Bitcoin noose to tighten amid drain on vital resources

In recent weeks, there has been a growing crackdown on bitcoin and other virtual currencies by nations across the world, and some constraints could even be described as repressive.

Among them, China has cracked down the hardest with financial and payment institutions no longer allowed to accept virtual currencies as payment and settlement tools and also prohibited from offering services and products related to virtual currencies. In addition, virtual currency trading accounts are strictly being checked and trading capital chains are being cut off as part of Beijing's clamp on bitcoin mining and trading.

There are many analysts who believe that governments around the world are against virtual currencies such as bitcoin and ether because they threaten the status of major fiat currencies such as the greenback, euro and renminbi.

But there's more to it than that.

Bitcoin's dizzying rise this year has led to an increase in crypto mining activity, but these mining machines consume vast amounts of energy while generating huge carbon emissions.

These power-hungry mining machines have put pressure on power grids and forced governments to subsidize electricity to maintain stability.

Preivously, many governments turned a blind eye to crypto mining, even though they did not approve of virtual currencies.

But since the start of this year, hundreds of thousands of kilowatt hours of electricity in the world has been consumed by millions of these mining machines, according to the latest data.

And while crypto mining has given rise to related industries such as production of these mining rigs and software development, it has also increased demand for chips and semiconductors - which are already in short supply - and inflated their prices.

The bitcoin-driven chip crunch has become so bad that two of the world's biggest automakers were recently forced to cut production for one to two weeks because of the shortage.

China has been the most affected by crypto mining.

According market estimates, before China launched its crackdown, as much as 70 percent of the world's bitcoins were being generated in the country, which means Beijing would have been battling both rising power demand and a shortage of chips.

Therefore, it's understandable why China decided to crack down aggressively on virtual currencies like bitcoin.

But bitcoin is still trading above US$30,000 (HK$234,000) and many miners have moved from China to other parts of the developing world where production costs are low, including Azerbaijan and Iran.

And now, these two countries too have begun to impose restrictions on crypto mining.

Azerbaijan's Black Sea coast has been hit by power shortages and blackouts, and the local government blames uncontrolled bitcoin mining for overloading the power grid.

Iran is an oil-rich nation, so power should be not a problem, while electricity is cheap. But this summer it was hit by power shortages as well as blackouts, which officials blamed in part on cryptocurrency mining.

A local official, quoting research conducted by the University of Cambridge, said electricity consumption by cryptominers in Iran has increased 4.5 times since October 2020, with illegal bitcoin mining rigs consuming up to 2,000MW of electricity compared to 300MW used by legal operations.

Countries, therefore, will continue to crack down on virtual currencies not only to protect their own currencies but also to safeguard their power production and ease the semiconductor shortage.

This is also a major reason why virtual currencies are falling in price and investors who are still sentimentally attached to crypto must pay attention to these trends.

Andrew Wong is chairman and CEO of Anli Securities