Shutting down China's bit mines

The private sector of the People's Republic of China has provided some of the key institutional support that Bitcoin and other altcoins needed to get off the ground. The infrastructure drive undertaken by the Party as a counter-recessionary measure after 2008 overbuilt the electricity supply, resulting in bargain basement prices. Local capital saw fortunes to be made and started building out cryptocurrency mining infrastructure to make a quick buck. The Chinese now are dominant players in this market; the Chinese-owned Bitmain manufactures the flagship Antminer S-series of miners, they own a significant amount of the world's cryptocurrency, and they own significant trading platforms. The fields of mining buildings they built out underpin the global network of Bitcoin. Given all that, why on earth would they ever start making moves to undo all that? And what does it mean for the market?

For starters, it's important to note what has and hasn't happened there, and not make too much of this. They have prevented new ICOs on Chinese shores, and they have banned trading. So their exchanges are probably makeshift satoshi orphanages right about now, with hordes of English-speakers going up to them, lips quivering, asking "Please sir, may I have some more?" And if that's you, well, that's the danger of investing in a country with an independent nuclear deterrent. But they haven't banned the manufacture or sale of bitminers, they haven't banned the ownership of cryptocurrency, and this tells us a lot about where this will end up. You see, China doesn't want to truly throw away its world leadership in this market, it just wants to eliminate the threat it poses to its own society. It makes the world's best bitminers right now, and it has no real need or reason to throw away that industry bringing in foreign money. The People's Republic will sell us bitminers to our heart's content. If its investor class wants to fly to America or use a VPN and trade in crypto in some other country, by all means they can do that. But they don't want the environmental problems attendant with the industry in its current format. They also certainly don't want a class to rise that will (from their perspective) destabilize their society. Let's break them both down.

First off, the environment. China built something called the Three Gorges Dam. It's the largest dam in the world. They could've built a bunch of smaller ones for a fraction of the cost and environmental damage, but okay sure they like big. The dam produces a huge load of hydroelectric power, and like the Pacific Northwest after the New Deal, it's electric supply in the rare difficulty of finding a producer. In the Pacific Northwest, aluminum smelters moved in to take advantage of the cheap electric rates. In China, bitmining took that economic niche instead.

Which is fine and good, except that the energy it produces ought to be displacing coal and oil and natural gas in the country's energy portfolio. The Central Committee's gotten behind the renewable transition, planning to become a major player in that industry by adopting ambitious standards quicker than other developing nations. All this energy from the Three Gorges Dam could be redirected towards turning off coal plants, as hydroelectric is excellent baseload power. But until the bitminers shut down, they're keeping the coal plants online. So at least in China, they're environmentally unfriendly, and the Party doesn't just ignore that anymore. But surely the more pernicious threat, from the Party's perspective, is the rise of a sort of petty cryptobourgeoisie, a lot of people who make a living doing this. It's routine practice in Marxist-Leninist countries to engage in periodic currency reform, exchanging old currency for new on a progressive scale that wipes out the savings of the rich. Stalin did it, the Kims have done it. But it's pretty hard to do that when there's an impenetrable store of wealth owned by a lot of Chinese citizens. If Bitcoin and its ilk stay a toy of the Chinese bourgeoisie, that's fine. If they play with it in America or South Korea, well, those people are partners of the cadres, or else they would not have their wealth. In any case, they will not upset the system that keeps them wealthy. Especially now that Premier Xi has taken to executing them when it proves convenient, many feel a powerful need to keep such measures inconvenient.

But for the CCP, under no guise can the average Chinese citizen be allowed to use such cryptocurrency. It can be a tool for speculation, for crime, for unregulated economic activity. It creates a new form of petty bourgeoisie, or "capitalist roader" in Marxist-Leninist-Maoist terminology. The Chinese state has been captured by the "capitalist roaders" since the days of Deng Xiaoping's mice-catching capitalist cats. Xi's father was arrested during the Cultural Revolution for being a capitalist roader, which makes Xi's opposition to this all the more remarkable. This isn't quite another Cultural Revolution, but Xi is trying to change the nature of the Chinese state like Deng. He isn't a complete reversion to Maoist form - he arms Duterte against the Philippine Communists - but he seems interested in rebalancing the class base of his own Communists. Attacking Bitcoin will remove a tool of resistance to his plans to remake Chinese society, and removing that will also remove the corruption he seeks to root out in the lower ranks.

Without a reason to stop working for a living, the Chinese workers will keep their jobs and their support for a regime that nominally rules in their name. They will not gain enough wealth to oppose or undermine the regime, at least not in any form that the regime cannot yank away at will. They will be cheap fodder for foreign investment, and provide Xi's base for the other reforms he plans on undertaking.

It's not entirely unclear this is a bad idea, at least not from the point of view of the CCP. Already the Chinese cryptobourgeoisie is finding ways around the ban on ICOs and cryptocurrency trading, despite the death penalty for doing so. They are risking death for this, in a massive show of defiance against the regime. They are also bleeding the country dry of yuan when it needs it invested to keep the economy going. But they are getting rich in the process, so it is in their interest to disregard all that. This is why Xi wants to undermine that interest. So the People's Republic of China is moving ahead with these reforms that will take a lot of the world's bitmining capability offline and reduce a lot of the world's demand for cryptocurrency. What does this mean for you?

Well, remember Bitcoin's rally about a month before Christmas? We were all predicting it would resume after Christmas, but it didn't. Bitcoin has hovered somewhere between $12,000 and $17,000 since Christmas, as waves of Chinese money works its way out of the system with every momentary rally. Don't expect a whole lot of coins to moon for a while, although a few coins with promise might get near Bitcoin's level in a year. But Bitcoin itself will have downward pressure on it for a while until the Chinese money's all been Dunkirk'd out of the PRC and all the S9s assembled in those server farms in China have all been eBay'd over to South Korea or America or Iceland. That won't happen overnight.

Second off, there's gonna be a dip. A huge dip. People willing to hold yearlong positions in Bitcoin after buying them during the dip will get to go to the moon for their efforts. The dip will reverse itself eventually after the market's adjusted, and then Bitcoin will resume its climb upwards.

Third off, this is absolutely the time to get into bitmining. The Chinese will be looking to sell off shiploads of miners, and the glut of those miners combined with the dip will reduce their price significantly. If you only have $200 to spend, you'll be better served buying an S3 from China sometime in June than buying Bitcoin or just about any altcoin now. Especially if you live in a home that requires heating, and/or you live in an area with cheap electric rates, why get satoshis just once when you could get them forever, plus the free heat? I'll cover this world in more detail in a future post.

#BTC #China #cryptocurrency #daytrading #mining