Last month, China finally put its foot down. It actualized the threat it’s been peddling since 2018: shutting down all mining within its borders.
The price of Bitcoin (BTC, Tech/Adoption Grade “A-”) dropped on the news, and fearmongers predicted the mass shutdown would be a nail in the King of Crypto’s coffin.
But these talking heads are missing the fundamental resilience of Bitcoin, as Weiss crypto analyst and editor of Weiss Cryptocurrency Portfolio Juan Villaverde points out in our latest Weiss Crypto Sunday Special.
You can watch his interview with host Chris Coney here, or read on for the full transcript ...
Chris Coney:
Hi there, guys. This is Chris Coney speaking, and welcome to the latest edition of the Weiss Crypto Sunday Special. I have one of my favorite guests back again: Juan Villaverde. Juan, welcome back to the Sunday Special.
Juan Villaverde:
Hey, Chris. Good to see you.
Chris:
Good to see you, sir. So, the topic for today, Juan, is the Bitcoin mining economy. We did one on energy consumption and so on, but today I want to talk about Bitcoin mining. It’s a little economy of its own, and I’ve written down what I think are the five major components of the Bitcoin economy. And then if you can just give us a breakdown of how each one functions.
First, there are the hardware manufacturers … so those are like electronics. They manufacture the electronics, the ASIC devices that actually do the Bitcoin mining. I call those the hardware manufacturers.
Another component in the Bitcoin mining economy are the energy producers that generate the electricity for those mining machines.
You’ve then got the mining farms that these big companies with the big warehouses that stuff them full of these Bitcoin mining machines buy the power, and then do the mining.
The fourth [component] are the Bitcoin mining pools, which are like syndicates you join to increase your chance of making money. Maybe you can expand on that.
And then the fifth [component] are the software vendors. I mean, this isn’t probably well known or of any particular interest, but the Bitcoin mining farms have these software systems that they either develop themselves or buy in to manage the whole facility. So they’re probably the least important from an investor’s point of view.
But can you give us an overview of just what’s the significance of each of those and how they interact?
Juan:
Okay, good question, interesting. I think there’s a lot of overlap between them. For example, Bitmain is famously the hardware manufacturer for Bitcoin ASICs, the machines people use to mine Bitcoin. They’re also very involved in mining themselves. They have these large farms — which used to be located in China, so I guess they’re going to have to go elsewhere now — and they also have their pools. So now —
Chris:
Sounds like they take part in all aspects of the business.
Juan:
They do.
They’re integrating all verticals. I think that’s a technical term, isn’t it? You go from hardware to mining.
Chris:
[So, they’re in the business of mining] every which way. They’re selling the kit, they’re using their own kit to mine and then they’re also operating a pool as well.
Juan:
I don’t want to accuse them of anything either, but they used to ... Back in the day when I tried to get into mining, they used to manufacture new hardware, use it themselves first until difficulty would adjust and, once it adjusted, [the hardware] would hit the market.
Chris:
So, these Bitcoin mining machines, they’re like computer processors in the sense that they’re constantly innovating, constantly getting faster and consuming less power, which in the Bitcoin mining economy is absolutely critical because it’s capital-intensive to buy the kit and the facilities.
But really, most of it is in the profit and loss. You buy power in, put it through your machine and some Bitcoin comes out. So, the less you can spend on power and the more CPU processing power you can get out of that power, the better.
And the thing that sits in the middle of that ... Well, there’s a few of them. There’s Avalanche, I think is one manufacturer, there’s Bitmain, and there [are] a few others around the world.
Juan:
Yeah. I mean, that’s one of the things I love about proof-of-work (POW) mining that other systems don’t have: it’s pretty open to competition. If any sufficiently capitalized party wants to get involved in this mining, then they can. Just look at El Salvador. So that’s pretty interesting.
I like that open system; permissionless, they call it. I mean, if you have the resources to produce your own hardware, you can participate in mining. That’s why people used to mine with their laptops. Anybody with a computer is able to do it.
Chris:
Right, so we’ll go back to El Salvador. Which role do they play? I’d call those one of the energy producers, primarily ...
Juan:
Energy producer, definitely. Yes.
Chris:
And I suppose Bitcoin, in the Bitcoin mining economy — if you’ve got natural resources, say hydro or volcano power, geothermal in their case, they can use Bitcoin to monetize those natural resources in a way that’s never been possible before.
Juan:
Yeah, and it makes it economical. I think we touched on this last time. It makes it economically feasible to perhaps exploit some of these energy sources because without Bitcoin, without the capacity to directly monetize some of that power, perhaps it’s just locally, then maybe it wouldn’t make sense to tap into that particular volcano to produce electricity.
El Salvador would be, in my opinion, part energy producer, part farm operator, probably. I’m guessing El Salvador will seek to mine its own Bitcoin as well as allowing companies to establish themselves and mine with their own hardware.
Chris:
They have the power generation in the form of the geothermal and a number of different ways of monetizing that. They could just lease the geothermal real estate to a miner. They could do a joint venture with them and say, “We’ll split the Bitcoin part 50/50, or whatever. We’ll supply the power, you supply the hardware.” There are different business models, but that would be a way for the El Salvadorian government to start to create a certain amount of Bitcoin reserve for themselves by becoming a government miner with the natural resources that they have.
Juan:
Yes, which I think they’re looking to do because the president of El Salvador is a pretty smart dude. Young, too. He was doing an interview with McCormack, Peter McCormack, and he said, “Listen, when we use dollars or any other form of fiat currency, we’re actually subjecting ourselves to the monetary policy of a foreign nation.” And he explained that what he liked about the Bitcoin system is that it’s not only open to all for participation, anybody who wants to come in can do so, but it’s just fundamentally more democratic. They get a stake. They become a stakeholder in this global monetary system, rather than a passive... What’s the term I’m looking for? They’re just a passive importer, a passive participant.
Instead of just directly importing somebody else’s monetary policy, which is pretty arbitrary, you’re participating in this new monetary system that has deterministic monetary policy. That’s Bitcoin: You cannot really change any of the parameters of its monetary policy, but you become a stakeholder. You are actively participating in securing this network, in processing transactions and, of course, you get some of the rewards.
It’s just fundamentally more open. Anybody who wants to participate can do so, and that’s what’s interesting about all these parties that are involved in Bitcoin.
And one more interesting note to me is the energy producers, because energy producers don’t necessarily have to produce that energy for Bitcoin. But again, because Bitcoin is an open system, you can just tap into any resource that, and use it to mine Bitcoin.
Now, it has to be cheap enough. So it’s not like anybody can do it, but provide-
Chris:
It has to be profitable.
Juan:
Profitable enough, yeah. So providing you have access to cheap and abundant electricity, you can participate in the system. Mining farms plus pools, I think they’re oftentimes the same. If you’re running a large mining operation, chances are, you’re going to allow third parties to connect to your farm and pool that hashrate together in exchange for a fee.
So basically, if I’m mining Bitcoin, I can allow others to mine alongside myself in exchange for a fee. And the reason you would do that is to form a syndicate, essentially.
Chris:
So if I had just one Bitcoin mining machine in my garage, I could join your mining pool, and then effectively, that machine may as well be in your warehouse.
Juan:
Exactly, exactly.
Chris:
So that’s when mining farms — who have these big warehouses — might also allow other people to come in with them.
And you say syndicate; that’s the way I describe it. It’s like when people join syndicates to play lotteries, because if you buy one ticket for the U.K. National Lottery, it’s a 1-in-40 million chance you’ll win the jackpot. So, while people know that it’s going to reduce their reward, they increase their chance of winning by joining a syndicate. They know it’s going to be shared, but it’s actually more sustainable that way. Isn’t that the main reason why pools exist?
Juan:
Absolutely.
Chris:
They’re designed to make the income less random and more consistent, even if it’s lower.
Juan:
100%. From a statistical standpoint, you’re actually keeping your returns roughly static, except that you are increasing your probability of making money while reducing the final payout.
Now, statistically speaking, that means you’re just reducing the volatility of your income, but receiving about the same income, minus a fee, obviously, because you have to pay into this pool. A portion of your returns need to be paid into the pool operator, that’s why they do it. That’s why they’re incentivized to do it.
I guess folks need to understand that when you have, let’s say, an isolated ASIC, if you have one miner, if you run a miner by yourself —
Chris:
Solo mining.
Juan:
Solo mining. The only chance to make money is to find a block. So you’re competing with these giants of mining, located all over the world.
Chris:
Yeah, to win in the U.K. lottery is 40 million-to-one. I think that’s more likely than if you were mining with one machine. I think the odds are worse than that, 40 million to one. The chance of you finding a block with one machine is many times that. So, highly, highly, highly unlikely.
Juan:
And you have to remember that you’re spending electricity for every second that machine is running. So, you have this completely unexpected payout. You don’t know when you might get paid. You may get paid tomorrow. You may literally win the lottery and get paid tomorrow. Or you may have to run this thing for years before you see some income come in.
Chris:
You have to sink all that cost in the meantime.
Juan:
Exactly. So, the way people do it is they pull their resources together and share with one another. Because if you have a bunch of people mining together, then the probability of getting some of those blocks is much, much higher. And everybody gets-
Chris:
Even if it’s not your machine that hit the jackpot, it doesn’t matter, because it’s all one big cloud of computers.
Juan:
Yeah. Because you get paid per ticket, right? It’s just like forming a syndicate for the lottery. I mean the more tickets you bought, and the more tickets you contributed into this pool, the larger your share of the payout, if and when that takes place. So it works in the exact same way.
Chris:
And that’s effectively what the mining machines do — generate lottery tickets as fast as they possibly can to guess what the winning combination is. And the faster your machine and the cheaper it is, the better overall, right?
So, I’ve mentioned those software vendors earlier. But I suppose they get rolled into pools as well. Because what the pool gets paid for is to maintain the platform that sucks in all the mining power into one big chunk, and then submits that to the Bitcoin network and generates income from newly mined Bitcoin.
Juan:
Yeah. And I suppose you need software as well to manage all these, because you have to know how many calculations each miner performed until that block was discovered. So there’s some management there that needs to be done. You have to figure out how much each person contributed before you can decide what the payout should be for each individual participant.
Chris:
Right. Optimizing for efficiencies is critical because you might have two identical warehouses with the same number of mining machines, but one is more profitable than the other because they’ve optimized for efficiency to the max. So it is a highly specialized business now.
And it’s what most people, when they first talk to me about Bitcoin, seem to be most interested in; mining, as if they can create their own money. They think they can break the laws of economics in that, if something’s highly profitable, it attracts competition.
Juan:
Correct.
Chris:
That’s Bitcoin economics 101. And that’s what then reduces the margin to near cost. And then innovation happens. And it happens all over again.
So, that takes me back to the El Salvador thing: What is disempowering about say, El Salvador using the dollar is they’re not in control of the creation of the currency. So weirdly enough, at least for the next hundred years or so, these energy producers or anyone who’s going to establish a Bitcoin mining farm can join the money creation game. And that’s basically what Bitcoin does, right? I don’t know if you’re going to refute that perspective or not.
But isn’t that what El Salvador is saying? “Okay, Bitcoin is going to allow us to print money, not print it like the federal reserve, but effectively create new Bitcoin up to the limit?”
Juan:
So, the way they conceptualized it — and I think it’s pretty interesting the way they said it — they were listening to the right people, the government, or at least the president. Because what they said is basically, when you have the dollar, for example, which is a top-down centralized system, the first one to spend that dollar will get the most juice out of that dollar. So that dollar, the minute it’s created and spent for the first time, that’s when it has the most purchasing power. You and I spoke about this.
Chris:
Diluted existing stockpile.
Juan:
So by the time El Salvador gets those dollars, they’re fully diluted. I mean, they have lost a lot of that purchasing power. And yet they still need them. So, in a way, they’re economically subject to the power center that actually creates this money. If you go to Bitcoin, it’s a continuing effect.
Chris:
The closer you are to the spigot, the better.
Juan:
Exactly. And they’re very far from the spigot. El Salvador, the smallest country, I think, in Latin America, one of the poorest nations on the planet; they’re not very close to that power center. By the time they get the dollars, they’re fully diluted.
In contrast, when you look at the Bitcoin system, all the Bitcoin that they create, they are the ones who get to use it for the first time. It’s the Bitcoin that they created. So you’re actually an active participant in this system, instead of a passive observer that just, again, imports monetary policy from somewhere else. You participate in this monetary policy. Not that you can make any changes, but you do become a stakeholder.
You could envision a future where if some big decision needs to be done regarding Bitcoin, they are going to have a voice. They’re going to have a say. Like for example, recently, Bitcoin upgraded its blockchain to include this Taproot, which I think is a soft fork. You can correct me if I’m wrong.
Chris:
It is a soft fork.
Juan:
It’s a soft fork. So it’s not a big deal. I saw some Bitcoin people say, “Oh, you know how it went super smoothly, as opposed to the block size one.” Where I’m like, “Yeah, because it’s a soft fork. And it doesn’t matter if you don’t support it. It’s fine.”
Chris:
It’s a soft fork, which is segue, and is still integrating. It’s taking a long time.
Juan:
But listen, El Salvador will have a say. As a miner, as an active stakeholder in the Bitcoin economy, they will have a say whenever the community proposes a new upgrade for Bitcoin.
There [haven’t] been any hard forks, contentious hard forks, with Bitcoin in years. But there will be in the future. There will have to be, absolutely, for sure. I think you and I can actually touch on that a little bit in a moment. But, there will be times in the future where Bitcoin will have to make some decisions regarding how to operate its network. And El Salvador, as opposed to [when it relied on] dollars, it’ll be an active participant in the system. They will have a voice. They will have a say. They will be able to voice their concerns, participate in discussions and vote according to their view of where Bitcoin should go from that moment on.
It’s just much fairer. And I think that’s how the president described it, as a fairer system.
Chris:
I was going to make that point. While they don’t have arbitrary control over monetary policy like the Federal Reserve does over the dollar, the way I would put it is, they are empowered within the rules. And those rules cannot be changed. So the rules apply to everybody. And the opportunity is there, and the options are set out — for everybody.
And that’s what’s level about it: the playing field. And only by mass, mass, mass consensus of all the users of Bitcoin would those rules ever change. And we’re talking about mass. Like a ridiculous, almost impossible, level of consensus you’d have to reach amongst all the participants.
Juan:
That’s what decentralization does. It dilutes the individual power of all parties involved. That’s the whole point, is to dilute all this power and have an economy of stakeholders. I don’t want to quote Klaus Schwab there, but it’s a stakeholder economy where everybody is a participant. Everyone has a voice, and no one has a monopoly on what’s going to happen. That’s what we want.
So, one thing that I often notice is, from El Salvador’s perspective, they’re going from a system, the dollar system, where they’re completely passive — they just import whatever the dictates of the Federal Reserve are — to, okay, one where they at least have a voice. At least they can vote. At least they can say, hey, I think we should do this. And people are going to take them seriously or not. It doesn’t matter. The larger a participant they are, the more voice they’ll have.
And as a miner ... I think miners are some of the most important stakeholders in the Bitcoin economy. Although, I do think that, at the end of the day, anybody who’s running a Bitcoin node matters when it comes to Bitcoin economy. In other words, I think one of the participants, I don’t know if you mentioned this or not, are node operators, people who are synced to the blockchain. These can be wallets, exchanges or just your average Joe who has a piece of hardware just syncing to the blockchain and pushing transactions directly.
Chris:
To technically define what that is: A node is someone that has the entire history of the Bitcoin transactions on a hard drive. That’s about as concisely as I can put a node. And that’s a role you can play in Bitcoin, which is distinct from miners.
And the most consistent way I can describe a miner is, if your mining hardware solves the block, you get to decide which section or which collection of currently unconfirmed transactions gets confirmed. That’s basically the function of a miner. And why it’s described as miners secure the Bitcoin network is that there’s so much work, proof of work, that goes into solving the block. The more miners there are, the more difficult it would be to strong-arm the network. Because there’s just so much mining power, it’s so unlikely that you would be able to compete with —
Juan:
There’s a cost.
Chris:
There’s a cost.
Juan:
The bit about proof of work is there’s a cost. There’s a cost to producing a block. There’s a cost to minting new Bitcoin. It’s not free, as opposed to proof of stake, which is also very popular. I like both systems.
But I will say, the one thing that’s beautiful about proof of work is there’s an actual physical resource cost to produce a token — that’s what miners are for. But nodes, people who are syncing the entire history of the blockchain, get to verify all the blocks that are proposed by the miners. So when somebody pushes a new block, if I’m syncing to the Bitcoin blockchain, I will receive that block and I will look at it. And I’ll be able to vote yay or nay on whether that block is valid. So I’ll look at it in my own local hard drive and say —
Chris:
... the Bitcoin software will —
Juan:
My software would. Right.
Chris:
Based on the —
Juan:
The Bitcoin software that I’m running, exactly. It will look at this new block that’s been proposed by some miner somewhere in the world. And it will vote yes or no on whether or not it thinks it’s valid.
And that’s a very important role because all the node operators are witnesses to what the miners are doing. It’s not like the miners can collude with one another and do whatever they want. Because, if they were to do so, all the other people who are actually looking at all these transactions [could] say, “Hey, I think they can cry foul.” They can say, “You’re cheating.” When people say, “Well, miners can collude with one another to 51% of that,” that’s not really true. If half the miners were to collude with one another and say, “This is what we think happened,” all the other witnesses to what those miners are doing would immediately say, “No, there’s something wrong here,” because they’re verifying everything they do.
So, miners do not operate in isolation. They’re actually being checked by all the other stakeholders in the Bitcoin economy because they bear witness to everything they do. And they verify everything they do. So it’s not like miners really control things.
For example, with China, there used to be [miners], but not anymore. What’s happening now is China finally, it seems, means it for real. So, they’re finally pushing. It’s a not-so-subtle indication that they need to leave.
Okay, fine. [Miners are] packing up and leaving. You have all these videos going viral on social media, showing these mining farms being shut down, blah, blah, blah. That’s been seen as a negative, now. It’s being spun as a negative for the Bitcoin economy now.
If you go back to 2017, the criticism was the exact opposite. The criticism was there [are] too many miners coming out of China. What if the Chinese government decided to stage an attack on Bitcoin and they seized all those resources?
What a lot of people failed to point out is that miners do not operate in isolation. If Chinese miners wanted to push the Bitcoin blockchain in a certain direction — something they sort of tried with Bitcoin Cash (BCH, Tech/Adoption Grade “C+”) — all the other node operators are going to say, “No, we do not trust that chain anymore.” So, the system isn’t nearly as fragile as they make it out to be when they say, “Well, what if all of these miners were to collude with one another?”
You have to remember that most node operators, most of the stakeholders in the Bitcoin economy, are witnesses to what the miners are doing. And they act as a check and balance to that.
Chris:
So it was this approach with China saying, “Right, okay. You’re no longer allowing it to mine Bitcoin in China.” And then that was like a light touch. And now, the miners are just moving their hardware out to Maryland and El Salvador and wherever else they can mine. So isn’t that preferable in terms of a crackdown than the Chinese government trying to coerce them into defrauding the Bitcoin network in some way? So it’s not hostile towards the network per se. They’re just saying, “We don’t want that in our country.” Which is the lesser of the two evils, if you ask me.
Juan:
We’re 100% agreed. This is not a big deal. For one, these miners are running multibillion-dollar businesses at this point. Bitmain, for example, remains the No. 1 manufacturer of the hardware used to mine Bitcoin, I think. I doubt they’re just going to shut down their business because the government told them to. I mean, that’s not the China I know. They would probably continue to operate in some way.
By the way, when I say it’s not the China I know, it’s the Chinese government that has said for years that they didn’t want miners. The miners themselves just stuck around. They just figured out a way to continue running their businesses. So they’re not going to give up now. Let’s be clear about this. What they’re going to do is they’re going to take all that hardware and move it offshore to other places where they can source cheap, abundant electricity. That’s going to be El Salvador. It’s going to be other places.
What I hope this leads to is miners dispersing geographically — more than they used to be. Instead of all of them going from China to, say, Maryland in the United States, I hope they go all over the place because what you really want is decentralization. You want to decentralize all the aspects of the Bitcoin economy as much as possible. A geographic concentration, I think, was overhyped as a threat to Bitcoin. I don’t think it was ever the threat they made it out to be, but there’s proof of it. Yeah. They can just shut it down.
Chris:
If Bitcoin survives this exodus of miners from China, that will be proof that even when you got 70% of the mining in one country and the country bans it, it survives.
Juan:
Yeah. That just moves somewhere else. That’s what happens. It was designed to do this. Bitcoin was not ... You don’t see in Bitcoin’s design that it needs to be mined out of a particular jurisdiction. There’s nothing in the rules of the network that says, “Oh, by the way, mining needs to be done here. Otherwise the network will collapse.”
I mean, the rules are pretty simple, and they state that a certain amount of resources need to be spent to produce next block. If that turns out to be too expensive, if a network is asking for too many resources to be spent, it actually self-adjusts to ask for [fewer] resources. So it’s kind of a living organism that adapts to whatever the market conditions are at the time.
It used to be extremely easy to mine Bitcoin. You could just turn on your laptop and you could mine full blocks. As some people say, you would get 50 Bitcoin every 10 minutes. That was back in 2009.
That’s no longer the way it works because we have more participants in the network. If these [Chinese] miners were to go away, that would actually create an opportunity for miners elsewhere to take up that slack. If none do, then the difficulty of creating a new block goes down. And so the network reaches a state of balance again. Basically, if it’s too expensive to mine, it becomes cheaper. That’s how Bitcoin works.
Chris:
And also less competitive. So there’s almost like several layers of protection against the hold of the Bitcoin mining network collapsing.
China likes it’s manufacturing industry. So I dare say, they’re going to allow Bitmain to continue manufacturing the hardware and export it. They’re going to be quite happy for them to continue. Right?
Juan:
Agreed. Yeah. I don’t see them shutting that down.
Chris:
Because there’s no risk to the monetary policy or the yuan. They’re happy to manufacture electronics and sell them as long as the mining is done elsewhere. So, I think Bitmain still has a future in the manufacturing business.
Juan:
And probably the mining business, too. They’re just going to mine somewhere else. I think Bitmain specifically has mining in Texas. Don’t quote me on that. But I think they have a mining farm in Texas, or they were thinking about doing it, because the Chinese government has been threatening to shut down mining locally since at least 2018. And I remember thinking about all these miners having contingency plans for that because they would come.
Chris:
If you had any sense, you’d think, well, how credible is the threat? Well, even if it’s only moderately credible, should we hedge ourselves in a different geographic region?
Juan:
Again, you’re running, yes, a multibillion-dollar business. You have to think about these things. You can’t just be a sitting duck.
You can’t just think, “That’ll never happen.” I mean, I don’t think you’re going to let your business depend on some government edicts, especially when they’ve been signaling for years that, eventually, they’re going to crack down on this particular activity. So if you want to continue doing it, you’re going to have to look for alternatives. And so pretty soon you’re going to see the proof that none of this matters.
Let me make a prediction: Hashrates, the amount of resources that go into mining Bitcoin, will be at all-time highs before the end of the year. It’s taken a huge hit now, but you’ll see, it’ll be at all-time highs again by the end of the year. And when that happens, it means this whole mining crackdown ban has been fully priced out of the network. It’s been fully compensated for. The market has adapted.
So that one number tells you what’s happening right now. Right now it tells you, yes, some resources are no longer being deployed to secure the Bitcoin network. But when that number reaches a new all-time high, you will know that, whether through upgrades in the hardware itself or because these miners found another place to mine, the network has managed to absorb the shock. And it will absorb it. There’s no doubt that it will.
Chris:
So that drop in hashing power right now might simply be because those mining machines are in container ships, moving to different countries right now. And as soon as they get plugged back in and come online in Maryland or Iceland or El Salvador, boom, it’s going to come back.
Juan:
Exactly. And it can be the same actors, it can be someone else; it doesn’t really matter because either way, it creates an opportunity. If a certain participant is no longer able to mine this resource, that creates a profit opportunity for other participants. That’s how it works.
Chris:
I don’t know what the fear mongers believed would happen to all those thousands and thousands of mining machines that were shown being turned off. Do they think that we’re going to abandon them in the warehouse, after all that capital investment? I mean, that’s why we’re doing this, to educate people as to how this works.
When you see something like that, unless you knew the mechanics of how the Bitcoin adjusts its difficulty and the fact that there’s actual multibillion-dollar businesses behind this, they’re not just going to turn off those 5,000 miners and leave them in the warehouse to gather dust. They’re not going to do that.
They’re going to sell it to all the people that are going to mine, or they’re going to move their entire operation to a different country. Because you just need a warehouse, some reasonably high voltage power lines and the mining machinery, and you’re back in business.
Juan:
Yeah. And you have to think about it from their perspective: When you see all these mining machines being turned off, put yourself in their shoes. Would you let your multimillion-dollar investment just go to waste like that? No. You’ll probably seek a way to recoup those losses or continue running your business somewhere else. That’s what you would do. You wouldn’t just let all this money just burn.
And so, they’re going to find a way to continue their operations because they’re incentivized to do so. They have the know-how, they have the equipment; they’re just going to do it somewhere else. It’s just a matter of time. Of course, it takes time to physically move devices overseas. But eventually, it will happen.
Chris:
Gotcha. All right. Last two minutes. Question. So we’ve got the ASICs, right? The ASICs — which is an acronym, an application specific integrated [circuit] — is a processor designed to only mine Bitcoin — that’s its only purpose versus a general purpose processor in your computer that might stream video one minute and audio the next, and then open Word documents, etc. So that’s why they call it a CPU in general purpose processors versus an ASIC that can’t do any of that. [It can only] create Bitcoin hashes.
It’s a highly competitive market. People are using those big warehouses and so on. Say all the governments of the world managed to ban industrial scale mining, and then it couldn’t happen because any centralized warehouse of mining would get cracked down on. What I think would happen then is Bitcoin mining would go almost back to the way it was. It would drop down to the next level, which is people using their graphics cards at home to mine Bitcoin, because they’re the next most powerful thing down.
And ultimately, if that got cracked down on, you could just have millions and millions, if not billions of people — I’ll call them the miners of last resort — who would take up the slack and resume mining with their laptops. Right?
If in the worst-case scenario Bitcoin is cracked down on so hard that you end up with you and [me] via VPN just doing small calculations on our laptops, bought en masse, the Bitcoin money network is still alive. So the chances of the network truly failing is almost none.
Juan:
Almost none. Yeah, I agree with you. I think this used to be referred to in the Serum community as the “Ice Age.” What happens is, if it becomes too difficult to create a new block because, all of a sudden, all these machines are turned off simultaneously, creating this massive Bitcoin mining blackout — it would take a coordinated effort on a global basis that we have not seen, ever.
Just look at COVID. Not that I want to go there, but there was absolutely no international coordination amongst different governments on what to do as a response to this emergency. You think they’re going to coordinate to crack down on Bitcoin?
So let’s just assume that’ll never happen. You’re never going to see a worldwide ban on Bitcoin mining. Not going to see that.
But even if you were to see that, hypothetically, the worst-case scenario would be a hard fork. Because if all miners shut down because all governments say, “You cannot do this anymore,” then, fine. What happens then is, for a period of time, you’re not able to mine Bitcoin because you cannot just take your laptop and begin mining because the network is configured. It’s too difficult. It would take too long. And that means you enter something called the “Ice Age” because it would take, for example, a year or two with all these laptops, to create a new Bitcoin block.
So, what you would need to do in that extreme case — again, this is completely unrealistic — is a hard fork. In other words, the network would have to come together and manually lower the difficulty. Just take a few zeros off that number.
Chris:
You adapt by changing the software code, and then everyone updates their software.
Juan:
Exactly. So, you change the software. You just manually bring that down. Now, it would take a massive global coordinated ban on Bitcoin to get all stakeholders to agree to this. Because right now, if you wanted to do that, good luck. You’re not going to have any support.
But if some coordinated global effort were to take place to crack down on miners globally, then yes, chances are you would have extremely high support for something like this. The alternative would be to just let Bitcoin die. And that’s not going to happen. At the end of the day, you have to realize, these systems work on consensus.
The reason it’s hard to change Bitcoin is because it’s very difficult to get everybody to agree on something. It’s not because it cannot be done. Of course it can be done. You can change any parameters on Bitcoin. But you need consensus.
In other words, you need everybody, or most everybody, to agree [on a change]. I would say it’s not 50% — it’s 90% of participants need[ed] to agree on something before you can change something on Bitcoin. So can you create more than 21 million Bitcoins? Absolutely. But good luck getting +90% of participants to agree to that. In fact, I would say on that one specifically, most people would say no.
So, if Bitcoin were to freeze because something miraculous happened and, for some reason, global leaders decided to agree on this one thing that Bitcoin is not kosher, the entire Bitcoin community would agree, “OK, we need to manually adjust this difficulty.”
Once you pass that resolution, let’s just call it, once that manual adjustment is passed and the software is upgraded, you would be back where you started. Now, you could mine with laptops and begin to rebuild the economy.
Could you go back to having large mining farms? It depends on whether or not this is allowed. But Bitcoin would find a way to adapt itself because Bitcoin is consensus. Bitcoin is an agreement by millions of people that it exists. Bitcoin is an idea, at the end of the day. Yes, it’s hardware. Yes, it’s software. Yes, it’s regulation. Yes, you have all these stakeholders. But at the end of the day, Bitcoin is an idea. And you cannot kill an idea.
Chris:
Cool. Let’s leave it there, Juan. So until next time, thanks for being on the show, mate.
Juan:
Thanks Chris. Thanks for having me.
Chris:
That’s going to do it for this week’s edition of the Weiss Crypto Sunday Special with me, your host, Chris Coney. Until the next one, it’s me, Chris Coney, saying bye for now.