China’s Crackdown on Bitcoin Mining Is Good News for North American Crypto Miners

China's Crackdown on Bitcoin Mining Is Good News for North American Crypto Miners

Bitcoin erased its 2021 gains this week as China ramped up its crackdown on mining of the cryptocurrency, a move that’s expected to help shift the industry’s center of gravity from Asia to North America.

Meanwhile, the Bitcoin price formed a death cross on Monday, with the 50-day moving average trading below the 200-day moving average (MA). This technical pattern is often seen as a bearish sign of things to come, but that may not be the case with Bitcoin.

Bitcoin death crosses have not historically been consistent downside price predictors. Take a look at the chart below, shared in a Tuesday tweet by CoinShares. The digital asset investing firm analyzed Bitcoin’s price action one, three, six and 12 months following previous death crosses, and no pattern emerged suggesting that a sustained bear market was triggered when the 50-day MA dipped below the 200-day.

Bitcoin Death Cross
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If anything, the chart shows that your chances of being rewarded improved the longer you held. A death cross occurred in March 2020, and had you held for a year, you could have seen returns as high as 450%, according to CoinShares.

Bitcoin Price Range Has Expanded by a Factor of 20 with Each New Halving Cycle

I should also point out that Bitcoin’s price range appears to have expanded by a factor of 20 with each new halving cycle. As a reminder, halving events are built into the Bitcoin network and are designed to control the supply of the crypto. Whenever 210,000 blocks are mined, which happens roughly every four years, the reward Bitcoin miners receive is cut in half. Currently that reward is 6.25 BTC. It used to be 12.5 BTC, and before that, 25 BTC. When the next halving occurs, sometime in 2024, a block will contain only 3.125 BTC.

Acquiring a new Bitcoin, in other words, becomes increasingly more difficult—not unlike how gold mining has become more difficult over the years as large mineral deposits have become rarer and more expensive to develop.

Bitcoin reward is cut in half
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In the first cycle, which ended with the halving in November 2012, Bitcoin reached a high of approximately $30; in the second, ended July 2016, it was $1,200; and in the third, ended May 2020, $20,000.

Here we are a little over one year into the fourth cycle (check out CoinMarketCap’s timer here), and so far Bitcoin’s price has topped $63,000. Could it hit $100,000, $200,000, $500,000? Obviously, past performance is no guarantee of future results, but the math suggests incredible upside potential, both in this cycle and the next (and the next, and so on).

Each Bitcoin Halving Cycle Scale Is 20 Times Larger Than the Previous Cycle
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Mining About to Get Easier for North American Crypto Miners, Thanks to China’s Crackdown

Having said that, mining is set to become a whole lot easier (and profitable) for North American crypto miners, thanks to the Chinese government’s aggressive crackdown on the industry. Until recently, China accounted for between 65% and 75% of all Bitcoin mining. Market dominance is expected to shift to North America, though, after an estimated 90% of China’s Bitcoin mining capacity has been ordered to shut down due to concerns over its environmental impact.

Blockchain.com data already shows that the global hashrate, a measure of the computational power used per second by the Bitcoin network, has fallen 50% from its peak in mid-April. It’s now at its lowest level since November 2020.

This could be highly favorable for U.S. and Canadian crypto miners, including HIVE Blockchain Technologies, who (for now) will no longer have to compete with China for precious blocks.

Big-Name Actors in Finance Bullish on Crypto

Some big-name actors in traditional finance are using this time as an opportunity to make their moves in the crypto ecosystem.

Bullish, a new crypto exchange that’s backed by a group of billionaires including PayPal co-founded Peter Thiel, is in talks to go public by merging with a special purpose acquisition company (SPAC). Launched in May, the exchange is an independent subsidiary of Block.one, the software company behind the open-source blockchain platform EOSIO. Bullish could be valued as high as $12 billion, according to Bloomberg.

And then there’s Andreessen Horowitz. Also known as a16z, the venture capital firm launched what’s believed to be the largest crypto fund to date, with more than $2.2 billion to invest. The mandate of the fund, named the Crypto Fund III, is to invest in a wide range of sub-industries within the ecosystem, including not just the digital currencies themselves but also decentralized finance (DeFi) companies, crypto trading and exchange firms, crypto brokerage firms, privacy and security firms and more.

“We are radically optimistic about crypto’s potential to restore trust and enable new kinds of governance where communities collectively make important decisions about how networks evolve, what behaviors are permitted and how economic benefits are distributed,” the Crypto Fund III team wrote.

It’s not just a16z that’s radically optimistic. So far this year, investors have poured more than $8.8 billion into crypto startups and private equity, far outstripping the total amount seen in any other year.

Investors Have Poured More THan $8.8Billion into Crypto Startups so far this year
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It’s definitely an exciting time to be an investor in this nascent industry. Some people may worry it’s too late to start participating, but I believe we’re still in the bottom of the first inning. And with Bitcoin and ether well off their highs, now could be a very attractive entry point.

Know what else could be driving crypto prices? Metcalfe’s Law! Get the full story by watching the video here.

Metcalfe's Law Could Be Moving Crypto Values

Index Summary

  • The major market indices finished up this week. The Dow Jones Industrial Average gained 3.44%. The S&P 500 Stock Index rose 2.74%, while the Nasdaq Composite climbed 2.35%. The Russell 2000 small capitalization index gained 4.32% this week.
  • The Hang Seng Composite gained 1.69% this week; while Taiwan was up 1.57% and the KOSPI rose 1.07%.
  • The 10-year Treasury bond yield rose 83 basis points to 1.53%.

Blockchain and Digital Currencies

 

Strengths

  • Of the cryptocurrencies tracked by CoinMarketCap, the best performer for the week was Quant, rising 48.00%.
  • New York Digital Investment Group (NYDIG) and Q2 Holdings announced their partnership to provide access to Bitcoin for bank account holders in the U.S. Q2, a firm that specializes in providing digital services to financial institutions, provides internet banking services to about 30% of the top 100 U.S. banks and serves over 10% of the country’s digital banking customers. This partnership, as per a press release, could potentially open Bitcoin buying, selling and custody channels to 18.3 million bank customers in the U.S. in a bid to provide easy access to Bitcoin for U.S. customers, NYDIG has already partnered with Financial Technology (fintech) firm Fidelity National Information Services, cloud-based digital banking service provider Alkami, and California-based First Foundation Bank.
  • El Salvador’s President Nayib Bukele announced that the nation’s Bitcoin Law is set to come into effect on September 7, 2021, which will make the largest cryptocurrency a legal tender within the nation. The government will use the Chivo e-wallet, preloaded with $30 of Bitcoin for anyone who downloads it. The users will have to verify their identity via Chivo’s face recognition software before receiving the $30 in Bitcoin. The law was passed by El Salvador’s legislature on June 9, 2021, by a supermajority.

Weaknesses

  • Of the cryptocurrencies tracked by CoinMarketCap, the worst performer for the week was Kusama, down 42.87%.
  • Founders of AfriCrypt, a South Africa-based crypto investment firm, have allegedly disappeared with approximately 69,000 Bitcoins, worth an estimated $2.3 billion. According to investors in AfriCrypt, they received an email claiming that the platform was ending operations and freezing all accounts after it fell victim to an alleged hack, adding that the investors should not report the hack to law enforcement, claiming that it would only slow down the recovery process. AfriCrypt’s founders – 20-year-old Ameer Cajee and 17-year-old Raees Cajee—reportedly transferred the pooled investor funds and fled to the U.K.
  • The U.S. Securities and Exchange Commission (SEC) postponed its decision on whether to approve a Bitcoin exchange-traded fund (ETF) filed by Texas-based Valkyrie Digital Assets. After receiving comments on the proposed rule changes regarding the Valkyrie Bitcoin Fund, the SEC delayed its deadline for a decision by 45 days, and is designating August 10, 2021, as the revised date for its decision. This comes a week after the SEC delayed its decision on the VanEck Bitcoin Trust for the second time, citing that it would need more answers from interested parties on questions regarding the susceptibility of a Bitcoin ETF to market manipulation.

Opportunities

  • Digital Assets AG (DAAG), a Switzerland-based token issuer, announced the launch of its stock-tokenization infrastructure on the Solana blockchain. This will allow users of the FTX Cryptocurrency Derivatives Exchange trading platform a novel way to access traditional equity markets. DAAG reported that FTX customers, who have completed Know Your Customer (KYC) documentation, will have access to 55 free-floating stocks which can be traded even when the traditional exchanges are closed. Free-floating stocks are assets that have received regulatory approval for trading on a tokenized platform, and DAAG said that tokenized stock offerings are valid in the European Economic Area through a prospectus endorsed by Liechtenstein’s Financial Market Authority.
  • Venture capital firm Andreessen Horowitz launched the biggest-ever crypto venture fund, Crypto Fund III, at $2.2 billion. The California-based company said that the fund will be used to finance cryptocurrency networks and teams that contribute to the new decentralized economy—investing in all stages, from early seed-stage projects to fully developed later-stage networks. Andreessen Horowitz is already a prolific investor in the blockchain industry with investments in the Solana blockchain, non-fungible token (NFT) marketplace OpenSea, Talos trading platform, Coinbase, and Facebook-backed Diem.
  • Citigroup announced that its wealth management division has formed a Digital Assets Group, which will focus on all aspects of the fast-growing space of blockchain enabled finance. As part of Citi Global Wealth Investments (CGWI), Citi’s Digital Assets Group will service clients interested in the world of digital assets such as cryptocurrencies, NFTs, stablecoins, and central bank digital currencies (CBDC). This announcement marks the foray of another legacy bank into the digital asset space amidst increased interest from its clients.

Threats

  • Earlier this week, Bitcoin’s hash rate dropped by 16.94% in less than 24 hours after authorities in China’s Sichuan province ordered 26 mining farms to close operations. This latest crackdown on cryptocurrency mining in China is being attributed as the reason for Bitcoin’s latest slump, as the largest cryptocurrency fell below $29,000 for the first time since January 2021. In April, Chinese authorities in Xinjiang region imposed a ban on cryptocurrency mining, cutting Bitcoin’s hash rate by 30% and contributed to a $10,000 decline in Bitcoin’s price. Chinese miners account for roughly 65% of the total computational power backing the Bitcoin blockchain, and a decline in total hash rate reduces the overall security of the network and increases the time spent on validating blocks and transactions, further reducing the profitability of miners. The following chart shows that Bitcoin dropped below $30,000 this week on the back of China’s crackdown.

Bitcoin Briefly Fell Below Key Level Tuesday
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  • Japan’s Financial Services Agency (FSA) issued a warning to cryptocurrency exchange Binance, stating that the exchange is not registered to do business with residents of Japan. The FSA had issued a similar warning to Binance in March 2018, and to Bybit this year, as none of these exchanges are registered in the country.
  • MicroStrategy Inc. is set to mark down the value of 13,005 Bitcoins it purchased this week after the price of the largest cryptocurrency plunged. The company had bought these Bitcoins at an average price of $37,617 per coin and accounting rules dictate that MicroStrategy must write down the value of its holdings once the market value dops below the price at which it had acquired the coins. The company is set to take a charge of $284.5 million in its next earnings report from previous write downs, and it will bring MicroStrategy’s total Bitcoin-related impairments to more than $500 million.

 

Gold Market

This week spot gold closed the week at $1,781.44, up $17.28 per ounce, or 0.98%. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 0.35%. The S&P/TSX Venture Index came in up 0.18%. The U.S. Trade-Weighted Dollar fell 0.45%.

Date Event Survey Actual Prior
Jun-23 New Home Sales 865k 769k 817k
Jun-24 Durable Goods Orders 2.8% 2.3% -0.8%
Jun-24 GDP Annualized QoQ 6.4% 6.4% 6.4%
Jun-24 Initial Jobless Claims 380k 411k 418k
Jun-28 Hong Kong Exports YoY 24.4%
Jun-29 Germany CPI YoY 2.3% 2.5%
Jun-29 Conf. Board Consumer Confidence 119.0 117.2
Jun-30 Eurozone CPI Core YoY 0.9% 1.0%
Jun-30 ADP Employment Change 575k 978k
Jun-30 Caixin China PMI Mfg 51.9 52.0
Jul-1 Initial Jobless Claims 380k 411k
Jul-1 ISM Manufacturing 61.0 61.2
Jul-2 Change in Nonfarm Payrolls 700K 559k
Jul-2 Durable Goods Orders 2.3%

 

Strengths

  • The best performing precious metal for the week was palladium, up 6.67%, as platinum group metals bounced back strongly this week from the double-digit losses experienced last week. Gold continued to stabilize after comments from Fed Chairman Jerome Powell indicated that inflation should move back to the 2% target once supply imbalances are resolved. Toward the end of the week, gold edged lower as economic data indicated a recovery is underway.
  • Silvercorp Metals reported assays from its 2021 exploration program at the LME mine at its Ying Mining District. The average of 60 infill and step out holes drilled on known veins averaged 448 grams per ton silver. This is higher than the current measure and indicated (M&I) grade of 301 grams per ton silver.
  • Montage Gold Corp last night provided an update on developments at its Kon Gold Project, with a positive takeaway in our view of the rapid pace of development that the company continues to have. With seven drill rigs turning, this program is now 95% complete with a total of 49,694m drilled to date since commencement of the program in January 2021.

Weaknesses  

  • The worst performing precious metal for the week was gold, but still up 0.98%. Hochschild Mining reported that a bus operated by one of its contractors to transport employees between the Pallancata operation and the city of Arequipa in southern Peru was involved in a traffic accident resulting in 27 fatalities and 13 injuries. A total of 50 miners were in the bus when it flipped.
  • Equinox Gold Corp. said Tuesday that a mine in the Mexican state of Guerrero has been blockaded by a group of unionized employees and members of the Xochipala community. The Canada-based mining company said it has suspended operations at its Los Filos mine, and said that it is working to find a long-term solution with the union and community members who are demanding higher payments than were contractually agreed upon.
  • Kinross Gold provided an update on the Tasiast fire that occurred on June 15. The company has resumed mining activities (including stripping to access higher grade ore), while milling operations remain suspended. Kinross is building higher grade stockpiles for when the mill restarts – possibly by year-end. Preliminary estimates indicate a restart of the SAG mill by year-end at a cost of up to $50 million. Production estimates were reduced by 13% for 2021.

Opportunities

  • Gold purchases by central banks and ETFs is continuing. Poland’s gold holdings increased 1% in May, to $7.4MM ounces. The May purchase was the first major purchase by the central bank since 2019. Thailand has boosted its gold reserves 60% in recent months. ETFs added 283,000 ounces of gold last week, which was the biggest increase since March 19. Gold has had seven straight weeks of inflows. Net inflows have been $390 million in the first three weeks of June.

SPDR Gold Shares Had Net Inflows In May and Further Inflows Seen In June
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  • De Grey Mining released its maiden resource statement for its gold discovery at Hemi, declaring 6.8 million ounces at a finding cost of just A$8.50 per ounce, well below industry averages. This brings the gold inventory up to 9.0 million ounces for De Grey’s Mallina Gold Prospect. De Grey’s gold discovery is in the Pilbara region, not known for gold discoveries, but more the home to the iron ore mining districts. This still provides a costs advantage to De Grey as there is well developed infrastructure support in the region, which could lower capital costs.
  • Indonesia, home to one of the world’s largest gold mines, plans to set up a bullion bank to spur trading of the precious metal domestically. The plan is to start this bank in 2024. Indonesia currently exports much of its gold to countries such as Singapore and Australia.

Threats

  • Morgan Stanley forecasts that scaled back bond buying and higher interest rates are likely to be a drag on gold. Susan Bates, commodity strategist, wrote that higher inflation is likely to be transitory. Jewelry markets are expected to recover but total sales will likely end 2021 12% lower than the pre-pandemic year of 2019.  Morgan Stanley left intact its $1,680 price target. A counter factor outside the Morgan Stanley report that investors will be watching for, that would overpower the transitory inflation argument, would be rising wages for labor.
  • Bolivian lawmakers are debating a bill that would require all gold produced in the country to be offered to the central bank as the nation builds its reserves and cracks down on the illegal bullion trade. Local producers would need certification to sell abroad and would first be required to offer their gold to the central bank at international prices in return for tax breaks.
  • According to RBC, new projects have faced upward pressure on capital costs due to ongoing cost inflation including steel (up 50% or more year-to-date) and labor. Since 2019, RBC estimates that project capital intensity has increased by 25%, with average cost to build a 100,000 ounce per year operation of $205 million. Operating costs are also under pressure. Diesel is one of the largest components of input costs, with higher prices to date (up 25%) placing upward pressure on operating costs. RBC estimates a $90 per ounce cost impact for open pits versus $28 per ounce for underground mines.

 

Read the full article at https://www.usfunds.com/investor-library/investor-alert/chinas-crackdown-on-bitcoin-mining-is-good-news-for-north-american-crypto-miners/

June 25, 2021

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors