Will Bitcoin Halving Grow China’s Already Outsized Influence?

© Can Stock Photo Inc. / leungchopanBitcoin was designed to be decentralized, but as it matures, the currency is moving increasingly toward centralization — in China.

This has significant implications for the cryptocurrency, whose future early developers imagined would lie in the hands of a distributed global network of miners, but now largely lies in the hands of a few large Chinese companies. Further, predetermined events built into bitcoin’s code are also pushing power into the hands of few, rather than spreading it out across the network.

The halving of bitcoin that took place this weekend (meaning that each mined block of bitcoins now yields 12.5 coins, half of the previous 25) could also tip the balance further toward China. Each halving lowers the payout and makes mining less lucrative, and harder for companies with higher costs to compete. Over the past several years, Chinese miners have taken advantage of lower costs of labor, microchips, and local electricity to dominate the industry — 70% of bitcoin mining power now resides in China.

“[The halving] is a major event, which takes place only every four years,” Marco Krohn, CFO of Hong Kong-based Genesis Mining, told Bank Innovation. “Supply-side halving might have a significant impact on the bitcoin price in the next few months.”

Krohn said that three factors determine competitiveness in the mining world:

  1. hardware efficiency
  2. electricity prices
  3. overall management of the farms — in other words, efficiency of the mining venture

“Everyone is using roughly the same hardware,” he said. “Electricity prices are one of the main drivers and our primary edge certainly comes from operational efficiency in managing our farms thanks to tools like Genesis Hive.”

Hive is Genesis’s mining software, which it sells to other mining operations.

The concentration of power in China may seem strange to casual observers, but it must be remembered that bitcoin is a largely Chinese phenomenon, with some 90% of transactions involving Chinese traders, according to Bloomberg.

The halving of mined blocks is a planned phenomenon and has happened before. In November 2012, the price per mined block dropped from 50 coins to 25, but back then, the value of one bitcoin was just $12, while today it is close to $650. After the last halving, the price per coin was largely unaffected. But when the value of bitcoins, after reaching an all-time high in 2013, dropped significantly, Chinese miners were able to keep operating at a profit when many Western rivals were not.

If Krohn is correct and we see another price drop — the price of a bitcoin is down about 4.3% in the last week — it should increase the advantage of more cost-efficient Chinese operations.

Bitcoin faces yet more growing pains, as the network matures and expands. Another is that the network was capped at 7 transactions a second by design. This makes scaling up to handle many global transactions difficult. The main solution proposed to expand capacity is increasing block sizes — the amount of data per mined block — but this, one side of the debate argues, would further concentrate power in the hands of large mining groups.

But it is miners who hold the voting power on the matter of block sizes. A significant (and somewhat secret) meeting will be held in California later this month to discuss this issue. Jihan Wu, CEO of Antpool, the second-largest mining operation in the world, told Bloomberg that he believed a decision would be reached at this meeting.

Martin Hagelstrom, a bitcoin project executive at IBM, has suggested that the block size debate is really about payments vs. settlement:

In short, we have one group (Bitcoin Classic) that thinks that bitcoin should always be a payment network, aimed at ultimately replacing traditional payment methods. Then, we have another group that thinks of bitcoin as more of a settlement network (Bitcoin Core), and that end users should use sidechains, the Lightning network or other future initiatives that could appear in the future as networks for payment.

So, we have on one hand a thesis for a bitcoin blockchain that would handle more transactions with low fees following a network hard fork, and on the other, a thesis for a bitcoin blockchain that can handle fewer transactions but higher amounts (and as a consequence higher fees).

Halving has already happened, and soon the block size debate will be settled. It seems that with bitcoin, whichever way the argument is decided, China wins.

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