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Global trade wars are affecting crypto.

The US and China have been engaged in a trade war for some time now. The recent expansion of sanctions on the Chinese government is not only the harshest, but it is also the first time that the crypto industry has ended up in the crossfire.

Earlier this year cryptocurrency mining rigs were not subject to any tariffs, which kept costs down for American customers. That all changed in June when mining rigs were classified as an “electrical machinery apparatus” by the United States Trade Representative (USTR). The reclassification designated the hardware as one of the 250 Chinese goods targeted by the recent US sanctions.

When this reclassification occurred, the first round of sanctions were implemented and all Chinese manufactured mining rigs became subject to a 2.6% tariff. American miners were not excited at the time but the amount was negligible so most people did not pay attention. That all changed within 90 days though.

In August, the US government ratcheted up the trade war by introducing another 25% tariff on certain Chinese manufactured goods. Cryptocurrency mining hardware made in China is now 27.6% more expensive than it was in the first five months of this year, which has a number of important implications.

• Mining hardware manufacturers will suffer — Tariffs are implemented because they work. They discourage American consumers from buying the products that are targeted or create additional pain for the manufacturers of those products. Companies like Bitmain and Canaan are likely to see a noticeable decline in mining rig purchases from the US. Multiple reports suggest that Bitmain currently has over 50% of their revenue coming from the US, while Canaan has less than 10%.

• American miners may relocate — If US-based mining companies believe the tariffs will remain for the foreseeable future, it would not be surprising to see some of them leave to seek a more attractive business environment. The cost of mining hardware is one of the two largest input costs in the mining business, so a 27.6% tariff will have a significant impact on the economics of each miner’s business.

• America could fall behind in computing race — If data is the new oil, computing power is the new steel. The countries with the most advanced and efficient computing power are best positioned to lead the Computing Revolution. This is not only cryptocurrency mining, but also includes machine learning, artificial intelligence, and self-driving cars.

The last point is the most important. The US government is currently engaging in a traditional trade war, but may not understand the long-term implications this could have on the country’s ability to compete in the digital world. If tariffs make cryptocurrency mining rigs cost prohibitive, America will have drastically less computing power (and hash rate) than other countries.

This scenario would give other countries, specifically China, more importance and power in the decentralized world. In fact, many would actually argue that China has already won and is the leader of the Computing Revolution. Discouraging American companies and consumers from purchasing mining equipment only exacerbates the issue.

One of the solutions to this problem would be an increase in American manufacturing of cryptocurrency mining rigs (and computing hardware in general). Unfortunately, I have not seen many American companies that can (1) design competitive hardware, (2) manufacture at competitive scale, and (3) understand the nuances of global distribution.

The United States is in a precarious position: Re-ignite the entrepreneurial spirit that led to us to dominance during the Industrial Revolution or attempt to hold on to our global dominance from a defensive position.

Sometimes the best defense is a great offense.

-Pomp

The “Off The Chain” podcast has been downloaded 110,000+ times in 120 countries. You can listen to the latest episode with Josh Brown, CEO of Ritzholt Wealth Management now: Click here for Off The Chain podcast

THE RUNDOWN

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