Bitcoin Mining Is Big in China. Why Investors Should Worry.
Why the digital currency’s dependence on China, specifically Xinjiang, is concerning.
By Isaac Stone Fish
Wed, Feb 24, 2021 1:27am
3 min
3 min
Critics of the nearly ubiquitous digital currency Bitcoin often focus on its environmental consequences. After Tesla announced recently that it had bought roughly US$1.5 billion in Bitcoin, sending the cryptocurrency’s value skyrocketing, sustainability investors decried the “level of carbon dioxide emissions generated from Bitcoin mining.” Certainly, “mining”—the energy-intensive process by which computers solve complex algorithmic problems to verify blockchain transactions, for which they’re rewarded in digital currency—is an undeniable environmental offender.
But there is another worrying aspect of Bitcoin, one that should make investors think twice about including it as part of an ethical investing strategy.
A large amount of new Bitcoin comes from Xinjiang, the region in northwest China where more than a million Uighur Muslims and other minorities have been imprisoned in concentration camps. According to the Cambridge Bitcoin Electricity Consumption Index, as of April 2020, China was responsible for 65% of all Bitcoin mining. And of that, 36% takes place in Xinjiang, the largest regional component. Why? Cheap coal means cheap energy to power the machines that mine Bitcoin. Xinjiang has an abundant supply of coal, and the region’s relative remoteness means that it’s far cheaper to use the resource locally than move it to other parts of China. The issue is not that the Chinese government uses forced labour in Xinjiang coal mines—the reporting on that is inconclusive. Rather, because of the atrocities occurring in Xinjiang, any product produced there brings with it high ethical and regulatory risk.
In the camps—which Beijing calls “vocational educational and training centres”—guards try to “deradicalise” Uighurs for crimes such as wearing long dresses, abstaining from pork or alcohol, or praying. While the difficulty of reporting in the region means that concrete evidence is scarce, camp survivors have described systemic torture, forced sterilization, and rape. (Beijing denies committing atrocities.) In January, right before leaving office, Secretary of State Mike Pompeo declared that Beijing was committing “genocide” in the region. His successor, Antony Blinken, agrees.
To summarize: Roughly 20% of new Bitcoin is mined in Xinjiang, the site of some of the world’s most egregious human-rights abuses.
Today, Bitcoin’s association with Xinjiang is barely discussed. But that may change. For public-facing funds considering investing in the notoriously volatile asset, there are two other risks to consider. The first is that because of the concern among the American public about human-rights abuses in Xinjiang, holding assets tied to the region comes at the risk of a public relations disaster.
Already, activists have criticised Olympic sponsors for participating in the “genocide Olympics”—the 2022 Beijing Winter Games. Multiyear campaigns to hive Xinjiang off from the global supply chain are already well under way.
In July, more than 190 organizations, including the AFL-CIO, called for clothing brands to end all sourcing from Xinjiang within the next 12 months. (In 2020, roughly 20% of the world’s cotton came from Xinjiang.) It’s not hard to imagine Bitcoin becoming another frontier in their campaigns.
Investors should be alert for regulatory action. Bitcoin’s Xinjiang relationship gives ammunition to those in the U.S. government who may want to further monitor or restrict the transactions. Analysts expect the Biden administration to pay close attention to Bitcoin. In mid-February, Treasury Secretary Janet Yellen criticised the “misuse” of cryptocurrencies in laundering money or funding terrorism. At the same time, Bitcoin’s Xinjiang connection could put it on the radar of the various arms of the Commerce, State, and Defense departments that are seeking to reduce U.S. dependence on physical and digital Chinese goods. If this trend intensifies, the Treasury Department could sanction the Bitcoin mining firms that have large operations in Xinjiang, or issue advisories that it is “studying” Bitcoin’s links to the region—signalling to global financial institutions another risk of holding the cryptocurrency.
In January, U.S. Customs banned the imports of Xinjiang cotton and tomato products and told U.S. companies to get forced labour out of their supply chains. Extricating Bitcoin from Xinjiang could be far more difficult. Unlike, say, blood diamonds or Iranian crude oil, Bitcoins exist only digitally. While there is a public record of the billions of Bitcoin transactions, it’s exceedingly complicated to determine the geographic origin of a particular Bitcoin. That means all Bitcoin holders can deny any connection to human-rights abuses—but also risk being tarnished by the association.
It has long been ironic that Bitcoin, developed to decentralize power, is so dependent on China, a country ruled by a government obsessed with centralizing it. But depending on China is one thing. Depending on Xinjiang is another. There are many excellent ethical and regulatory reasons not to buy Bitcoin. Add Xinjiang to that list.
Isaac Stone Fish is the CEO and founder of Strategy Risks, a firm that quantifies corporate exposure to China.>
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Nvidia’s earnings will test Wall Street’s confidence in the AI boom.
By David Uberti and Krystal Hur
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Chip makers are fighting to assure investors that the artificial-intelligence boom is racing forward. Wall Street might not believe it until Nvidia’s NVDA -0.98%decrease; down pointing triangle Jensen Huang says so.
When Huang steps up to the mic for his company’s earnings call Wednesday, he will have the world’s attention. What he says about Nvidia’s present will preview the future of AI, dictate the path forward for a tech-crazed stock market and influence an American economy increasingly tethered to hopes that the boom won’t go bust.
The $5 trillion chip maker has provided the key building blocks for AI since the launch of ChatGPT in 2022 set off a race for dominance among OpenAI, Anthropic and established Silicon Valley giants. Now, as Nvidia backstops sprawling data-center projects and an exotic money pipeline to boost chip demand, the company’s influence is arguably bigger than ever.
But there are signs of trouble ahead. Political pushback to AI is growing. A bond selloff propelled borrowing costs to their highest levels in years. The hyperscalers that include some of Nvidia’s key customers—once cash-printing machines—are relying more on debt. OpenAI recently told investors its revenue rose by a tepid 18% in the second quarter while its losses deepened.
Nvidia is increasingly stepping in to shore up potential weak points across the market. Earlier this month, the company teamed up with six of Wall Street’s biggest firms on a $500 billion AI-financing plan, pledging to backstop lending to customers that can’t afford its chips otherwise. The chip maker last week also took a stake in Cloverleaf Infrastructure, which arranges power for data centers, and struck a $6 billion deal with startup Poolside aimed at developing a powerful open-weight AI model.
After watching shares in other chip makers and the so-called Magnificent Seven tech companies swing wildly in recent months, Wall Street is hoping Nvidia can beat expectations—again. The countdown is on.
“It’s kind of becoming more and more like the World Cup final than the Super Bowl at this point,” said Brian Mulberry, chief market strategist at Zacks Investment Management. “It’s just gotten to be that big.”
The company has smashed analysts’ earnings estimates for each of the 14 quarters since the AI boom kicked into high gear. Nvidia posted 210% annual growth in net income in its last three-month period, according to FactSet, making Wall Street’s 126% projection look pedestrian.
Expectations for a blowout second quarter have risen rapidly over the course of this year. All Nvidia will have to do to beat this target: outrun 95% annual earnings growth to more than $51.5 billion. Analysts project the chip maker will report record sales of $92 billion for the period, up from a forecast of $78 billion at the start of this year.
In July, big-tech earnings sparked volatility. Concerns about runaway capital spending spread across the sector after Alphabet’s and Tesla’s results, driving a $890 billion wipeout that contributed to the unwind of hedge fund Situational Awareness. Microsoft posted the largest one-day gain in market capitalization by any company, ever, after a quarter proving that it could still show investors the money. SpaceX rocketed higher after a record-breaking initial public offering, only to see $1 trillion in value evaporate.
Surging memory prices and borrowing costs have fueled fears that those and other companies will be unable to keep plowing more money into supplies including Nvidia chips. Shaia Hosseinzadeh, founder of OnyxPoint Global Management, has recently bought dips in AI-infrastructure stocks when Wall Street has strained to absorb massive debt issued by Silicon Valley.
“The macro data is really quite robust,” he said. “Of course, there’s a level at which everything breaks.”
Investors have kept pumping money into the AI trade despite concerns around chip consumers—and to the benefit of chip producers. That is why Nvidia’s outlook for semiconductor demand could send ripples through counterparts such as Micron Technology and Sandisk, developers of the data centers in which their chips reside, and a supply chain of power producers, contractors and other specialists that underpin the globe-spanning AI build-out.
“We joke internally that we’re all Nvidia analysts now,” said David Lefkowitz, head of U.S. equities at UBS Global Wealth Management.
The irony is that investors have tended to sell Nvidia stock immediately after blockbuster earnings, with shares falling each trading session after its four past quarterly reports. Some are betting that will be the case this time around, too.
The options market is pricing in a 5.3% swing, higher or lower, in Nvidia shares during the session following earnings, according to Option Research & Technology Services. That is higher than the 4.8% average move in Nvidia’s stock over the last 12 months after the company reports quarterly results.
In recent days, some of the most actively traded Nvidia options have been put contracts tied to the stock falling from its Friday value of $214.75 to $205 and $210 apiece, according to Cboe Global Markets data. Put options give the right to sell a stock by a set price and typically represent a bearish wager.
Many analysts remain optimistic. Frank Lee, global head of tech hardware and semiconductor research at HSBC Global Investment Research, recently raised his price target for Nvidia shares to $360 from $325, citing, among other things, Nvidia’s strategic partnerships with suppliers and its role as a top contributor to open-source AI.
