Cryptocurrency Mining Heads West


In recent months, a significant number of cryptocurrency experts and enthusiasts have been keeping a keen eye on what may happen after the sudden cessation of mining in China.

China’s communist government has for some time been showing signs that it may well ban cryptocurrency mining, so this year’s swoop by the authorities on some large mining entities within mainland China should perhaps have come as no surprise.

Chinese miners, aided by huge hardware resources, cheap and sometimes free electricity, and a will to dominate the production scale of cryptocurrency – and in particular Bitcoin – have been the largest group of miners in the world for some time until just two months ago, when many began offloading their equipment en masse. Ultimately, the government is larger than everyone in the People’s Republic.

It was always a possibility that this would happen. Everyone knows that China’s government is completely opposed to any form of self-empowering circumvention of the state’s methods of controlling the financial behavior of every citizen, and that eventually there would be action taken.

Now, there is a new dimension to cryptocurrency mining which is likely to keep the stability of peer-to-peer methodology, yet do so in the free world, where it is limitless and will never fall foul of the long arm of the government.

That new dimension is the State of Texas.

In the middle of rural Texas, a cryptocurrency mine is currently under construction and hundreds of very powerful machines are about to be housed in a 320-acre mining facility in Dickens county, where they will work day and night to solve a complex series of algorithms. If successful, the reward will be newly minted Bitcoins, currently worth about $44,000 each.

All the machines need to thrive are spaces to sit and electricity – lots of it and one of the advantages Chinese miners had which led to over 50% of all Bitcoin mining having taken place in China until recently is what could be perhaps termed ‘power arbitrage’. Quite simply, Chinese miners had a huge advantage over everyone else because they either did not pay for electricity at all, or received it for very low prices.

That simply is not the case in the free market nations, and therefore Chinese miners were able to profit massively by comparison, but using government-supplied power to mine Bitcoin is not something the Chinese Communist Party would take kindly to.

Texas’s power grid is deregulated, which means customers can choose between different power providers and providers are thus incentivized to provide low rates.

Mining facilities can set up long-term contracts with power providers that allows them to purchase electricity at a fixed price for many years according to Jason Les, CEO of Riot Blockchain, a US-based cryptocurrency mining company which is publicly listed and whose shares have been doing very well lately.

Riot Blockchain recently acquired Whinstone US, the largest bitcoin mining facility in the US based in Rockdale, Texas, for $80 million. Whinstone says its facility can produce 500 bitcoin per month – worth a total of $22m at bitcoin’s current value.

Back in 2019, many thought leaders began to consider what could happen if China went ahead to ban Bitcoin mining, and a number of scenarios were considered likely. One of the main ones was that the network would temporarily lose over 75% of hashrate, because at that time, 75% of all mining pools were based in China. What this means, is that for that while fewer transactions would be carried out, and the rate of creating new Bitcoins would drop significantly. Once new rigs have been formed and implemented, network activity can return to normal.

That has hung over the heads of all Bitcoin participants since, because the combination of the majority of the mining coming from a country whose government strongly disapproves of the nature of free peer-to-peer decentralized finance is one that justifiably leads to these concerns.

The reality is that despite the bans which have happened this year, the hashrate is strong and the all those enormous rigs that have been disposed of having resulted in no change in the demand and value of Bitcoin really represents the ultimate stress test.

Of course, miners needed to find another solution, and it would have to be in the free market world, but the free market world charges for its power as power is provided by private companies.

This is resolved by a dynamic in Texas in which during periods when demand for electricity goes up, particularly in the summer months, Texas power companies will actually pay mining facilities to lower their energy usage.

Another important consideration is that, given Elon Musk’s infamous tweet earlier this year regarding the perceived damage to the environment caused by the power-hungry mining of Bitcoin, there is more sustainable, green energy in Texas than in China, which in the future would give no weight to claims like that.

For example, in Texas, wind and water power is utilized much more to generate electricity than it is in China, where most of the power comes from fossil fuel power stations.

Interestingly, as well as the Argo and Whinstone facilities, BIT Mining, a Chinese mining company, has invested $25 million to build a mine in Texas.

The reality is that if the whole cryptocurrency ecosystem is going to continue on its decentralized, democratic trajectory, and provide all areas of blockchain-related technology such as smart contracts, NFTs and neo-bank facilities, it has to be done using sustainable infrastructure which cannot simply be turned off by an illiberal government.

The move toward Texas, therefore, is one to be celebrated.