Russia wants miners as China ban triggers a crypto cold war

By Raffaele Redi

Meanwhile, US faces shortage of bitcoin miners and increased costs

Newspaper headlines and text about the historic events happened during the Cold War                                 
The project could see Russia controlling more than 25% of the global hash rate – Photo: Shutterstock
                                

Following China’s ban on cryptocurrencies, the main Russian blockchain association is calling on crypto miners to move to Russia, to avoid a concentration of mining resources in the US. However, a lack of regulation in the country still keeps major miners a long way from Moscow.

Meanwhile, as China cracks down on mining facilities, shipping delays and increasing costs are hitting some US West Coast miners, who tend to rely on Chinese companies for their hardware supply.

According to Securities and Exchange Commission (SEC) filings, the US is facing a shortage of bitcoin miners, increased component costs and delays in the delivery of orders, due to the shipping crisis.

If miners are slow to migrate, the effect of the China ban could hit the crypto market for the entirety of 2022.

Russia call: Chinese miners wanted

The Russian Association of Cryptoeconomics, Artificial Intelligence and Blockchain (RACIB), the only public organisation in the Russian Federation representing the crypto industry, recently launched a project for the transit of mining resources to Russia.

The scheme aims to build a green crypto hub in the Kamensky District of Rostov, where the largest wind farm in the Russian Federation, with a capacity of more than 300MW, is located.

“Currently, the largest foreign partner of RAСIB in this project is a consortium of the largest mining companies in China, which together controlled more than 25% of the global hash rate of the main cryptocurrencies and, first of all, bitcoin,” said the RACIB, which also explained that it is working with Russian authorities, key energy enterprises and foreign business partners.

Crypto miners could fuel Russian energy industry

With China developing its digital yuan and the US and Canada retaining most of the crypto miners, Russia fears being left out of the crypto game.

“The rapid inclusion of Russia in this [miners’ migration] process will avoid another concentration of mining resources in one region, in this case already in North America, which will undoubtedly have a positive impact on the stability and security of the entire global digital economy,” said the RACIB.

The Russian president, Vladimir Putin, recently said: “To mine crypto, you need a lot of energy, and for that people have to use traditional sources of energy, primarily hydrocarbons.” Russia is one of the top five countries in terms of electricity production, generating around 1,100TWh a year.

However, Russia’s reported lack of regulation of both blockchain technology and miners is helping the spread of artisanal miners – those mining in their garage, for instance – rather than inviting large mining factories to the country.

Russia’s hash rate accounted for around 11% of the total on August’s Bitcoin Mining Map, generated by the University of Cambridge.

China ban hits US miners

The Russian call comes as the Chinese ban hits US miners. The global cryptocurrency supply chain is heavily dependent on China, where a large number of mining equipment suppliers are located.

The Chinese government seems to be hitting mining suppliers as well, after the vice chairman of the Jiangxi Provincial Communist Party was expelled because of mining activities.

The first hint of trouble in the US came from Greenidge Generation Holdings. In a SEC filing about its Q3 2021 results, the company warned investors: “We rely on third parties, principally located in China, to supply us with bitcoin miners, and shortages of bitcoin miners or their parts, material increases in bitcoin miner costs, or delays in delivery of our orders, including due to trade restrictions and Covid-19 supply chain disruptions, could significantly interrupt our plans for expanding our bitcoin mining capacity in the near term and future.”

The cryptomining company, which posted net losses of $7.9m for the third quarter, compared to a loss of $0.3m in Q3 2020 and a net income of $3.5m recorded in Q2 of 2021, added: “China has also limited the shipment of certain products in and out of its borders, which could negatively impact our ability to receive bitcoin mining equipment from our China-based suppliers.”

And Greenidge is not the only company affected. “Should any disruptions to the China-based global supply chain for cryptocurrency hardware occur, we may not be able to obtain adequate equipment from the manufacturer on a timely basis. Such events could have a material adverse effect on our business, prospects, financial condition and operating results,” warned Cipher Mining in its recent SEC filing.

But not all US miners

On the other hand, the Chinese ban has helped US miners, such as Hut 8, that don’t rely on supplies from Asia.

“The sharp decline in global hash rate stemming from the ongoing prohibition on cryptocurrency mining in China, and the resultant downward bitcoin network difficulty adjustments, has resulted in Hut 8 producing significantly higher quantities of bitcoin at a lower cost per bitcoin produced,” the company recently said.

Average production for Hut 8 increased by approximately 50%, from 6–6.5 bitcoin per day in late June 2021 to approximately 9.5–10 bitcoin per day in late July 2021.

“With the recent ban on bitcoin mining in China, Hut 8 has nearly doubled its market share and is producing approximately 10 bitcoin per day. Reports suggest that the exodus of miners from China may take an extended period to resolve and the global network hash rate could remain depressed well into 2022,” said Jaime Leverton, CEO of Hut 8.

“With 109MW of installed power in Alberta, and with a third site being stood up in the fourth quarter of 2021, Hut 8 is well positioned to take advantage of favourable bitcoin mining economics expected to continue into 2022,” he added.

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