A Review: the Great Hash Rate Migration of 2021

China Bans Itself from Bitcoin

This should lead one to think, “If a country has to ban something more than once, can they really ban it?”

However, regard­less of how ineffec­tive this ban will be, the Chinese author­i­ties proved to be more severe about this crack­down compared to previous ones. 

After the announce­ment, Chinese Bitcoin mining opera­tions were forced to shut down entirely, and cryptocur­rency trading was made illegal. Chinese miners had no choice but to leave the country in search of a new home for their mining operations.

In many ways, this was the scenario that Bitcoin critics had cautioned about for years. They warned that the Chinese govern­ment would attack Bitcoin, the network would fail, and Bitcoin’s price would fall to zero. Make no mistake, this ban was an attack on Bitcoin. With little warning, the Chinese govern­ment forced miners to shut down their equip­ment, drasti­cally reducing Bitcoin’s hash rate in the process. Shortly after­ward, the Bitcoin price dropped ~50%. 

Yet, this did not result in Bitcon’s death like critics falsely predicted. On the contrary, it provided further evidence of Bitcoin’s resiliency. The network continued to function with perfect uptime despite the attack. On top of that, Bitcoin’s hash rate continued to make an impres­sive recovery since the ban.

Bitcoin’s hash rate has now recov­ered to around 160 Exahash from its all-time high of 197 Exahash before the China ban. 

Hash Rate Recovers

This chart is evidence of the healthy recovery the Bitcoin network has been experi­encing since July. Bitcoin’s energy usage is funda­mental to its security. The larger the hash rate, the more hash power an attacker would need to obtain to success­fully perform a 51% attack. This is no doubt a positive on-chain devel­op­ment to see.

In addition to the hash rate recov­ering, the mining diffi­culty adjust­ment has increased 8 consec­u­tive times since July. This indicates that the unplugged Chinese miners are contin­u­ously coming back online.

Difficulty is Rising

The diffi­culty adjust­ment working just as Satoshi Nakamoto intended is a beautiful thing to witness. As the Chinese miners turned off their machines, the hash rate fell abruptly. Like clock­work, the diffi­culty adjust­ment also dropped, making it easier for surviving miners to mine blocks. This incen­tivizes miners to stay on the network because it’s more profitable for them to do so. The diffi­culty adjust­ment is Bitcoin’s own internal mecha­nism to keep miners happy while at the same time enticing more miners to plug into the network. From this chart, we can clearly see that reinforce­ments have arrived.

Meanwhile, during the largest state-level attack in its 12-year history, Bitcoin’s network has continued to run flawlessly. Approx­i­mately every 10 minutes, every block was mined right on schedule. Bitcoin’s elegant design and robust security have been on full display for all to see during this hostile stretch of time.

Home Sweet Home

When the Chinese miners got kicked out of their country, they abruptly had to unplug their equip­ment, trans­port all of it, locate viable energy resources, get polit­ical approval to deploy their equip­ment, then rebuild their opera­tions in a new country. This obviously takes time, but the on-chain data above indicates that many of these miners have found new homes.

The question then becomes — where did all this hash rate go?

The data finally arrived last month from the Cambridge Centre for Alter­na­tive Finance (CCAF), showing where the Chinese hash rate likely migrated to.

A Redistribution of Bitcoin’s Hash Rate

The country that saw the greatest change in its hash rate relative to its pre-ban levels was actually the land down under Australia. Its hash rate has increased over 5x over the time period. This could be explained by the fact that Australia has close finan­cial and polit­ical relations with China and simply because Australia is in close proximity to mainland China. Exiled miners likely sought refuge in Australia to plug back into the network quickly. 

The biggest winners in terms of share of the total hash rate were:

• The USA welcomed 14% of the total hash rate, up 62%

• Kazakhstan gained 10% of the total hash rate, up 106%

• Canada received 4% of the total hash rate, up 60% 

• “Other” increased their total share of the hash rate 0.51%, up 14%. 

The biggest losers during this period were China (obviously), France, and Iran. Iran’s drop in hash rate can be explained by its own short ban on Bitcoin mining after mining was blamed for unplanned black­outs across the country. France’s drop could be a result of the uncer­tainty surrounding its cryptocur­rency tax laws that may have scared miners away from the country. 

Note: There are some limita­tions with this data that I will address at the end of this piece.

A New Leader is Crowned

The USA is now the undis­puted hash rate leader control­ling 35.40% of the total hash rate. The USA, Kazakhstan, and Russia combined now control 64.73% of Bitcoin’s total hash rate.

The United States becoming the hash rate leader over China is no doubt bullish for Bitcoin long term. The United States has a history of embracing new innov­a­tive technolo­gies, plus there is a healthy rule of law there that theoret­i­cally supports and protects capitalism, democ­racy, and property rights.

For all intents and purposes, this should be a safer home for Bitcoin miners compared to China, where the Chinese Commu­nist Party rules with an iron fist. China rules from the top-down and gener­ally dislikes things they can’t control. It makes sense that they dislike Bitcoin because they can’t wield it to exert their power and will over the Chinese people.

Bitcoin and the princi­ples upon which the United States was founded are a match made in heaven. Namely, personal freedom, equality of oppor­tu­nity, distri­b­u­tion of power, and property rights.

Bitcoin does not discrim­i­nate, is open to all, and allows individ­uals to take personal owner­ship of their wealth like no other asset in history. Many Bitcoiners call Bitcoin “freedom money” because it brings sover­eignty back to the individual and brings balance to the power between the state and the people.

What better place for freedom money than the land of free?

Bitcoin miners have relocated to safer pastures within the US because the values and goals of America and Bitcoin are much more aligned compared to Commu­nist China.

The Disunited King of Hash Rate:

There’s another benefit to consider regarding hash rate migrating to the U.S. Take a look at this graphic from Nic Carter’s recent presen­ta­tion at the recent Texas Blockchain Summit. It displays the U.S. hash rate distri­b­u­tion using data from the U.S.’s largest mining pool, Foundry USA Pool.

This image displays how Bitcoin is increas­ingly becoming more decen­tral­ized across state lines. Unlike most countries where one govern­ment rules over the entire country, the United States comprises 50 individual semi-sover­eign states with their own states’ rights and state laws. 

States’ Rights are supported by the 10th Amend­ment of the U.S. Consti­tu­tion, which reserves for the states: 

“The powers not delegated to the United States by the Consti­tu­tion, nor prohib­ited by it to the States, are reserved to the States respec­tively, or to the people.” 

Strong state govern­ment is funda­mental to the ideals this nation was founded on and more consis­tent with the vision of the republic put forward by the Founding Fathers. 

To avoid tyranny and ineffec­tive central planning, every state is free to enact policies that work for its own popula­tion. Each state in America has its own property laws, taxes, politi­cians, and cultures. This has never been more evident than today. In other words, there’s a reason why every state has its own flag.

Recently I visited California and Texas, and I am not being dramatic when I say I felt like I was walking in two separate countries. This is the sad truth of America in 2021. America has become increas­ingly divided socially and polit­i­cally over the last decade. U.S. society as a whole no longer has a clear shared set of social and polit­ical values anymore.

This division has made the idea of states’ rights more popular than ever. Ameri­cans are moving to states specif­i­cally because they align with the states’ values, freedoms, and laws. America is balka­nizing, and Bitcoin benefits from this. 

For Bitcoin, this means the largest share of its hash rate is now being spread out across a nation that can be thought of more as a nation of nations today. This state decen­tral­izing dynamic within the USA is pretty unique and just another reason to be bullish about the hash rate migrating from China to the Disunited States of America. 

Pro / Cons of the Hash Rate Migration 

In the end, after analyzing the CCAF data, the China ban has been a huge net positive for Bitcoin. In a lot of ways, it was one of the best geopo­lit­ical outcomes to happen to Bitcoin in its entire history.

Bitcoin went from having a large share of its hash rate within a single hostile juris­dic­tion to now having that same hash rate distrib­uted geograph­i­cally across dozens of juris­dic­tions. 34.5% of the hash rate just went from being located in one nation with one ruling govern­ment to being spread out amongst many different insti­tu­tions, cultures, and laws.

Bitcoin’s hash rate is now more decen­tral­ized than it’s ever been before, making it much more resis­tant to attacks. Bitcoin has never been more de-risked than it is now after the China ban.

Another bullish takeaway from the data was the growth in the share of the total hash rate of the “Other” nations. “Other” nations increased their total share of the hash rate by 0.51%, up 14%. This means that more and more small nations are hosting Bitcoin miners, and the hash rate is decen­tral­izing more.

The CCAF data shows at least 5 nations now host a share of the hash rate in August that didn’t have a material share before the ban: Zambia, Cambodia, Myanmar, Afghanistan, and Honduras. 5 new mining nations that are now plugged into the Bitcoin network and are incen­tivized to protect it.

This is good for Bitcoin.

There are some reasons to be concerned here. It’s not a good thing for the majority of Bitcoin’s hash rate to be located in any one nation, no matter how good a juris­dic­tion may appear to be for Bitcoin. Foundry USA Pool just became the world’s largest mining pool in the world.

The US has abundant energy resources, which makes it a logical desti­na­tion for Bitcoin miners. I see the miner migra­tion to the US, there­fore, accel­er­ating with the real risk being that the US eventu­ally acquires too much of the total hash rate. This central­iza­tion of hash rate would be a negative devel­op­ment for Bitcoin, no matter where it occurs.

Ideally, we want to see the top countries’ shares of the total hash rate decrease over time as the hash rate distrib­utes spatially across more and more countries, further decen­tral­izing the hash rate.

The good news is — the trend has been clear so far.

Bitcoin’s hash rate IS becoming more decen­tral­ized over time. If that continues, Bitcoin will just harden and grow ever stronger over time. I expect the hash rate distri­b­u­tion to continue to change as some nations choose to embrace Bitcoin and benefit from it. In contrast, others choose to shut themselves off from it at their own expense.

Conclusion

As you can see, Bitcoin didn’t just survive this disorder; it thrived on it. Whatever doesn’t kill Bitcoin only makes it stronger.

To all the investors who stayed away from Bitcoin because they believed miscon­cep­tions like “China can control Bitcoin, ” “China can ban it, ” or “China can kill Bitcoin, ” perhaps it’s time to challenge your original assump­tions. China did ban it, but Bitcoin didn’t die. Instead, Bitcoin continues to grow more decen­tral­ized and more secure by the day.

It’s amazing to see the resiliency of the Bitcoin network during this great miner migra­tion. The price crashed, but it’s now nearing all-time highs. The hash rate was cut in half, but it is slowly climbing with every miner that returns to the network. Bitcoin’s network uptime remained at 99.99% despite suddenly losing ~50% of its hash rate without warning. That’s simply incred­ible. Bitcoin is the most anti-fragile network in the world, and it has earned that title through proof of work.

Limitations

There are some limita­tions with this data that I would like to address here. First off, I highly doubt that 100% of the Chinese hash rate has left Mainland China, as the CCAF data claims. It’s much more likely that a small percentage of Chinese miners have gone under­ground since the ban and are mining off-grid secretly in the country. That being said, I think it’s safe to say that a majority of the Chinese hash rate has indeed migrated elsewhere.

Another limita­tion is that it’s diffi­cult to ascer­tain exactly where the hash rate is coming from, given the rise in popularity of VPNs and other proxy services. The CCFA makes a specific note of this with regard to its hash rate record­ings from Ireland and Germany. There are no known major mining opera­tions located in these countries today, and yet the data shows that ~9% of Bitcoin’s hash rate is coming from there.

These hash rate readings are likely the result of redirected IP addresses from VPN services, not from miners actually located in these countries. Despite this limita­tion, the CCFA combines data from many mining pools across the globe and remains the best resource avail­able today to gain insights into the geographic location of Bitcoin’s hash rate.

Lastly, when looking at the hash rate distri­b­u­tion in the United States. The data above is only from the largest mining pool in the world, Foundry USA Pool (21.4% EH/s). This data fails to capture the hash rate contri­bu­tions from other smaller US mining pools such as Luxor, Marathon, and Rhodium. There­fore, this data should be viewed as incom­plete and only gives us a piece of the picture of domestic hash rate distri­b­u­tion today.