China just made a Geopolitical Mistake by Clamping Down on Crypto

Tracking the markets
Tracking the markets

As the Chinese government has banned crypto, there are others that are waiting with open hands to embrace the miners. What one government tries to ban; others will embrace.

Enjoying Austin BBQ
Enjoying Austin BBQ

Based on the differences in vision and ideology, or simply out of spite, the other side would welcome them. Also, note that the energy that miners utilize often would have otherwise been wasted. They seek out stranded energy in order to save on costs.

The lower the cost of electricity, the more profitable and rewarding Bitcoin mining is. Again, the communities they migrate to welcome them as they are wealthy people with a heavy war chest of USD and BTC. They could easily invest in the community and hasten development. A repertoire of business activities follows them. This alone is an incentive for governments to welcome them, as compared to refugees who are traveling with all they have in their pockets.

The majority of the geopolitical mistakes that have been made happened as a result of violent combat. They either happen in a high-tension period that leads up to the conflict or during the actual conflict with another country. This is an age-long story.

Once in a while, people make mistakes on the global stage that don’t involve violent combat. Most often such a nation-state shoots itself in the foot while trying to harm another nation. You can call this a self-inflicted wound.

One notable example of this in history is internet access in North Korea. The Internet is available in North Korea. However, it is highly restricted. It is only used for government purposes and also by foreigners. Although North Korea has broadband infrastructure including fiber optic links between major institutions, most individuals and institutions are only able to go online through a domestic-only network that is called Kwangmyong. Access to the global internet is limited to government officials and their friends and a few selected people.

North Korea’s leadership made the decision that the internet would only be used by the government and the ruling family. The citizens of the country and business owners are not allowed to access the global Internet except with special permission.

This decision from North Korea has had significant economic implications. They chose to put authoritarian control of the country and its population ahead of economic prosperity. Although this decision has enabled them to consolidate power, it has also spelled disaster for the citizens of the country. China is in the process of repeating this same mistake.

China has had a love-hate relationship with Bitcoin for a long time. The government essentially banned digital currency and any related activities for years. The interesting aspect is that the ban only applies to the average citizen or entrepreneur. Government officials and individuals with special permission are not bound by such directives. For such people, the Bitcoin network is available for their use. This is almost an exact replica of the North Korean internet decision — it keeps technology that could empower the people in the hands of a few elites.

The Chinese market is seeing a speedy digital transformation. Much of this growth has been focused on consumers. They spend more money online in traditional e-commerce outlets. According to a survey by Network giants Cisco, 89% of respondents use independent shopping apps at least once a week.

The digital transformation has facilitated the acceptance of different technologies from manufacturing to marketing. These help to maximize the prospects of every production process, resulting in quality products.

Notwithstanding the digital transformation, China has recently doubled down on its stance against cryptocurrency. They are enforcing a ban that is much more aggressive than it has ever been. This has led to over 90% of Bitcoin miners in the country being shut down. The miners have two choices- either to patiently wait and see if authorities would reverse their decision anytime soon or to pack up and leave the region to build their business elsewhere.

Chinese business
Chinese business

As you would expect, many of these miners have decided to leave China. The effect of this is that the total mining hash rate has fallen drastically. The beauty of Bitcoin is that a drop in the hash rate like this will be quickly corrected by the mining difficulty adjustment that happens almost every two weeks. This means that the remaining miners will be more profitable because mining bitcoin will become easier for those who are still on the network.

This move by China is significant because it has nullified the belief held by many that China has a hold on the Bitcoin network. This assumption was due to the fact that China had the lion’s share in the mining market. As a result of this, people believed that they had the ability to control or manipulate the network at will.

However, the current move means that China does not control Bitcoin and the economic incentives would lead bitcoin miners to seek places where mining is cheapest. They would like to go where the cost of electricity is cheapest this occurs in areas where there is the greatest political and regulatory stability. Bitcoin miners in China often relocate their business to places like Sichuan, which has a good supply of hydropower, in the wet season.

Abiodun Ajayi has more than 6 years of experience in Security and IT architecture. He consults and helps form strategies, perform project feasibility studies.