China is the second largest bitcoin mining center as miners go underground

Bitcoin miners are not surrendering in China, despite Beijing’s ban on practice.

China was once the world’s largest crypto mining center, accounting for 65% to 75% of the total “hashrate” – or computing power – of the bitcoin network.

But the country’s share of global bitcoin mining capacity fell sharply to zero in July and August 2021, according to Cambridge University, after authorities launched a new crackdown on cryptocurrencies.

Among China’s steps was the abolition of crypto mining, an energy-intensive process leading to the creation of a new digital currency. This has led to several miners fleeing to other countries, including the United States and Kazakhstan, which borders China.

But, as CNBC previously reported, several underground mining operations have appeared in China since then, and miners have taken care to circumvent Beijing’s ban.

Now a new study by the Cambridge Center for Alternative Finance shows that Chinese bitcoin mining activity has quickly recovered. By September 2021, China accounted for just over 22% of the total bitcoin mining market, according to Cambridge researchers.

This means that China is once again the world’s leading player in bitcoin mining – second only to the US, which eclipsed China as the largest destination for the sector last year.

There is one caveat: the research methodology relies on aggregate geolocation of huge “pools” for bitcoin mining – which pool computing resources to more efficiently mine new tokens – to determine where activity is concentrated in different countries.

Such an approach could be vulnerable to “deliberate obfuscation” by some bitcoin miners who use a virtual private network (VPN) to hide their location, the researchers said. VPNs allow users to route their traffic through a server in another country, making them convenient tools for people in countries like China, where Internet use is severely limited.

However, they added that this limitation “will only moderately affect” the accuracy of the analysis.

Unlike traditional currencies, cryptocurrencies are decentralized. This means that the work of processing transactions and minting new currency units is a distributed network of computers, not banks and other intermediaries.

To facilitate bitcoin payments the so-called miners must agree that the transaction is valid. This process entails complex calculations to develop a puzzle, the complexity of which increases as more and more miners join a network known as the blockchain.

The first person to solve the puzzle can add a new batch of transactions to the blockchain and will be rewarded with bitcoins for their efforts.

This method of consensus, known as “proof of work”, consumes a lot of energy – about as much as entire countries such as Sweden and Norway.

China has often warned about the crypt. But the latest overclocking was perhaps the toughest.

The world’s second-largest economy last year faced months-long energy shortages that led to numerous power outages.

China remains heavily dependent on coal and is increasing investment in renewable energy, seeking to become carbon-neutral by 2060. Authorities see crypto mining as a potential obstacle to the plan.

Now the revival of bitcoin production in China has catapulted the country to the second largest for people hoping to find a new digital currency – it remains to extract 2 million bitcoins. However, now it may be a less lucrative business if the price of bitcoin has fallen by more than 50% from its peak in November.

The National Development and Reform Commission of China and the People’s Bank of China, which issued severe warnings against crypto mining and trade, were not immediately available for comment when contacted by CNBC.

– Mackenzie Sigalas and Evelyn Cheng of CNBC contributed to this report