What happened
China doesn't want its citizens mining cryptocurrencies like Bitcoin (BTC 2.11%) anymore, and it ramped up its crackdown efforts over the weekend. That's why the price of Bitcoin is down roughly 12% over the past five days, and also why it fell by about 6% over the past 24 hours.
Almost every investment that is heavily connected with blockchains and cryptocurrencies also lost ground, including companies like Ebang International Holdings (EBON 7.87%), The9 Limited (NCTY 10.60%), and Future FinTech Group (FTFT 2.40%). When the market closed Monday, those stocks were down 8.5%, 11.8%, and 11.3%, respectively.
Image source: Getty Images.
So what
The Global Times isn't a completely neutral news source, being supported by China's government. But it reported Sunday that the government has been intensifying its crackdown on Bitcoin miners in the province of Sichuan. Basically, the miners are having their power turned off. The national government has already cracked down on cryptocurrency mining in other parts of the country. After what happened in Sichuan over the weekend, 90% of Bitcoin mining in China is now shut down, according to The Global Times.
The computational power allotted to crypto mining is measured in something called the "hash rate" -- essentially, the speed at which new tokens are mined. Not surprisingly, as China's government has shut down miners, Bitcoin's hash rate has plummeted.
Data by YCharts.
The overall hash rate of the Bitcoin blockchain network has dropped by roughly 48% from its April high. Theoretically, this makes the blockchain slower and less stable, since there are fewer machines running it. That said, there's a lot of other factors in play as well (such as the number of overall transactions) making it hard to draw a strong conclusion from the drop in the hash rate.
Furthermore, it's worth noting that while Bitcoin's hash rate has fallen sharply, it's still almost where it was this time last year and almost double what it was two years ago, showing the continued strength of Bitcoin mining in countries other than China.
Image source: Getty Images.
Now what
Ebang International put out a press release in May stating that China's mining crackdown won't affect its business at all. Specifically, it can still sell its mining equipment to customers abroad, and its plans for its own mining operations are outside of China as well. That said, it's important to note that 99.8% of Ebang's revenue in 2020 came from Bitcoin miners located inside China. Perhaps these miners will relocate and continue to use Ebang's equipment. But I'm apparently more concerned about this than its management team is, and I believe it's a situation worth monitoring for investors.
As for The9, it's been delving into mining different cryptocurrencies including Bitcoin and Filecoin (FIL 2.32%) in China, all of which fall under the Chinese government's ban. The company has been trying to diversify mining operations outside of China recently, and also just announced that it has moved some of its Bitcoin holdings into cold storage where they will be safe. But it's hard to imagine the crypto ban in China won't affect The9's business in the same ways that it could Ebang's.
It may be surprising to see Future FinTech in this roundup since it doesn't have anything to do with Bitcoin directly. However, consider that this is a highly speculative stock that enjoyed a big run-up when Bitcoin was soaring as investors cheered the company's plan to blend blockchain technology with e-commerce. In the first quarter, its sales of goods were up over 500% year over year. However, its total quarterly revenue was just $6,613. Comparing those meager sales with its lofty market capitalization of around $265 million shows just how hyped this small-cap stock was. And now that Bitcoin is dropping and hype surrounding cryptocurrencies is fading, Future FinTech stock is coming back down to earth.
I'd recommend not getting caught up in hype, whether it's about small-cap stocks like Ebang, The9, and Future FinTech, or even the largest companies in the world. When investing for the long term, what's important are a business's fundamentals. That said, shareholders of these companies undoubtedly wonder what's going to happen next with the price of Bitcoin, since these stocks' moves are often correlated with those of the cryptocurrency.
I'll stop short of predicting what Bitcoin will do in the near term. But I will note that price is controlled by supply and demand. And there is a potential driver of increased demand for Bitcoin coming in 2021. Specifically, Bitcoin miners just approved an update to the blockchain network called Taproot, which will allow new use cases for Bitcoin. Taproot likely won't arrive until November, but people may be more likely to buy Bitcoin once these new use cases are more clearly understood. For now, I'd watch how Bitcoin developers start preparing for Taproot's release.
