China’s Bitcoin Miners at a Crossroads

It was May 25, 2021. Wang Li was wearing thick medical protective clothing and waiting for takeoff in the international flight terminal, fully armed.

After all, the overseas epidemic has not yet stabilized, and the huge international terminal seems empty at this time. No one will go abroad at this time unless it is necessary, such as Wang Li’s situation.

As an employee of Bitmain, a well-known domestic mining machine manufacturer, Wang Li did not expect that one day he would "ride alone for thousands of miles" and go to a foreign country alone just to find a piece of land suitable for stationing a new mine.

Sitting in the departure hall, he had a lot of thoughts in his mind, but couldn't figure out what was going on. He just posted a message on his Moments: "Turn off my phone for 16 hours."

It all started a few days ago, on an ordinary Friday night.

At 10 pm on May 21, the Financial Committee of the State Council announced that it would crack down on Bitcoin mining and trading, and resolutely prevent individual risks from spreading to the social field. This is the first time that the State Council has clearly stated that it will crack down on virtual currency mining.

As soon as the news came out, the cryptocurrency circle was in an uproar.

If the previous "Inner Mongolia shutting down Bitcoin mines" can be considered a local action, and the "Sichuan power outage in the consumption park" can be explained as ensuring electricity for life and production, now Bitcoin miners really can only give up their fluke mentality, find solutions in advance, and wait for the shoe to drop.

This also means that domestic Bitcoin miners are no longer just migratory birds migrating back and forth between Sichuan, Inner Mongolia, Xinjiang and other places. They have to sing the song of wanderers again and look for their own "gypsy" mines around the world.

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"Wandering" may be the "initial gene" engraved in China's Bitcoin mining industry.

In China, which has advantages in natural resources, the abundant hydropower in Yunnan, Guizhou and Sichuan, and the abundant thermal power in Xinjiang and Inner Mongolia are favored by Bitcoin miners.

Just like migratory birds that migrate north and south every year, choosing to live near water, Bitcoin miners also chase the cheapest "electricity". Every year, they travel back and forth between Xinjiang, Inner Mongolia, Sichuan and other places during the dry and rainy seasons, and shuttle between the mountains in the southwest and northwest, looking for hydropower stations on the rivers with the most turbulent water flow, as well as thermal power stations and wind power stations in the desert Gobi.

Weibo related comments

The flood season is also considered the "gold rush" for miners. The flood season is generally during the rainy season or the spring when the temperature continues to rise. At this time, the river has abundant water and lasts for a long time. The abundant water power brings more and cheaper electricity. For miners, this means lower costs and higher profits.

When talking about the flood season, Zhihu netizen "Mine Director" said that many miners like this season, hoping to spend less electricity and make more profits. This year's flood season starts on May 25, and miners have already shipped their machines to Sichuan to select locations in advance.

However, as the debate over the environmental pollution caused by Bitcoin mining continues, the ESG (Environment Social and Governance) movement becomes more popular, and power shortages in southern China continue, the attitude of national regulators towards mining has also changed.

Since February this year, Inner Mongolia has begun to clear out virtual currency mining, requiring a comprehensive cleanup and shutdown of virtual currency mining projects, requiring all mining farms to exit by the end of April 2021, and strictly prohibiting the establishment of new virtual currency mining projects. On May 25, the Inner Mongolia Development and Reform Commission once again issued the "Eight Measures on Resolutely Cracking Down on and Punishing Virtual Currency "Mining" Behavior (Draft for Comments)", proposing different crackdown and punishment strategies based on eight categories of targets.

In Sichuan, where hydropower is abundant, a hydropower consumption industry demonstration zone was built to solve the problem of "abandoning water and power", and many virtual currency mining companies settled in it. According to Bo He, the founder of Qimiao Capital, the power consumption park in Sichuan has been cut off and may not be restored until the policy is clear.

With the flood season approaching this year, many miners were forced to stop working.

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When the mining machine stops running, this change is directly reflected in the computing power.

According to data from the F2Pool website, in the past two weeks, the BTC network computing power has dropped from a high of nearly 213EH/s to a low of 125EH/s, a decrease of 41%.

BTC network computing power trend

If we look at the data of the major mining pools, the trend of decreasing computing power has been continuing. According to data from the BTC.com website, the computing power of the top five mining pools is basically on a downward trend. The only exception is the 11th-ranked BTC.TOP mining pool, which still maintained a 29% computing power growth on May 27.

Mining pool hashrate changes on May 27

Jiang Zhuoer, founder of Litecoin Mining Pool, told Lvdong that their mines are mainly located in Xinjiang and Sichuan, and there are currently no mines in Inner Mongolia, so Inner Mongolia’s clearance policy has almost no impact on them.

Talking about the power outage in the Sichuan consumption park, Jiang Zhuoer believes that the main reason is that Sichuan has less rainfall this year and electricity is tight. "But our new models are basically in Xinjiang. Sichuan only has old models such as Ant S9 and Avalon A8, and most of them have just been taken out of the warehouse and have not been turned on, so the impact is not great."

The other side of the decline in domestic computing power is the continuous increase in computing power of foreign mining pools.

At present, China's computing power may only account for 50% of the world's total computing power. On the contrary, the United States' computing power has risen to about 12%.

It should be noted that China’s computing power has always dominated the global Bitcoin mining network. According to data from the Cambridge Center for Emerging Finance (CCAF), China’s mining computing power accounts for 65.08% of the world’s total computing power, followed by the United States, Russia, Kazakhstan, Malaysia and Iran.

China’s share of global computing power in April 2020

This means that the Bitcoin computing power landscape is changing. As China's computing power continues to decline, the development of compliance and the influx of funds have led to a rapid increase in North American computing power. Grayscale's Foundry USA mining pool has quickly risen from outside the top ten to the eighth place in the world.

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The flow of computing power represents the choice of large miners.

"At present, large mine owners in China who have their own mining machines are basically looking for opportunities to go overseas while waiting for policies to be implemented." Wang Wenguang, head of the mining business of BitDeer Group, told Lvdong that this currently largest mining service team in China has already sensed the emotions of the large miners.

"Currently, the income from mining is still quite considerable, so their current status is to mine while waiting for policies and seeking to go abroad," said Wang Wenguang.

According to verification by multiple sources, domestic mining companies such as Bitmain, BitDeer, and BigWave (a mining service under the Litecoin Mining Pool) have all started plans to go abroad.

Industry insiders close to Bitmain told Lvdong that before Bitmain's "separation", domestic mining farms were mainly assigned to Zhan Ketuan (Bitmain's chairman), and foreign mining farms were assigned to Wu Jihan (BitDeer's chairman). Therefore, Bitmain's mining farms are currently mainly distributed in Xinjiang, Inner Mongolia, Sichuan and other places in China.

After the State Council’s policy was released, Bitmain required its mining machine sales to go overseas to find mining sites to solve domestic problems. “Currently, this batch of sales has gone to North America, the Middle East, Central Asia and other places, fully armed and vaccinated, and it is unclear when they can return,” the person said.

In addition, Jiang Zhuoer also told Lvdong that he would consider adding computing power in North America and other places in the future, and would not increase computing power and mining farms on a large scale in China. At present, his mining farm has planned to expand to North America.

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Where are the ways to go overseas? Currently, there are two major directions: North America and the Middle East.

Wang Wenguang told Lvdong that in North America, represented by the United States and Canada, local policies are relatively stable and the legal system is relatively sound. Many large mining companies have been stationed there, but the overall cost of mining in North America is too high, and the United States also imposes a 25% tariff on Chinese electronic products.

Another relatively cheap option is Kazakhstan. The region has abundant energy resources, is closer to China, has lower labor and construction costs, and tariffs are much lower than those in the United States. However, the rule of law is not high, the business environment needs to be improved, and like China, policy is the biggest risk.

Bohe also told Lvdong that in North America, Canada may have greater advantages in establishing mines than the United States. Canada's mines are mainly concentrated in Ontario and Quebec. Ontario has rich natural gas resources, and Canada has only a 5% tariff.

Currently, people who choose to go abroad are often divided into two types.

One is to directly go abroad to build a mining farm. Wang Wenguang revealed to Lvdong that due to the high local equipment and labor costs, the cost of building a mining farm in North America is about six to ten times that of China. In Kazakhstan's relatively cheap environment, the comprehensive cost of building a mining farm is roughly the same as that of China.

The other is to ship mining machines abroad for hosting. However, it is not easy to ship a large number of mining machines abroad.

Bohe told Lvdong that the cost of exporting mining machines includes tariffs, shipping costs, operation and maintenance costs, labor costs and time costs. For example, it takes at least half a year to rebuild a mining farm in Canada, while it only takes half a month in China.

At present, Chinese mining machines can be exported according to the general export process of electronic products, but the door for mining machines to return to China has been closed. Wang Wenguang revealed that in order to prevent electronic waste from flowing into the country, China does not accept second-hand electronic products into the country. It is very difficult for mining machines to return to China after they are exported.

In addition, as mining is a relatively new industry in the world, "no other country has a mature supply chain and infrastructure like China, and maintenance and spare parts for foreign mines will be more troublesome," said Bohe.

"Even though the mining environment abroad is not as mature as that in China, going overseas has become a trend. Domestic computing power will continue to decline, while foreign computing power will continue to increase. This trend is irreversible," said Wang Wenguang.

Bohe said that the current overseas expansion is a helpless move due to policy changes. If conditions permit, China will still be the first choice for the mining industry.

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When mining companies and large miners went abroad to find new homes despite difficulties, the high cost of going overseas discouraged managed mines and small miners.

Those who stay in the country don’t have many options.

Some mine owners choose to relocate further in China, moving their mines to other low-cost areas such as Xinjiang and Yunnan, waiting to see the details of the policy. Lao Ji is one of them. Having been in the mining circle for many years, he has a steady and low-key style. He believes that he has seen ups and downs, but he was also confused by this policy change.

“This situation is completely beyond our expectations. When the Inner Mongolia policy was introduced, I was not worried because my mines are all in Sichuan and use hydropower. But this time it looks like a big deal. If hydropower mining is also banned, it will be very difficult for miners.”

At a loss, Lao Ji had no good idea and could only wait and see.

"Our machines are all physical assets, with an initial investment of tens of millions. How can we just disband them? We don't understand the situation overseas. Now we can only continue digging while there is still electricity and wait for the policy to be implemented." When talking about the way out, Lao Ji was quite helpless.

Some people choose to leave the mining industry and sell their mining machines. Before the State Council’s policy was released on May 21, Ludong found that some miners had sensed the drastic changes in the industry through the attitude of the local government and sold their mines in their WeChat Moments.

Changes in mining farms also affect the price of mining machines. A senior person in the mining circle told Lvdong that most domestic mining machine vendors were "second-hand dealers" before. As a large number of mining farm owners moved and sold mining machines, the mining machine market began to cool down from mid-May, and second-hand mining machines also began to fall in price.

However, Jiang Zhuoer remains relatively optimistic about the survival of small domestic miners.

He believes that if conditions permit, the existing domestic mining machines can continue to mine. In the future, when the policy is implemented, the worst case scenario is that all domestic mines will be shut down, and the mining machines will flow into the hands of small and medium-sized miners, or even family miners.

"In 2014 and 2015, there was a large-scale emergence of home miners. They found a warehouse and ran dozens of machines, or placed a few mining machines at home. They could increase their income by several thousand or tens of thousands of yuan each month. There must be people who continued to mine," said Jiang Zhuoer.

Another important question for domestic miners is when will the shoe drop? Will the policy be one-size-fits-all?

Bohe believes that the policy requires preventing individual risks from spreading to the social field. The products and platforms mainly affected are cloud computing power, disguised fundraising, and illegal fundraising and mining. Cloud computing power platforms may face a comprehensive withdrawal, and various service platforms that provide social information will also face rectification.

"Currently, Bitcoin mines in Sichuan and Yunnan, China are mainly clean energy mines that use waste water to produce electricity. This is in line with the requirements of my country's carbon neutrality policy. The mining process does not produce any wastewater or exhaust gas, which is very environmentally friendly," she said.

Mint called for a moderate crackdown on overheating, but a one-size-fits-all policy would be detrimental to supervision. Many industrial chains would go underwater, making supervision more difficult.

Just as this article was about to be finalized, a netizen in the Lvdong circle of friends revealed new news, "I heard that the big miners were called to a meeting for research, and the policy has not yet been implemented in a one-size-fits-all manner. As for the power consumption in Yunnan, Guizhou and Sichuan, the miners' worst plan is to mine until the flood season." The credibility of the news is unclear, but it represents the miners' earnest expectations.

This morning, the Sichuan Supervision Office of the National Energy Administration held a small-scale research symposium on virtual currency mining. As an important province for clean energy mining, Sichuan's regulatory details basically foreshadow the overall regulatory attitude of the country.

Where should Chinese Bitcoin miners go at the crossroads, and when will their wandering stop? The answers may be revealed.

Acknowledgements: 0x 33 also contributed to this article.

In this article, Wang Li and Lao Ji are pseudonyms.