China Just Made A Geopolitical Mistake

The superpower of the East has had an interesting relationship with bitcoin over time. The government has essentially banned digital currency and any related activities for years. That ban only applies to the average citizen or entrepreneur though. If you are a government official, or if you’re able to secure special permission, the bitcoin network was available for your legal use. This is almost an exact replica of the North Korea internet strategy — keep the empowering technology for the elites or their friends.

But China has recently doubled down on its anti-bitcoin stance. They are enforcing the ban in a much more aggressive manner in the last few weeks. This has led to upwards of 90% of all bitcoin miners in the country being shut down. These miners have two choices — patiently wait to see if the regulators will allow them to resume operations later or pick up and leave the region to begin re-building their business elsewhere.

As you would expect, many of the Chinese miners have decided to leave China. This decision means that they operationally have to shut down their mining equipment, pack it up, ship it to a new location, set it up again, and then commence mining activities. We can see this happening in real-time as the total mining hash rate appears to have fallen off a cliff recently.

The beauty of bitcoin is that a drop in hash rate like this will be quickly corrected by the mining difficulty adjustment that occurs approximately every two weeks. For those who are unaware of how this works, the simplest explanation is that mining bitcoin will become easier for those still on the network (this makes the remaining miners more profitable until the miners who left are able to return to their mining activities).

There are a few ramifications that I think are worth calling out here.

First, this move by China is a significant blow to the bitcoin critics.

The anti-bitcoin argument historically revolved around China’s market share of mining or the ability of the country to control/manipulate the network. As we are watching miners move out of the country, this argument is losing most of its teeth.

China doesn’t control bitcoin and never has.

Also, the free market of economic incentives will always lead bitcoin miners to seek the lowest-cost power, specifically in regions where there is the greatest political and regulatory stability.

Next, the United States is a massive winner in this situation.

Take for example the exclusive gain in hash rate for the largest American bitcoin mining pool, Foundry USA.

While China is losing market share in bitcoin mining, the United States is gaining market share.

It won’t necessarily be one-for-one because some Chinese miners will not come to the US, but it is hard to argue any country is going to benefit more from this than the United States.

This is why I started the letter with references to geopolitical mistakes. China has chosen a path that will become a more obvious self-inflicted wound, while simultaneously handing a large, non-violent victory to a Western superpower. It is hard to see at the moment.

It may not be obvious for years. But this is what we are watching occur in real-time.

Historians will write that China had a majority of hash rate within their geographic borders, yet they made decisions that pushed that hash rate into more democratic and capitalistic societies.

Just as North Korea chose to embrace the internet only for the elites, China is making a similar mistake here. As if that wasn’t bad enough, China’s plan for a nation-state digital currency is similar to North Korea’s internal “internet.”

As we have discussed over and over again, open systems beat closed systems. The Chinese approach of banning an open monetary network in pursuit of a tightly controlled monetary system is unlikely to be seen as an advantageous strategic move for their citizens.

But just like North Korea, this decision will be helpful in continuing to consolidate power and ensure the longevity of the dictatorship.

The United States is choosing to embrace the open monetary system though.

We must continue to encourage our political and regulatory leadership teams to become the global leader in this open monetary network.

Whether we embrace it or not, the bitcoin network will be adopted by countries around the world. Just as it didn’t matter if North Korea or others leveraged the internet, because other countries decided to plug into the open information system, it won’t matter what one individual country does with bitcoin.

There will still be more countries waiting to plug into the open monetary system.

This is the beauty of Bitcoin.

It doesn’t care about geopolitics.

It doesn’t care about monetary policy.

It doesn’t care about sentiment.

The bitcoin network simply continues to produce block after block after block of transactions. The network just doing what it was designed to do — providing a decentralized payment system that can be used by anyone in the world with an internet connection.

China just made one of the greatest geopolitical mistakes in recent memory.

The United States is the greatest beneficiary of the situation.

Americans should be celebrating, and capitalizing on, this gift that we were just given. In a game of chess, you don’t always need to win.

Sometimes, you just need to wait for your opponent to make a mistake.

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Heinrich Bredenkamp

Heinrich Bredenkamp

Crypto Enthusiast and Investor. I give regular market updates, trends and analyses regarding cryptocurrency. I use a variety of sources for my content.