Bitcoin Mining Is Decentralizing – Here's Proof

Insights, news and analysis for the professional investor

By Marc Hochstein, Executive Editor

October 17, 2021

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As we put this newsletter to bed Friday, my CoinDesk colleagues broke the news that the U.S. had tacitly approved an exchange-traded fund (ETF) tied to bitcoin (well, at least, to futures tied to the cryptocurrency). The prospect of an imminent ETF launch is all well and good, but as I like to say, the horse is ultimately more important than the saddle.

In this week's Briefing, my colleague Lawrence Lewitinn looks at a more fundamental issue for bitcoin than any financial instrument that investors might climb onto in hopes of riding the asset to riches. That issue is the degree to which mining activity is geographically centralized, and therefore exposed to the vagaries of any single government. Using an old-fashioned method for measuring market concentration, he finds some encouraging signs.

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Enjoy the rest of your Sunday.

– Marc Hochstein, executive editor

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The Briefing

There's at least one industry where the United States now has China beat: bitcoin mining.

After Beijing's crackdown on crypto in September, the U.S. took the reins as the leading location for bitcoin mining, according to data compiled by the Cambridge Centre for Alternative Finance and released last week. Just two years ago, China accounted for three-quarters of all of bitcoin's total hashrate (the computational power used to mine bitcoin), while the U.S. contributed a scant 4%. As of August, China's bitcoin miners were gone, while the Americans were responsible for 35%.

U.S. Takes the Lead as BTC Hashrate Recovers

A recurring criticism of bitcoin mining in the past was that so much of it came from China. So long as that was the case, the more extreme arguments said, the Chinese government could somehow pressure miners to do its bidding. Whether that was the case is now moot because that government rescinded any opportunity to do so by kicking its miners out of the country.

Adding Kazakhstan's 18% with the U.S.'s 35% means that more than half of all bitcoin mining is happening in just two countries. That may seem like bitcoin is pretty much as concentrated as it was when China was the dominant player, but one index is showing that concentration has declined significantly with China's exit.

Let's get HHI

The Herfindahl–Hirschman Index (HHI) is often used by the U.S. Department of Justice and the Federal Trade Commission to determine the concentration of an industry. The higher the index, the more control of that industry is in the hands of a few players. It's calculated by adding up the squares of an individual company's market share (after multiplying each by 100). Doing so amplifies the weight of those firms with larger market shares.

The DOJ puts markets into three buckets based on their HHI score:

Unconcentrated Markets: HHI below 1,500
Moderately Concentrated Markets: HHI between 1,500 and 2,500
Highly Concentrated Markets: HHI above 2,500

The regulators use this as a tool to determine whether to greenlight a merger or acquisition. If combining the two companies would raise the HHI by more than 100 points in a moderately concentrated market, that could raise red flags. Doing so in a highly concentrated market significantly decreases the chances such an M&A deal will go through.

Using it for countries? Are you HHI?

HHI is generally used to look at companies in an industry. Applying it to country market share isn't quite the same thing. After all, within each country many firms could be vigorously competing for their tiny slivers of the overall market share. And one firm could have facilities in multiple countries, making this even more an apples-to-oranges comparison.

Nonetheless, coming up with an HHI figure for how concentrated bitcoin mining is by country does give some insight into whether bitcoin mining is as diversified as it should be if it's to survive the whims of any one government's capriciousness.

Read the full article here.

– Lawrence Lewitinn

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Chain Links

The ProShares bitcoin ETF is set to launch this week, and Invesco's might, too. TAKEAWAY: The much-anticipated bitcoin ETF appears to finally be opening to U.S. investors. The ETFs will not hold any physical bitcoin, but it will trade futures contracts for the underlying asset. The market responded positively, and BTC nearly reached $60,000 for the first time since May.

Bitwise, a $1.2 billion crypto asset manager, filed for a physically backed bitcoin ETF amid the wait period for several futures-based ETFs. TAKEAWAY: Bitwise found that the CME bitcoin futures market was largely responsible for price discovery. A lack of regulation and potential for manipulation was a large reason physical bitcoin ETFs have been denied in the past.

Morgan Stanley CEO James Gorman expressed his belief in blockchain and cryptocurrency while his company is not seeing much client demand. TAKEAWAY: Gorman had a more positive outlook on cryptocurrency than his peers Jamie Dimon of JPMorgan and Larry Fink of BlackRock. Large banks and asset managers have not signaled as much interest in blockchain technology as payment providers and other financial institutions.

Bitcoin hashrate has recovered since China's crackdown, with the majority appearing within the United States. TAKEAWAY: Bitcoin mining has moved west following regulation in China, which was once home to the majority of hash power. Investment in mining companies has become more lucrative in the United States as crackdowns around the world increased profitability elsewhere.

Sam Bankman-Fried, the CEO of FTX, handed control of Alameda Research to Caroline Ellison and Sam Trabucco. TAKEAWAY: FTX's quick growth forced Bankman-Fried to focus 98% of his time on the exchange and move away from his trading firm, which booked over $1 billion in profit last year. The hand-off was something of a formality, making it official that Trabucco and Ellison will have control over trading, yield farming and other operations.

a16z and Paradigm raised new $515 million and $1.5 billion dollar funds, respectively, as more investors look for exposure to cryptocurrency. TAKEAWAY: The influx of capital into crypto has been apparent through all markets, but a16z and Paradigm now appear to be established as two of the 'blue-chip' venture funds in the space.

– Teddy Oosterbaan

CoinDesk's Top University Blockchain Programs Ranked

As crypto adoption accelerates, so too does demand for academic research and teaching. Rigorously researched, here are the Top Universities for Blockchain by CoinDesk results. This year's ranking rates 220 schools internationally, expanding the sample from just U.S. schools last year. View the top institutions.