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How to profit from China banning crypto

Exclusive Research

  • China’s ban on crypto will lead to short-term and long-term industry impacts.
  • The US becomes the epicenter for crypto mining as miners relocate overseas.
  • Publicly-listed mining companies and hardware manufacturers will likely experience a huge revenue boost due to increased demand.

China has officially quit the crypto race. As the world's second largest economy, China was the biggest player in the cryptocurrency industry before the ban. Their absence from the market will lead to short-term and long-term changes, particularly for mining companies.

China before the ban: the world's mining machine

Over the last decade, China has been the epicenter of cryptocurrency mining. It has been estimated that 70-80% of all Bitcoin mining, to date, took place in China due to the country’s affordable electricity costs. But, as we should all know by now, the crypto ecosystem goes through some rapid changes as a developing industry. One of the most recent changes to shake the crypto world has been China’s severe crackdown on crypto. While China has threatened to ban and regulate crypto in the past, this time it’s official.

Why did China ban crypto?

China’s booming crypto industry flatlined after government regulators banned all crypto mining and trading in an effort to curtail fraud and money laundering. Officials also cited the move as part of the government’s goal to become “carbon neutral” by 2060. But the underlying reason behind the ban could be China’s ongoing development of their CBDC, the e-yuan. There has been widespread speculation that China’s attack on crypto could be an attempt by the CCP government to gain further control over their monetary supply as we argued elsewhere.

The ban kicked off with an official statement from the government, followed by authorities seizing 10,000 bitcoin mining computers in the province of Inner Mongolia, sending what remained of China’s mining industry fleeing for greener pastures. The inevitable impact on the crypto market was actually relatively muted. Following news of the crackdown, there was a small dip in the market, but prices rebounded shortly after.

Longer-term impacts of the ban could affect the survival of Chinese-based exchanges like Huobi that can no longer serve Chinese citizens. It’s also not clear how exchanges based outside of China will fare with their mainland Chinese customers. However, the biggest impact was felt not on the market, but the mining industry.

The devastating impact on China’s mining industry

Before the crackdown, China dominated the mining market, possessing 75.5% of the total computing power, or “hash rate,” of bitcoin’s network. As of writing, China has a 0% share of bitcoin’s global hash-rate.

Even before the ban, wary miners were starting to look for more stable political environments to conduct operations. According to a Reuters report, China’s hash rate fell from 75.5% to 46% around April this year before the official news of the crackdown, a decline most likely triggered from mining restrictions in Sichuan and bans on ICOs.

With China ceasing all cryptocurrency mining projects, mining pools and facilities have begun moving their operations overseas, as in the case of mining companies BTC.TOP, Huobi and HashCow. This regional shift is what experts are calling “The Great Mining Migration.”

The US becomes a safe haven for crypto mining

Perhaps no country has benefited from the crackdown as much as the US. According to the UK’s Cambridge Centre for Alternative Finance, the US has surpassed China as the global leader in bitcoin mining, possessing roughly 35.4% of the global hash-rate, followed by Kazakhstan and Russia. Months after the ban, the global hash-rate has already recovered its former levels as miners have relocated and restarted operations.

So, what is the upshot of this geographic shift? China’s crackdown could end up being a win-win for both miners and countries like the US, as it gives miners an opportunity to relocate to regions with cheaper labour costs, lower electricity prices, renewable energy sources and more stable cryptocurrency laws and regulations. Meanwhile, the US stands to gain economically from increased investments and production in the mining space.

One example of this, Shenzhen-based bitcoin mining firm BIT Mining, has already relocated to the US due to its relative political and legal stability. BIT Mining intends to invest $26m to build a data center in Texas, a growing land of opportunity for crypto entrepreneurs.

Texas, in particular, stands out as a beacon of hope for bitcoin miners due to its low electricity costs, crypto-friendly policymakers, abundant hosting infrastructure and deregulated power grid. The lone star state is also home to a rich renewable energy sector. Mining companies are poised to tap into natural gas waste from the state’s oil fields to power their rigs and reduce greenhouse gas emissions at the same time.

These are ideal conditions for miners. Darin Feinstein, co-founder of blockchain infrastructure and hosting provider Core Scientific, put it this way “If you’re looking to relocate hundreds of millions of dollars of miners out of China, you want to make sure you have geographic, political, and jurisdictional stability. You also want to make sure there are private property rights protections for the assets that you are relocating.” Mining companies are also looking to set up shop in states like Washington and New York, known for their hydropower mining farms and growing nuclear energy sectors.

One thing is for certain. If the U.S. is to have a long-term future dominating the crypto mining industry, it will have to go green. It will also need to ramp up its mining hosting infrastructure to accommodate miners. Thankfully, given the aftermath of the crackdown and the current exodus of miners from China, there is a huge demand for such infrastructure.

What should crypto investors take away from this

While the most immediate way to invest in the crypto market is to buy digital currencies on an exchange like Coinbase, there are good reasons to invest in mining companies – especially ones based in the US.

According to experts, US mining companies have made large equipment purchases, and have steadily built up hosting infrastructure and raised capital for mining operations. In the wake of China’s crypto ban, the U.S. is already reaping the benefits of their mining ecosystem growth as stranded companies from China are ready to build partnerships.

“We’ve noticed a massive uptick in mining operations looking to relocate to North America, mostly in the US”, Feinstein asserted.

Investing in the backbone of the blockchain industry is a good idea. It’s looking bullish, currently, and it arguably poses less risks than investing in the underlying digital currency itself. This is because the industry leaders are often tech companies that have multiple streams of revenue and work in a variety of markets. If the crypto industry tanks, these companies can stay afloat.

NVIDIA and Advanced Micro Devices are two companies in this category that deserve investor attention. NVIDIA, a GPU manufacturer based in California, has seen its stock rise over 135% over the past year, and nearly 50% since China’s crypto ban. NVIDIA produces graphic cards not just for crypto mining, but for computers in general and gaming.

Mining companies, although they are fully stacked behind the crypto industry, may also present a lucrative and less volatile investment. Mining companies can still make substantial profits even if the market drops in value, due to the profit margin between mining costs and a coin’s market price.

It shouldn’t come as a surprise that mining companies have done remarkably well since the ban. For instance, Riot Blockchain, which has recently expanded its mining fleet, saw its stock appreciate to nearly 50%, at its highest, following the ban, peaking at just over $44. BTC mining company Marathon Digital Holdings Inc. also experienced a massive increase just days after news of China’s crackdown. Its stock rose from $30 to $76 in just over a month (a 115% increase) before retracing.

To help investors quantify the health of the industry, Luxor Technologies, a Bitcoin mining pool and blockchain data analytics firm, recently launched the Crypto Mining Stock Index (ISIN), which tracks 50 publicly listed players in the mining industry. For those looking to invest in the space, look no further than the companies in this index, which contains pure mining and “mining-adjacent equities.” Listed companies include Riot, Argo, Hive, Northern AG and Galaxy Digital, as well as several blue-chip stocks like NVIDIA and SBI Holdings.

Crypto mining ETFs are also coming to the market at the perfect time. Investment adviser Viridi Funds launched a crypto mining ETF just before China’s ban. The fund, called the Viridi Cleaner Energy Crypto-Mining & Semiconductor ETF, will trade on the NYSE’s Arca platform.

According to Viridi’s website, 80% of the fund invests in publicly-traded mining companies, with the remainder going towards semiconductor companies. All companies in the fund must use a combination of carbon credits and/or renewable energy sources as part of Viridi’s goal of green investing.

Conclusion

While China’s sweeping crackdown on crypto has not significantly impacted the price tag of the big market cap cryptocurrencies, it has led to a profound industry shift, both geographically and ideologically, with eco-friendly mining and political stability as forefront issues.

With China stepping away from crypto, North America has become the new frontier in the mining industry. Tech manufacturers and hosting service providers should see a huge increase in operations and expect mining companies to proliferate. Now is a great time for investors and entrepreneurs to invest in US mining companies and manufacturers, as the future of the industry is in America’s hands.

Nothing in this article constitutes professional and/or financial advice. The content is provided exclusively for informational and/or educational purposes. Nothing is to be construed as an offer or a recommendation to buy or sell any type of asset. Seek independent professional advice in regards to financial, tax, legal and other matters.

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