Do Chinese mining machines threaten the world's cryptocurrency community?

The incident of Sichuan's heavy rains flooding mining farms and causing a sharp drop in global computing power has become a joke in the mining circle, but it also reflects China's position as the "world's hegemon" in computing power. However, this position does not mean that the mining industry is thriving in China. After visiting many mining farm owners, the Computing Power Think Tank learned that the Bitcoin mining industry is suffering from multiple pressures such as falling coin prices, fewer investors, and tightened supervision. Can this industry with a halo of huge profits withstand this unprecedented pressure? Where will the mining farms go?

There is a saying in the mining circle: 70% of the world’s mining machines are in China, and 70% of China’s mining machines are in Sichuan.

Although it was just a joke, the recent heavy rains in Sichuan that flooded mining farms and caused a sharp drop in global computing power seem to have confirmed the above rumors. For a time, the claim that the Chinese government controls the Bitcoin network and can paralyze the mining network at any time was widely circulated abroad.

But this is not the case. The computing power in China's mining pools does not all come from China. China does not actually have that much computing power, so it is completely nonsense to say that it can manipulate the Bitcoin network.

At the same time, the mining industry is not having an easy time, which is extremely inconsistent with its status as the "computing power overlord".

We learned from many mine owners that in addition to the continuous decline of digital currencies causing a sharp drop in mining income, the country has also frequently introduced mining restriction policies, making the mining industry even worse. A large number of miners may give up mining due to too low returns.

What is the truth?

Are Chinese mining machines a threat to the world?

The news that "heavy rains in Sichuan caused a sharp drop in global computing power" is probably the most ridiculous news in the mining circle recently.

Recently, continuous heavy rains in Sichuan have caused floods. Some mines concentrated there have suffered heavy losses, and tens of thousands of mining machines have been submerged by floods.

Sichuan mining machine submerged by floods

Almost at the same time, the global Bitcoin computing power dropped sharply, forcing the outside world to take a new look at the computing power of Sichuan mining pools. The Asia News Agency even called Sichuan the "world center" of Bitcoin mining.

Bitcoin computing power change chart

Blockchain.info's 2018 statistics show that among the world's top ten mining pools, eight are from China, accounting for more than 75% of the total computing power.

For a time, rumors that the Sichuan floods had caused a decline in global Bitcoin computing power spread widely, and there were constant rumors that China controlled the Bitcoin network and could paralyze the mining network at any time.

In fact, such rumors are completely nonsense.

The Computing Power Think Tank recently visited a number of miners. One of them, Miner C (anonymous at the request of the interviewee), who has opened mines in many places across the country, said that although the computing power in China accounts for the majority, the computing power in domestic mining pools does not all come from China.

Miner C pointed out that 77% of the computing power in China’s Bitcoin mining pools does not belong to Chinese mining pool operating companies, nor does it belong to Chinese miners.

“China does not actually own most of the world’s computing power. These computing powers are accumulated contributions from miners from all over the world. Most miners choose to allocate computing power to China’s mining pools because China has lower mining costs in all aspects.”

Miner C said that the reason why China has gathered most of the world's computing power is mostly due to the low domestic costs (mining machines, electricity, labor, site, etc.), especially electricity.

For example, western Sichuan has abundant hydropower resources, and the electricity cost can be as low as 0.08 yuan during the flood season. The low population density and cold climate in western Sichuan also have natural advantages in solving the noise and heat dissipation problems of mining machines.

“The claim that China can control the mining pools and launch a 51% computing power attack is even more ridiculous.” Miner C scoffed at this.

“A mining pool that controls more than 51% of the mining power can indeed launch a computing power attack, but the mining machines in the mining pool do not belong to just one person. The impact of a computing power attack is too large, and miners will also actively choose to leave the mining pool where the computing power is too concentrated to reduce the computing power value of the mining pool and prevent it from becoming the source of computing power attacks.”

Industry decline: mining reshuffle in progress

To outsiders, owning most of the world's computing power is like owning a gold mine, but in the eyes of insiders, this industry is becoming increasingly difficult and the mining industry is declining.

A miner named H who has just entered the market said that the cryptocurrency market continues to be bearish, mining income is getting lower and lower, and there are fewer and fewer customers. Once the cost-benefit is inverted, the mining industry is likely to usher in a major reshuffle.

From the beginning of 2018 to the present, the price of Bitcoin has fallen sharply, from around US$15,000 to US$6,300, a drop of about 60%.

Miner H revealed that the current price of Bitcoin is very close to the mining cost of miners.

"The electricity cost has a great impact on the mining cost. If the electricity price is 0.4 yuan per kWh, the mining cost is about 6,000 US dollars, which is almost equal to breaking even. Unless we can negotiate a lower electricity price, it will be difficult to make a profit."

“At the same time, the difficulty of Bitcoin mining will also increase with the increase of mining pool computing power. If the mining machine is not updated and the computing power cannot be increased synchronously, it will be difficult to mine Bitcoin, which also invisibly increases the cost of miners.”

Mine owner H admitted that the thinning profits from mining have led to fewer and fewer customers hosting mining machines at his mines, and he is now planning to start doing retail business.

"Managing mining machines and calculating profits and losses is a very tedious task. In the past, we only served large customers. We would not accept custody orders without hundreds or thousands of units. But now the market is not good. In order to survive, we also plan to accept custody orders from retail investors. Fortunately, the price of mining machines has also fallen a lot. I hope that more retail investors can participate in mining in the future."

Regulatory policies continue to tighten

Bitcoin mines have always been "chasing electricity". Currently, my country's mines are mainly concentrated in the southwest (Yunnan, Guizhou and Sichuan), Xinjiang, Inner Mongolia and other places, but the mine owners in these places are under pressure from regulators.

On January 5 this year, a document led by the Office of the Leading Group for Special Rectification of Internet Financial Risks was issued to local financial offices. The content mainly targets the guidance and risk prevention of virtual currency mining companies. The document mentions actively guiding companies under its jurisdiction to withdraw from the "mining" business, and requires local governments to compile statistics on companies engaged in "mining", including basic information, revenue, and preferential treatment. Local governments were required to reduce previous preferential measures by adjusting electricity prices, land, taxation, and environmental protection policies.

The aforementioned mine owner said that the local government is conducting a survey and investigation of the mines and clearing out those that do not comply with the regulations.

Mine owner C said that opening a mine requires approval from the local government, and some of the past illegal practices of private transactions are being stopped. Previously, several mines in Sichuan were closed by the government during the flood season because of illegal practices such as private power supply agreements with power stations.

We understand that not only Sichuan, but other popular mining regions have also introduced a variety of measures to manage the mining industry.

Currently, the Inner Mongolia Electricity Multilateral Trading System has stopped providing electricity rate discounts to local new cloud computing and big data companies, which is equivalent to tightening the electricity discounts for Bitcoin mines in disguise.

On July 17, the Office of the Leading Group for Special Rectification of Internet Financial Risks in Xinjiang issued a notice requiring active guidance of "mining" companies to withdraw and avoid preferential policies such as electricity prices, land, and taxes.

The aforementioned miner said that the country’s series of rectification actions have brought great pressure to the mining industry. If the currency market continues to fail to improve, the industry may face a major reshuffle.

“Many mines that were unable to obtain legal procedures have closed down. If costs continue to rise and coin prices continue to fall, the mines will either have to move overseas or close down,” said mine owner H.