From the Bitcoin halving in May to the ongoing price rally today, bitcoin has certainly seen its fair share of ups and downs in 2020. Even as the price of bitcoin sets new highs above those of 2017, observers have remained cautious, fearing that this may very well be a bitcoin bubble 2.0. However, pointing to a maturing market where interest in digital assets is rising among institutional investors, Bitcoin advocates have argued that this rally is not just another speculative frenzy. With such renewed optimism, one can only hope that this time, history doesn’t repeat itself.
At the same time, with miner revenues hitting pre-halving levels for the first time this November, much has changed since the genesis block came into being. No longer limited to a network of independent miners, we now see staggering operations at scale, in diverse jurisdictions stretching from lesser-known provinces in China to Kazakhstan and even Malaysia.
This post is part of CoinDesk’s 2020 Year in Review – a collection of op-eds, essays and interviews about the year in crypto and beyond. Nangeng “NG” Zhang is the founder, chairman and CEO of Canaan, a leading provider of supercomputing solutions.
Despite this growth, the burgeoning mining industry faces existential risks. And not only the ones related to the long-term sustainability of bitcoin mining after the last block is mined in 2140.
New year, new markets
With its inexpensive electricity, low production costs and readily available labor, China has long dominated the bitcoin mining sector. Yet, the center of gravity has started to shift in recent years, largely due to the emergence of mining pools in other parts of the world. Despite China still holding more than two-thirds of the global hashrate distribution countries such as the U.S., Russia and Kazakhstan are starting to catch up.
In order to carve out space and thrive in the bitcoin mining space, these new contenders need to consider a multitude of factors, namely: competitive energy prices or alternative energy sources, attractive real estate prices and a government supportive of digital assets.
Mining-friendly Kazakhstan, for instance, has seen significant growth in bitcoin mining activities, holding over 6.17% of the total bitcoin mining hashrate. This is in large part attributed to a tax-friendly government where crypto mining will not be taxed until the mined assets are exchanged for fiat money. Then there is the legalization of mining, which saw a recent bill approved by the Kazakh Senate and signed into law earlier in June. The low electricity costs only serve as icing on top.
This approach has certainly paid off, with investments in local crypto mining operations expected to double by the end of 2020 and an additional $738 million expected to pour in over the next three years.
China’s bitcoin mining crown will not be so easily displaced
As we look towards 2021, bitcoin mining will continue to move in a positive direction and see continued momentum. For two years now, markets across the Commonwealth of Independent States (CIS), Europe and North America have grown. This trend is only going to be more prominent as miners look to new jurisdictions to avoid regulatory crackdowns while searching for lower-cost electricity.
In Europe and North America, plans for opening new mining facilities may have been delayed as a result of the COVID-19 pandemic. But with the gradual recovery of the bitcoin market and the likelihood of a coronavirus vaccine in 2021, we may see a rebound in the demand for mining. The implications of a new Biden administration on the treatment of cryptocurrencies, on the other hand, still remain unclear.
Despite new markets looming on the horizon, China’s bitcoin mining crown will not be so easily displaced. The Chinese government has called to accelerate the development of blockchain technology and financial incentives to advance in renewable energy-powered crypto mining.
Bitcoin mining has certainly come a long way since the early CPU days of Nakamoto’s genesis block. From initial innovations like GPUs and FPGAs to the birth of today’s ASICs, miners continue to seek out the fastest, most powerful and cost-efficient machines.
The current competitive state of bitcoin mining means that technological innovation needs to constantly keep up with the industry’s fast-growing demands. If not, miners will no longer be able to compete based on equipment, but instead, look elsewhere – whether it’s in alternative sources of energy or other forms of consensus protocols – to further establish a competitive edge and earn maximum profits.
Since the ASICs revolution, much of the technological progress in bitcoin mining has come from the reduction of chip sizes and higher hashrates to provide miners with greater efficiency gains. However these improvements have been plateauing with each new iteration. And despite bitcoin mining being the ultimate manifestation of proof-of-work (PoW), questions over PoW’s long-term viability have been raised. Ethereum 2.0’s proof-of-stake (PoS) consensus is arguably a more sustainable and environmentally-friendly model.
When it comes to the next technological innovation, much has been said about the use of quantum computing. Touted as the next computing frontier, quantum tech may potentially crack Bitcoin’s security and effectively rendering Bitcoin’s cryptographic keys insecure. When this happens, a soft fork would be likely to occur, enabling the Bitcoin protocol to run on quantum-resistant algorithms, and potentially even be operated by nodes that run on quantum computers.
However, it’s early days for quantum computing and going into 2021, ASICs will still be the cornerstone of bitcoin mining. I believe bitcoin miners will be waiting another few years before the arrival of the next groundbreaking technology.
Sustainability not for sustainability’s sake
As mining machines get increasingly powerful, so too will energy consumption increase.
Regions like China’s Xinjiang and Inner Mongolia have historically been reliant on coal energy to provide crypto mining companies with lower energy prices. China is seeking to address pollution on a broader level, recently stating its ambitions for a “green revolution” to become carbon neutral by 2060. This means that mining with non-renewable sources of energy such as coal will become increasingly cost-inefficient for China-based miners.
See also: Nic Carter – The Last Word on Bitcoin’s Energy Consumption
To further compound matters, bitcoin miners have traditionally relied on the cheap electricity powered by hydroelectric plants in the Sichuan province as their source of renewable energy. But when you consider that hydropower is only available during the wet season in China, six months of the year, it’s no surprise that bitcoin miners have cast their eyes to more innovative and sustainable sources of energy across novel jurisdictions for renewable or surplus energy.
As 2020 comes to a close, the future of bitcoin mining looks bright. Just as we recovered from the last bitcoin bubble popping, 2021 will see a brighter outlook as the fourth industrial revolution plays out.
In reimagining a mining ecosystem that is both sustainable and viable, we will do well to plan strategically for the long-term and not only consider short-term wins – whether it’s in tech or profitability – focusing instead on the complete integration of commercial, sustainability and environmental goals.