In late January 2020, the Financial Times published a controversial piece titled “Coronavirus is good for Bitcoin”.
The recent cryptocurrency bull run has also been spuriously correlated with the Wuhan Corona virus outbreak.
But is there data to back this up? Is the virus outbreak somehow good for Bitcoin?
It definitely doesn’t seem to be the case.
In fact, Corona virus poses a serious risk not only for Bitcoin, but for all cryptocurrencies.
90% of the Bitcoin mining hardware companies are headquartered in Beijing and have factories in Shenzhen. Both these regions could be under imminent lockdown.
At the time of this writing, Shenzhen was being prepared for lockdown while Beijing, where the gigantic Chinese government headquarters are located, was trying to remain open for as long as possible.
There is a real possibility that China’s economy could collapse in 2020. Workers are being forcefully kept at home, production is slumping, ports and transportation infrastructure is grinding to a halt.
In this article I take a look at this situation from the cryptocurrency point of view. It’s possible that Chinese mining pools and mining machine manufacturers could be forced to stop their operations until the acute phase of the crisis subsides.
How long could this take? What are the risks involved? Here’s what I found.
I decided to take a closer look at what’s happening in China right now to try and perform some unbiased risk assessment.
Some of the questions I had in mind included:
- What’s at stake during the virus outbreak?
- How can it affect crypto?
- What are the assets and people involved? Are they at risk?
- Is there a supply chain issue somewhere?
- Is infrastructure safe?
I’ll focus on Bitcoin for the purpose of this analysis but the conclusions will likely apply to most altcoins as well.
What keeps Bitcoin running?
First and most important question : what keeps Bitcoin running?
Basically, it boils down to three macro components:
- Full nodes
- Functional network connectivity
- Human operators and sysadmins
We therefore have 4 areas where there may be risks involved:
- Mining Risks
- Risks to Full Nodes
- Network connectivity risks
- Risks to Human Resources
Let’s take a look at each.
At the time of this writing, the largest Bitcoin mining pools are still in China. This raises the obvious issue: how safe are these mining pools from Corona virus related risks?
First of all, what are the biggest mining pools in China?
According to Blockchain.com, the most dominant pools in China are Poolin, F2Pool, AntPool, BTC.com, ViaBTC and BTC.TOP. These pools concentrate most the network hash rate and solve most blocks.
Mining involves a physical location, human operators and infrastructure.
Breaking mining risks down into these three components we get:
Physical Mining Location Risks
What are the actual mining pool locations? It was a bit complicated finding these actual city names due to the language barrier. Since mining pool location isn’t really relevant during normal operation, this isn’t something miners usually really look into.
So I had an idea. Do these pools hire professionals? If they do, then their job offers will probably include a location! Bingo! Others simply listed their location on the footer. So collecting one by one I got:
Poolin: Beijing (Alibaba Cloud)
F2Pool: Henan (See footer address.)
AntPool: Beijing (Bitmain)
BTC.com: Beijing (Uses Bitmain phone nr +86-400-890-8855)
BTC.TOP: Beijing (Bitmain)
As you can see, most the world’s Bitcoin hash rate depends on Bitmain, not only for the mining hardware but also three of the largest mining pools are linked to them: BTC.TOP, BTC.com and AntPool.
Beijing also seems to be the world’s Bitcoin mining hub with Bitmaintech’s HQ and a total of four large Bitcoin mining pools.
Unfortunately, at the time of this writing Corona virus had already reached Beijing and there was one confirmed death.
Fortunately, Beijing is located at over 1100 kilometers from ground zero Coronavirus site at the city of Wuhan.
The biggest uncertainty here is how many infected patients exited Wuhan towards Beijing at the early stages of the Coronavirus outbreak since an estimated 5 million total citizens exited the city before the quarantine.
BREAKING: 5 million people left Wuhan, the epicentre of the coronavirus outbreak, before the lockdown went into effect.
— The Spectator Index (@spectatorindex) January 27, 2020
At the present moment, the risk for Beijing mining operations seems moderate, although we depend on the next developments and the Chinese governments ability to stop the current rate of contagion.
Henan is a lot closer to Wuhan than Beijing is. The risks to F2Pool are significantly higher than they are for the Beijing pools.
There are several routes between Henan and Wuhan and, again, we don’t know how many of the estimated 5 million may have reached the city. As reported by SCMP, Henan was a popular destination for those leaving Wuhan early on.
Another risk factor here is the Coronavirus hospital being built in Henan:
Basically Henan will become one of the main Coronavirus treatment sites in China. Although transportation of patients will obviously be controlled, this still presents risk for the F2Pool headquarter city.
Coronavirus cases have been reported in Shenzhen.
Located at over 1000km from Wuhan, Shenzhen is the 2nd farthest Bitcoin mining site from ground zero.
Shenzhen is a major industrial zone and extremely relevant to China’s GDP. The Shenzhen port is responsible for billions of U$ in tech product exports. It’s geographical distance from ground zero is a positive factor for Bitcoin mining risks, but the number of infected patients who left Wuhan is, again, the main risk factor. Commuting hundreds of km is common in China and there’s simply no way to estimate the infection rate, especially considering the 14 day incubation period where it’s nearly impossible to determine if a patient is infected without performing a blood test.
Of the three main Bitcoin mining regions, Shenzhen seems to be of lowest risk, although no region in China is free from Coronavirus.
Shenzhen Update 2020-01-30: Unfortunately things developed quickly from the time this article was published. Shenzhen has become one of the worst hit areas in China.
— BNO Newsroom (@BNODesk) January 30, 2020
Location Risk Analysis
Roads are blocked all over the country. Citizens are posting about it on social media (use translate function in Twitter) but they avoid complaining since criticism can be met with “political sanctions”.
— 温云超（Yunchao Wen，北风） (@wenyunchao) January 28, 2020
Likelihood of mining interruption at geographical locations: medium/low.
Impact of mining interruption at geographical locations: catastrophic.
Human Mining Operator Risks
Mining requires human resources. Large Bitcoin mining warehouses are often permanently monitored by 2 to 3 employees.
Mining machines are constantly serviced or replaced, ventilation is monitored, electrical installations are checked.
Employees often sleep at the mining sites so out of town transportation is not a big issue. The main problem is inter-city commuting which authorities seem to have under control at this time. It is assumed that Bitcoin mining site workers are not commuting between cities at this time.
Human Operator Risk Analysis
Likelihood of human resources interruption: medium.
Impact of human resources interruption: medium/high.
Mining Infrastructure Risks
It is unclear, at the time of this writing, what the internal situation is within China.
Authorities are publishing extremely conservative numbers. The external scene seems to indicate that there are a lot more cases than reported. The virus has been reported or there are suspected cases in every continent at the time of this writing. It’d be extremely unlikely that this would happen if only 4400 cases existed.
Given this uncertainty about internal Chinese data, we can only speculate what the infrastructural risks are.
Could the electrical grid be compromised by lack of human operators due to Coronavirus? Yes, but if this were the case then cryptocurrency mining would be the least of concerns. An electrical grid disruption in China would mean certain market collapse and generalized chaos.
Mining Hardware Infrastructure
Another infrastructural concern is with mining hardware supply chain interruption.
Most Bitcoin mining hardware is made by Bitmain in Beijing. As we’ve seen, it’s possible that Beijing could be quarantined from the rest of the country like several other cities already are. If this becomes the case, then no Antminers will leave the factory.
Although installed mining operations don’t require immediate supply of mining machines, in the medium to long term this could cause a severe impact on global Bitcoin mining hardware demand.
We don’t know how long the acute Coronavirus crisis will last. If one to three months, then mining machine supply will likely not become a big issue. If 6 to 12 months then we may have a larger problem.
Mining Infrastructure Risk Analysis
I rank infrastructural risk to be very low probability but having catastrophic impact.
Likelihood of infrastructure interruption: very low.
Impact of infrastructure interruption: catastrophic.
Full Node Risks
This is probably Bitcoin’s biggest strength. The risk to full nodes is the same risk faced by regular citizens worldwide.
Accoroding to the Johns Hopkins CSSE ArcGios Coronavirus outbreak monitor, there are currently 4474 cases around the world and growing fast. Despite the impressive rate of propagation, the risk to full node administrators is low. First of all, it is assumed that full nodes are run by relatively educated population segment. Since virus propagation is especially troublesome in poor and uneducated regions, I estimate that the possibility of a large disruption of full nodes due to Coronavirus is extremely unlikely, especially given the decentralized nature of the network.
Mining, as we’ve seen, is a lot more centralized. But verification, block propagation and transaction transmission is probably the last thing that would be disrupted in the Bitcoin network.
Still, as unlikely as it is, disruption of the full node network is likely fatal. No TX would reach miners unless full nodes are able to relay them. Again, an extremely unlikely scenario.
Likelihood of full node interruption: extremely low.
Impact of full node interruption: catastrophic.
Network Connectivity Risks
Again, given the decentralized nature of the Internet, a network disruption would almost certainly mean the collapse of Chinese ecommerce.
Since we don’t know the exact technology behind “China’s great firewall”, we can also only estimate what the probability is of a country-wide network disruption.
Also, as far as the international community goes, it’s extremely unlikely that the entire Internet would be disrupted by Coronavirus. Large scale network connectivity loss would obviously implicate full disruption of Bitcoin.
Likelihood of connectivity interruption: extremely low.
Impact of connectivity interruption: catastrophic.
Human Resources’ Risks
This is the highest risk factor of all.
The virus is, after all, a human problem. There is no intrinsic problem with the network, nodes or Bitcoin technology per se. The Coronavirus situation is a biological issue.
As we’ve discussed, human resources disruption can stop the Bitcoin mining operations in China. Should mining sites be quarantined and human resources be blocked from arriving at the scene, it’d certainly mean the miners would only work until their first technical problem. There would be no continuity.
Since we have no information about the current situation at Bitcoin mining sites, we can assume everything’s working fine for the time being.
One notable factor is the hash rate drop in recent days. In just 48 hours, total Bitcoin hash rate dropped from 120 exahashes/s to 94 exahashes/s. What caused this drop? Could there be disruptions in large scale Chinese mining operations?
Until the past 48 hours there had been no impact on hash rate whatsoever, even with thousands of confirmed Coronavirus infections. We cannot necessarily correlate the hash rate drop to Coronavirus, but if there’s any relation it is certainly linked to some kind of disruption in human resources.
Unfortunately, human resource disruption is very likely. Either due to road blocks, quarantines or plain simply fear, there’s a high probability that workers will not reach Bitcoin mining sites when requested. Also, the Chinese government has extended the holidays in order to keep people at home.
The impact of human resource disruption would not be as high as totally disrupting the network or full nodes, but the maintenance issue is a big one. If mining operations start to require manual intervention (very common) and there’s a lack of workers on site, then we could slowly see Chinese hashrate drop. The impact of Bitcoin mining reduction in China would be medium to high.
Likelihood of human resources disruption: very high.
Impact of connectivity interruption: medium / high.
The Financial Times provoked the cryptocurrency community with the headline “Coronavirus is good for Bitcoin”
Coronavirus is good for bitcoin https://t.co/Ix7PEaEVIA
— Financial Times (@FT) January 27, 2020
I strongly disagree.
Averaging out the likelihood and impact for each component, we see that the probabilities are medium to high, but most scenarios imply very serious consequences if they end up happening.
We’ve focused on Bitcoin, especially due to China’s relevance in this field, but most of what we discussed applies to other cryptos as well.
Updated 2020-01-30 with Shenzhen situation.