China is pumping money out of the US with Bitcoin
The ongoing US-China trade war has entered its fourth year. Former US President Donald Trump sees different results than he originally expected: The US has been hit by higher tariffs and sanctions against Chinese companies and has not benefited nearly as much. It has cost the country 245,000 jobs. The US Chamber of Commerce expects this situation to endanger the exports of the individual states. Florida’s export losses alone amounted to $ 1.9 billion.
At the same time, China has taken a smarter approach: not only does it impose reciprocal sanctions and export its products through middlemen (Vietnam, Taiwan, etc., and Mexico), but it also makes the US pay for the unsecured and poorly regulated asset – cryptocurrencies.
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The United States, without a doubt, pumps billions of dollars into the Chinese economy every year. The reason for this is that most of the world’s Bitcoin (BTC), which is primarily converted into US dollars, is mined in China. It owns 65% of the total mining operations.
To earn Bitcoin rewards, powerful computers solve complex math problems around the clock. Some of the newly mined coins are transferred directly to crypto exchanges, while the rest can be kept in the miner’s crypto wallet, but can ultimately be sold in dollars. On average, 900 BTC are mined per day and total sales are around $ 31 million (as of the end of June). That means the miners made more than $ 10 billion in just one year.
Taking into account the market share of China’s mining operations, local miners have made around $ 7 billion since last summer. If both the price of Bitcoin and its popularity continue to rise, revenue will double or even triple every year. Money will circulate through the country’s economy one way or another: it will be spent, saved or invested.
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Under party control
The Chinese government is aware of the scale and importance of US dollar investments through cryptocurrencies. Despite increasing regulations, the authorities are clearly not going to ban Bitcoin.
China restricted cryptocurrency transactions to banks and payment companies in 2013. In 2017, the authorities also closed local cryptocurrency exchanges and blocked access to foreign platforms. That said, locals have been able to legally own cryptocurrencies since then. What we see now is essentially more reminiscent of previous restrictions imposed on financial institutions than the introduction of new ones. On the one hand, the Chinese authorities want to prevent the “contamination of personal risk into the social sphere”, on the other hand they are leaving the door open to foreign investors.
At the same time, the Chinese authorities have started restricting mining, which worries many in the market. The official causes are excessive energy consumption and carbon dioxide emissions, which make it impossible for the country to achieve CO2 neutrality by 2060. However, the actual situation is slightly different from the official claims.
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First, Chinese miners supplied a cheaper hydropower source so developed in the southern provinces and only switched to fossil fuels during the dry winter when they migrated north.
Second, the authorities have completely banned new mining projects and existing projects in three regions: Qinghai, Inner Mongolia and Xinjiang. Other hydropower-rich provinces such as Yunnan or Sichuan are in no hurry to introduce a total ban. While Yunnan is only planning to close illegal BTC mining farms “with a campaign against electricity abuse,” it was announced at the end of June that all mining farms in Yunnan Province were closed.
The Chinese authorities seem to be fixing things instead of declaring war on cryptocurrencies. The technological limitations of the Bitcoin supply speak for China: it allows the country to influence the price of the cryptocurrency while it remains owned by miners and is not sold in the market. However, should the restrictions be tightened further, the generated energy could be redistributed to other countries. Chinese mining equipment manufacturers – BTC.TOP, Huobi and HashCow – have announced that they will end domestic sales and expand their international presence in North America.
Who gets ideas?
At face value, the possibility of Chinese miners moving to North America seems to benefit the United States. However, experts point out that the continent doesn’t have a lot of idle energy. Moving to another country also takes time, which competitors can take advantage of.
The idea of taking control not only of cryptocurrency transactions but also of Bitcoin mining is rapidly gaining traction in developing countries. In Iran, mining has become one of the most accessible industries amid tough US sanctions. The Iranian government is also following the same path as China: authorities will ban the use of cryptocurrencies created abroad, but they will allow payment for imported goods in mined currencies. Last year, Iran made over $ 400 million from crypto mining, of which US revenues are only double.
Another country planning to develop mining projects is El Salvador – the first country to accept Bitcoin as legal tender – which US President Joe Biden has refused to visit. President of El Salvador Nayib Bukele is in view of use “very cheap, 100% clean, 100% renewable” energy from local volcanoes.
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Kazakhstan appears to be the most politically neutral country in this context. A huge Enegix mining center with a capacity of 180 MW and 50,000 mining rigs will go into operation here in September, and the Chinese mining equipment manufacturer Canaan has also set up a hub. New service center in Kazakhstan.
China could use the export of its crypto farms to further weaken the US economy, while the US government has no significant leverage to curb the dollar flow caused by cryptocurrency transactions. Imposing a crypto ban on Americans would be simply undemocratic.
The only option for the US government is to weaken the appeal of Bitcoin in any way possible. This would explain why Elon Musk, the owner of some of the largest U.S. companies Tesla and SpaceX, has abruptly moved from favoring Bitcoin to criticizing its environmental impact.
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The same applies to Greenpeace, which no longer accepts crypto donations, although this has been the case for seven years. It seems that the escalation campaign against Bitcoin has more to do with politics than the environment.
Alex Axelrod is the founder and CEO of Aximetria and Pay Reverse. He is also a serial entrepreneur with over a decade of experience in leading tech roles. He was director of big data at JSFC AFK Systems’ research and development center. Alex previously worked for Mobile TeleSystems, the largest telecommunications service provider in Russia, where he led the development of anti-phishing and cybersecurity systems.