their toes in stocks, demand increases, thus yielding a large rise in price due to the perfectly price inelastic supply of the currency.
So, Bitcoin is very volatile due to its dependency on fluctuations in demand which makes the cryptocurrency a very risky, albeit potentially very good investment if timed correctly.
However, for the Bitcoin miners, this trade is potentially incredibly profitable and ludicrous.
Because of this profitability, Bitcoin miners have a massive incentive to mine as many Bitcoins as possible until they cannot mine anymore, consequently, groups of Bitcoin miners have constructed massive server-like rooms filled with computers capable of mining Bitcoin at a very fast rate.
These massive servers require a large amount of cooling due to the degree of machinery within them this combined with their 24-hour uptime makes Bitcoin mining extremely bad for the environment as carbon emissions from energy consumption make the trade a very dirty business.
This is likely one of the reasons why China is clamping down on the industry as in future, China will likely invest heavily into decreasing air pollution to ensure that its large population, which is mainly concentrated in cities, does not experience massive public health problems as this will place significant pressure on Chinese health services.
However, the most probable reason is related to the anonymity around Bitcoin as well as its unregulated nature.
Bitcoins blockchain system allows for a completely contactless, unregulated and anonymous method of payment, which is perfectly designed for anybody who wishes to have their day to day activities hidden from the state.
Hence, due to the state-controlled nature of the Chinese economy, this concept likely does not sit well with some CCP officials.
Consequently, although a more political issue, this anonymity is another likely cause for the Chinese crackdown on Bitcoin.
However, it should be noted that in future, Western nations may also begin to clamp down on Bitcoin for similar reasons as cryptocurrencies such as Bitcoin are very susceptible to market manipulation due to their unregulated nature, which is something Big Brother doesn’t like.
Furthermore, the implementation of digital currencies implemented by central banks, a concept which we have evaluated in other articles, may also cause further complications as it is unknown if they can coexist with Bitcoin thus making Bitcoin’s future a turbulent, uncertain but yet interesting one.
Written by Hubert Kucharski