Emerging markets have a critical role in the cryptocurrency mining industry.
This importance is due to the abundant manufacturing capacity and cheap electricity available in some emerging economies. China, by and large, plays a pivotal role in the industry.
First, most of the manufacturers producing specialised hardware that verifies and secures the largest cryptocurrency networks have most of their operations based in China.
Second, China has the largest hash rate (or computing power) of any country. Most figures put China’s contribution to the Bitcoin network at more half of the world’s mining capacity, meaning that most of the revenue from securing cryptocurrency networks flows to Chinese operators.
Additionally, with the recent IPO filings of the three largest cryptocurrency hardware manufacturers, the Hong Kong Stock exchange will allow investors access to 85% of the cryptocurrency mining hardware by revenue and exposure to almost 40% of the Bitcoin mining rewards, further solidifying China as the cryptocurrency capital concerning infrastructure access.
Outside China, we see countries such as Vietnam and Venezuela outright banning the shipment of cryptocurrency mining hardware into their territories to try to control currency flows. A study earlier this year estimated the cost of mining a single Bitcoin in Venezuela at $532. This cost has likely increased given that the difficulty of producing a Bitcoin has more than doubled. Venezuelans and citizens in emerging economies are turning to cryptocurrencies to preserve value in the face of hyperinflation.
Some believe that cryptocurrencies are volatile and a poor store of value, while others in emerging economies under oppressive monetary regimes view cryptocurrencies as a mechanism to protect wealth and store value.
Whether it be the need for a censorship-resistant store of value that cannot be confiscated like physical items, or whether it be a need for a relatively stable medium of exchange for day-to-day transactions, the use cases for emerging economies are often different from the ones for developed economies and stable financial markets.
In Q4, we expect that EM will continue to play an ever-increasing role in the growth and adoption of cryptocurrencies. China will continue to dominate the global mining order, despite the recent geographic diversification of domestic firms and the increase in competition from challengers abroad.
During the next bull run, we expect continued exponential growth of the cryptocurrency mining market. The capital raised during the coming IPOs will give investors significant exposure to the cryptocurrency market and give the respective firms plenty of resources to continue developing new hardware. Additionally, the most distressed EMs seem to be the canaries in the coal mine. With uncertainty and geopolitical risk increasing, cryptocurrencies could rise again if the global monetary system is tested.
Jacob Pouncey is cryptocurrency analystat Saxo Bank.
Jacob Pouncey
