When evaluating a stock, it is important to forecast the potential value of the company in the future. Part of the analysis should include whether the business itself has longevity. A good company should stick around, even if it has taken a significant hit in its infrastructure or in the price of its shares. A stock of a company that can withstand different kinds of attacks and pressures may be a stock worth buying.
A commodity, on the other hand, will stick around regardless of the companies producing it. In this light, Bitcoin (BTC -3.39%) appears to be more of a commodity than stock in the Bitcoin network. Regardless, the same investment principle applies: Investors who buy Bitcoin should have confidence that the Bitcoin network is robust. If the China Bitcoin mining ban of 2021 has taught us anything, it is that Bitcoin has a resilient network.
China Bitcoin ban of 2021
In May 2021, China banned Bitcoin mining across the entire country. A massive exodus of Bitcoin miners occurred shortly thereafter. They fled to neighboring countries such as Kazakhstan and as far as Texas. As a result, the Bitcoin hash rate dropped by 50% overnight.
Hash rate is a measure of how many computers are contributing to the network. Hash rate is a rough measure of the security of the Bitcoin network. The higher the hash rate, the higher the security. So when 50% of the security goes offline, it is reasonable to expect the network to have degraded performance, or be vulnerable to attack. So what were the real-world effects of the Bitcoin mining ban?
Impact of the ban
The result of the ban was that Bitcoin miners left China. The Bitcoin blockchain continued to produce blocks at a rate of roughly 10 minutes per block. The miners that continued to run the network did so without interruption. Within six months of the ban, the miners that left the country were back online in new geographical locations. The important thing to note here from an investment resilience perspective is that the Bitcoin network did not slow down and was not any more or less susceptible to attack. I doubt a company that just laid off 50% of its workforce could maintain its operational efficiency.
Reestablishment of miners in China
One year later, in May 2022, reports stated that as much as 20% of Bitcoin’s hash rate still comes from China. Despite a ban on Bitcoin mining, some operations have opted to remain online, risking legal consequences. Three things allow miners to remain operational against the wishes of the central authority. First, China is a geographically vast country, which makes fully dismantling or destroying Bitcoin mining operations difficult. Second, China has a surplus of hydroelectric energy, which means miners can buy the energy for very cheap. Finally, miners can connect to and use the internet through satellites. These three facts make any small to medium-sized Bitcoin operation difficult to detect and shut down permanently.
Bitcoin is robust
What this China ban tells me, as a Bitcoin investor in North America, is that shutting down all Bitcoin miners is more difficult than simply outlawing it. Additionally, if a country does succeed in pushing miners out of their borders, it does not spell doom for Bitcoin. The miners themselves are resilient enough to seek other locations to run the equipment. In the meantime, miners located in other countries (such as the United States) are happy and capable of keeping the network running with no discernible degradation in performance. This tells me that at a minimum, I should be able to access and use Bitcoin regardless of the political climate.
Bitcoin’s price is malleable
The caveat to the entire investment thesis that Bitcoin is robust is that unlike the Bitcoin network showing resilience, the price is still susceptible to political intervention. After China announced the Bitcoin ban in May 2021, the price of Bitcoin fell more than 50% from its all-time highs. The public perception of the events was that the miner exodus would be damaging to the network. This prompted some investors to sell Bitcoin in anticipation of long-term structural damage that never came. I sit comfortably knowing that I will be able to send and transact with Bitcoin in the future, as I have confidence that the network will persist. However, what its value will be is unknown. The price of Bitcoin is simply not as durable as the network that runs it.
