Why China's recent mining crackdown caused Bitcoin's recent decline

As Bitcoin prices continue their downward trend, a new crackdown by China on domestic mining activities could help explain the sudden drop.

An estimated 400,000 miners in Xinjiang province were forced to shut down operations. The sudden disruption cut off revenue streams, forcing some operators to sell their Bitcoin holdings to cover operating costs or finance transfers.

Mining disruption puts pressure on Bitcoin decline

Canaan's former chairman, Jack Kong, said in a recent social media post that China's computing power decreased by about 100 exahashes per second (EH/s) within 24 hours. He noted that this decline was due to the outage of hundreds of thousands of mining machines, estimated to be around 8%.

The news came just before Bitcoin fell to $86,000 on Tuesday, breaking below the $90,000 level it has held for the past week.

Some analysts say the timing is no mere coincidence and points to a correlation between mine closures and falling prices.

They point out that sudden harsh measures often force miners to take immediate action, which can amplify short-term market pressures.

Miner shutdown causes liquidity stress and sell-off

According to Bitcoin analyst NoLimit, when miners are forced offline, there is usually a chain reaction.

This includes immediate loss of revenue, urgent need for liquidity to cover operating and transfer costs, and in some cases forced sale of Bitcoin holdings.

These dynamics could have direct ramifications for the broader crypto market. If around 8% of Bitcoin's computing power suddenly goes offline, it will increase uncertainty and add short-term stress to Bitcoin's price.

“That's what creates the real selling pressure, not the other way around,” No Limit explained.

Timing further magnified the impact. China's mining sector had just re-established itself as a major contributor to the global hashrate.

Mining revival encounters sudden regulatory pressure

In less than a month, China has regained its position as the world's third-largest Bitcoin mining hub. The country accounted for about 14% of the global hashrate by October, according to the Hashrate Index.

Despite a formal mining ban being imposed in 2021, underground activities continue to expand across the country.

Analysts point to access to low-cost electricity and surplus power in certain regions as key factors for the resurgence.

Against this backdrop, this week's crackdown caught miners by surprise. With regulations suddenly tightened and Bitcoin's hashrate dropping, miner profits quickly became a top concern.

These pressures have been exacerbated by Bitcoin's roughly 30% decline from its October peak and persistently low transaction fees, pushing miners' profits to recent lows.

Given that mining underpins the security and operation of the Bitcoin network, the recent price drop appears to be consistent with broader disruption, although the full impact may become clearer over time.

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