There are rumors circulating the Chinese Communist Party may be planning to ban bitcoin nodes, isolating the country from the rest of the world as far as the bitcoin network is concerned.
We can’t verify the authenticity of these rumors, but the past few days have shown we should not expect any such verification until it actually happens.
Therefore, we have to take the rumors seriously and consider how a sudden cut-off of Chinese mining would affect bitcoin, and by extension, other digital currencies.
Some 80% of bitcoin mining is concentrated in China as shown in the image above. Most of the biggest, including Antpool, BTC.TOP and BTC.com operate mainly based on their own hardware.
Some, like F2Pool and ViaBTC, are actual pools in the traditional sense of the word. Many small miners pool together to make block finding more consistent. However, it is likely that the F2Pool and ViaBTC small miners are primarily Chinese.
So if we assume in the worst case scenario 80% of mining is cut-off, that means only 20% of blocks can be found in a 24 hour period.
Blocks are on average once every 10 minutes, or 144 a day. If China did ban mining, that would reduce blocks to just 28.8 every 24 hours, or around 1 per hour.
Actual figures may be different because it may be the case old hardware becomes profitable. Moreover, underground mining might continue in China, but if we stick for simplicity to 1 block per hour, bitcoin probably can continue to chug along.
However, it would do so under very restricted capacity. Fees would rise considerably. While at the same time other currencies, such as ethereum – which adjusts difficulty every block – would be up and running in hours as good as if nothing happened.
For bitcoin, it would take a lot longer. Its difficulty adjusts every ~2,000 blocks. That means it would take 69 days, just over two months, for bitcoin’s network to turn to normal operations.
Whether miners can afford to wait two months as far as actual finances are concerned is not clear. We have seen them mine altruistically in the short term, taking loses in the expectation of long term gains.
They may therefore keep the network running even if its not profitable, but from an analysis point of view, if the price remains the same, their profits should remain the same too. Because just as previously they were mining 20% of blocks, so too they are now mining 20% of blocks. Thus technically, as far as the remaining miners are concerned, it’s as good as if nothing has changed regarding the amount of blocks they find.
That’s if the price remains the same. Reduced utility due to very limited transaction capacity should arguably reduce price too. But the other coin of that consideration is that it would all be very temporary, with the network soon to return to normal operations. Something which the market may price in, which might mean, if we stick to these factors only, that although price may reduce, it may do so only to a limited extent.
Once the network returns to normal operations bitcoin, and by extension the very concept of blockchain based digital currencies, would have shown considerable resilience.
The end result would be an isolated China, while the rest of the world moves on as if nothing happened, with the events left to history books because it appears the network can continue operating even without making any protocol changes.
However, protocol changes might be on the table if developers unanimously put forward a reasonable proposal, such as perhaps difficulty reduction in a shorter time frame.
It is probable, if the circumstances demand it, that there would be unanimous agreement. The network can, in such circumstances, upgrade within hours. That would return normal operations almost instantly, while it is probable at least someone in China would run a node keeping the country in sync as far as technical network operations are concerned.
On a social level, the Chinese government could of course make bitcoin mining more difficult in the country. But to what extent they would succeed is unclear.
That’s because power plants themselves might defy orders considering the millions to be made. While underground mining would probably flourish. A practice already undertaken in the country as has been brought to our attention by news of miners arrested for stealing electricity by not paying for it.
But the days of huge mining farms with rows upon rows would probably be over. Something which may have the side effect of geographically decentralizing mining to some extent.
So the Chinese government would probably succeed, to some extent, but at a cost. Because it is probable no one would want to do any blockchain business in the country considering their sudden turn from friendly to totalitarian towards bitcoin and digital currencies.
China, therefore, may fall behind on technological advances, while the rest of the world moves on, just as it has previously, before they opened their market to a limited extent.