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Being home to 90 per cent of bitcoin trade and 70 per cent of mining, China is Calling the Shots in Bitcoin’s Civil War
Chinese economic growth is a worry for many, having fallen below 7 per cent in the first quarter of 2016, which means that Chinese slowdown is the worst in the past six years. While the country’s all dominant central government is scrambling to shore up the economy by providing stimulus in whatever way it can, there is something going on in the cryptocurrency world that brings to fore Chinese domination of that field. Bitcoin for all intents and purposes now may be a Chinese currency.
When it was conceived, Bitcoin was thought to be a libertarian dream.
As a unit of value it was not controlled by a central authority, it had to be mined like gold and it was pretty much thought to be inflation proof.
However fast forward to today and we live in a world where according to Bloomberg, China is ‘home’ to 90 per cent of bitcoin trades and 70 per cent of Bitcoin mining.
As the article reported, “Chinese miners have leveraged their access to cheap labor, inexpensive electricity and local chipmaking factories to outmaneuver their global peers in performing the complex calculations needed to verify Bitcoin transactions - a service for which they’re compensated in newly-minted bitcoin. When the cryptocurrency’s price tumbled from about $1,000 in late 2013 to below $200 in early 2015, lower costs in China allowed them to stay afloat even as many Western operators folded.”
Perhaps it as an apt time to quote the late Chairman Mao. After all if China is now the king of Bitcoin, they will have their say. Then there is the spectre of government intervention, which is never too far away in China.
Their media, political activity and of course the internet are all in one way or another under the control of government. Should the Chinese government decide that Bitcoin is a rival or a threat, you might see a massive clampdown in a matter of days.
As New York Times recently reported in an article titled How China Took Center Stage in Bitcoin’s Civil War, “China’s clout is raising worries about Bitcoin’s independence and decentralization, which was supposed to give the technology freedom from the sort of government crackdowns and interventions that are commonplace in the Chinese financial world.”
Enough has been written and said about the ‘network congestion’ that clogs the pipeways of Bitcoin world. There is currently many competing ideologies on how this congestion issue should be solved.
While the western approach, particularly the American one, has been one that calls for expansion of the network, the Chinese have mostly stuck to the idea that things should stay as they are for the moment.
The role of the Chinese companies in negotiations over the future of the Bitcoin is immensely important as Wang Chun, co-owner and Chief Administrator of F2Pool told Bloomberg, “The miners control the real voting power”.
It is important to realise though that while Bitcoin transactions at the moment are capped at 7 per second, if something is not done about the prevailing congestion, the time taken to process these transactions can reach hours or even days, rendering Bitcoin basically inoperational. Therefore some Chinese miners have also realised that something needs to be done.
The New York Times quoted Jihan Wu, the founder of Bitmain as saying that the network needs to expand and soon. He is known to have said in an email that if core programmers did not increase the number of transactions going through the network by July, he would begin looking for alternatives to expand the network.
The Chinese remain sensitive about western impositions and they are not likely to give in to standard ‘talking down’ approach of many western companies and governments.
At the same time, the concentration of Bitcoin mining in China is a hairy proposition considering what happened in the neighbouring Russia with respect to the Bitcoin ban. With the Chinese economy going through a rough patch, it may reach a situation where an overeager government wanting to impose ever stricter capital controls may come after Bitcoin.
It is in the interest of Bitcoin and everyone involved that the Chinese and the rest of the world find a new balance where concerns of each other can be taken care of.
In the event this does not take place, rest assured it would be the Chinese that would be calling the shots this time around.
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