Even after the Bitcoin ban, China still accounts for 20% of the hash rate

When evaluating a stock, it is important to predict the potential value of the company in the future. Part of the analysis should include whether the business itself has a long life. A good company should hang on, even if it has taken a significant hit in its infrastructure or in the price of its shares. A share in a company that can withstand various types of attacks and pressure can be a share worth buying.

A product, on the other hand, will stick around regardless of the companies that produce it. In this light, Bitcoin (BTC -3.52%) appears to be more of a commodity than shares in the Bitcoin network. Regardless, the same investment principle applies: Investors who buy Bitcoin must have confidence that the Bitcoin network is robust. If the 2021 China Bitcoin mining ban has taught us anything, it’s that Bitcoin has a resilient network.

China Bitcoin Ban in 2021

In May 2021, China banned Bitcoin mining across the country. A massive exodus of Bitcoin miners occurred shortly after. They fled to neighboring countries such as Kazakhstan and as far as Texas. As a result, the Bitcoin hash rate dropped by 50% overnight.

Hash rate is a measure of how many computers contribute to the network. Hash rate is a rough measure of the security of the Bitcoin network. The higher the hash rate, the higher the security. So when 50% of security goes offline, it is reasonable to expect that the network has degraded performance, or is vulnerable to attack. So what were the real effects of the Bitcoin mining ban?

The effect of the ban

The result of the ban was that Bitcoin miners left China. The Bitcoin blockchain continued to produce blocks at a rate of about 10 minutes per block. The miners who continued to operate the network did so without interruption. Within six months of the ban, the miners who left the country were back online in new geographic locations. What is important to note here from an investment resilience perspective is that the Bitcoin network did not slow down and was no more or less vulnerable to attack. I doubt that a company that has just laid off 50% of its workforce can maintain its operational efficiency.

Re-establishment of miners in China

One year later, in May 2022, reports stated that as much as 20% of Bitcoin’s hashrate still comes from China. Despite a ban on Bitcoin mining, some operations have chosen to remain online, risking legal consequences. Three things allow miners to remain operational against the wishes of the central government. First, China is a geographically large country, which makes the complete dismantling or destruction of Bitcoin mining operations difficult. Second, China has a surplus of hydropower, which means miners can buy the energy very cheaply. Finally, miners can connect and use the internet through satellites. These three facts make any small to medium-sized Bitcoin operation difficult to detect and shut down permanently.

Bitcoin is robust

What this China ban tells me, as a Bitcoin investor in North America, is that shutting down all Bitcoin miners is harder than just banning it. Additionally, if a country succeeds in pushing miners out of its borders, it does not spell doom for Bitcoin. The miners themselves are resilient enough to look elsewhere to run the equipment. Meanwhile, miners in other countries (like the US) are happy and able to keep the network running without noticeable performance degradation. This tells me that at a minimum I should be able to access and use Bitcoin regardless of the political climate.

Bitcoin’s price is malleable

The caveat to the whole investment thesis that Bitcoin is resilient is that unlike the Bitcoin network which shows resilience, its price is still susceptible to political intervention. After China announced the Bitcoin ban in May 2021, the price of Bitcoin fell more than 50% from its all-time highs. The public perception of the events was that the miner exodus would be detrimental to the network. This prompted some investors to sell Bitcoin in anticipation of long-term structural damage that never came. I sit comfortably knowing that I will be able to send and trade with Bitcoin in the future as I have confidence that the network will persist. But what its value will be is unknown. The price of Bitcoin is simply not as sustainable as the network that powers it.