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Bitcoin mining might get so much simpler after China's crypto crackdown

LAN network cables connected to a Bitcoin mining computer server are pictured in the Bitminer Factory in Florence, Italy, on April 6, 2018.

Alessandro Bianchi | Reuters

With China cracking down on cryptocurrencies, it could soon become a lot easier – and more profitable – to mine Bitcoin.

Last month, Beijing called for measures to eradicate Bitcoin mining amid concerns about its environmental impact. This has already caused crypto miners to flee China to other regions such as North America.

China's crackdown intensified over the weekend when authorities in China's hydropower-rich Sichuan province ordered crypto miners to cease operations.

According to reports, more than 90% of China's bitcoin mining capacity is said to be closed. It is believed that between 65% and 75% of the world's bitcoin mining takes place in China.

While it's not good news for bitcoin miners in China, others could benefit from it.

What is Bitcoin Mining?

When you think of mining, the first thing that probably comes to mind is a gold mine with picks and shovels. But Bitcoin mining is nothing like the hunt for gold or other precious metals.

Digital currencies are supported by a huge computer network around the world. In the case of Bitcoin, these computers struggle to solve complex mathematical puzzles in order to carry out transactions. This process also generates new bitcoins that reward miners in the cryptocurrency when they are successful.

Currently, miners rewards are capped at 6.25 BTC. It used to be 12.5 BTC, but since the total supply of Bitcoin is capped at 21 million, the amount of Bitcoin that miners are rewarded with halves roughly every four years.

Being the first miner to mine a new block – essentially a list of Bitcoin transactions – is "a game of chance," explains Alyse Killeen, founder and managing partner of Bitcoin-focused venture company Stillmark.

It gets easier

The overall hash rate, or processing power, of the Bitcoin network appears to have declined sharply in the wake of the Beijing move.

In the past few months or so, Bitcoin's hashrate has dropped from a record 180.7 million terahashes per second – a measure of the speed of crypto mining hardware – to around 116.2 million in mid-May, according to Blockchain.com- Data.

Read more about cryptocurrencies from CNBC Pro

Crypto experts say the share of other miners on the network will increase as more Bitcoin miners go offline due to China's restrictions, which may make mining a lot more lucrative.

"As more hashrate falls off the network, the difficulty will adjust downward, and the hashrate that remains active on the network will receive more for its proportional share of the mining rewards," said Kevin Zhang, vice president of crypto mining -Company Foundry, across from CNBC.

Meanwhile, Bitcoin's network difficulty – a measure of how hard it is to mine Bitcoin – rose from a record high of over 25 trillion in May to 19.9 trillion last week. The mining difficulty is adjusted roughly every two weeks, so there is a time lag in the data.

"The less mining equipment you have online, the less network difficulties you have," said Killeen. This effectively results in less competition for other Bitcoin miners.

However, another major factor driving Bitcoin miners' profits is the price of Bitcoin, which has fallen from record highs in recent months due to negative comments from Tesla CEO Elon Musk and China's crackdown on the industry.

Bitcoin's value has almost halved since it hit a record high of nearly $ 65,000 in April. The cryptocurrency fell below $ 30,000 on Tuesday, temporarily wiping out its 2021 gains, but has since rebounded, trading above $ 34,000.

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