An off-the-cuff tweet by Elon Musk is just as likely to send the price spiralling as the formal announcement of government policy. 

“Crypto has been very speculative and attracted a lot of attention, fuelled by social media and, in particular, Elon Musk’s love for crypto,” said RMIT’s Dr Angel Zhong.

Speaking on this week’s tumultuous market correction, Dr Zhong said, “What goes up must come down. The warning from China acts as a catalyst to calm the crypto market, just similar to stock market correction every now and then.”

However, one of the most significant factors shaping the crypto market that many investors overlook is the weather. 

As Southwest China heads into its annual monsoon season, the global hashrate – a metric measuring the total level of computer processing power being used to mine crypto across the world – is expected to rise. 

Part of this is due to ongoing delays in the delivery of improved mining hardware, but part of it really is due to the weather and the effect that the Chinese wet season has on local power prices. 

According to Arcane Research, “Over the years, the bitcoin mining industry inadvertently benefited from a massive over-investment in hydropower in southwest China. Excess cheap electricity, massive power capacity, cheap labor cost and physical proximity to manufacturers make it an ideal location for mining.”

While the Chinese government has not looked kindly on the rise of cryptocurrencies like bitcoin, it has been estimated that China accounts for around 65 per cent of the world’s hashrate. Take them out of the picture, and bitcoin mining would be less than half what it currently is.

Speaking to nestegg, Monash University’s Dr Michael Duffy said, “There are various estimates on the amount of Chinese bitcoin mining, but most suggest that China is the largest single player – producing anywhere from 50 per cent to 75 per cent of newly mined bitcoin.”

As put by Dr Duffy, “The more bitcoin is mined, the more that is available (subject to a maximum total of 21 million coins) which by itself might tend to reduce price. Conversely, the more quickly it is mined, the more quickly the rate of new bitcoin creation slows as the ‘reward’ rate halves after every 210,000 new blocks (in the blockchain). These effects may balance each other out a bit.”

The arrival of China’s monsoon season has historically coincided with not just a sharp uptick in the region’s hashrate, but a shift in how bitcoin mining is geographically distributed. 

As per research by the University of Cambridge, provinces in China where hydroelectric power is plentiful – such as Sichuan and Yunnan – account for a significantly greater proportion of the region’s total hashrate during the wet season than they do outside of it. 

During the 2020 dry season, Sichuan accounted for just 9.66 per cent of China’s hashrate while Yunnan contributed 1.95 per cent and Gansu made up just 0.51 per cent. However, in the previous 2019 wet season, Sichuan’s share of the hashrate was as high as 37.4 per cent, while Yunnan’s was 5.42 per cent and Gansu’s was 1.95 per cent. 

Sichuan is the biggest winner here, with some reports claiming the province alone might account for as much as 54 per cent of the global hashrate in 2019.

On the other hand, the biggest loser here may be the province of Xinjiang. According to the University of Cambridge, it accounted for 35.76 per cent of the regional hashrate during the 2019 dry season but fell by more than half that during the following monsoon season. 

The rationale for this dynamic is rooted in operating costs. Naturally, the electricity used to power the equipment necessary to mine bitcoin is one of the major operating costs for miners. 

Annica Research said, “For small-medium-scale miners, the flood season can reduce the cost by as much as 40 per cent. For large miners who own proprietary facilities, the flood season electricity cost is practically negligible.” 

“Over 80 per cent of the miners in Xinjiang, Inner Mongolia, will migrate in flocks to Sichuan, Yunnan and Guizhou to take advantage of the discount, and they move back or sell their equipment after the dry season arrives in November.”

Whether growing concerns over the environmental impact of bitcoin mining will affect this dynamic going forward is unclear. This year’s rain volume has been lower than expected, and one county in Sichuan has gone so far as to order local hydro power plants to stop working with bitcoin miners. 

“Although insiders on the ground do not expect the order to be enforced, it shows the complexity of the flood season energy scene. It’s not a magic switch that turns on and off to immediately cut down miners’ electricity bills,” said Annica Research.