Cryptocurrency miners earned millions in digital currency due to the presence of excess electricity in China. New government rules could end this gold rush
Mr. Gao tells me: "Just because something in China is not prohibited does not mean that it is allowed." Before the last word, he pauses a little, emphasizing it. Gao is a Bitcoin miner, the owner of many mining devices, several thousand of which he uses himself, and leases the rest out. Today, he has at his disposal 110,000 vehicles distributed in the vast western provinces of China, Sichuan and Yunnan, as well as in the north, in Xinjiang and Inner Mongolia. In other words, despite the rapid drop in the value of bitcoin over the past 18 months, Gao plans to expand the business.
In China, 70% of all cryptocurrency mining capacities are located, and more than 70% of them are located in the Sichuan mountains, where the available electricity from the hydroelectric power station makes the cost of a kilowatt one of the smallest in the world. However, the existence of cryptocurrency fever was in jeopardy. Mining Chinese bosses earn millions in the gray legal zone - and a directive issued in April 2019 by the State Development and Reform Commission (NDRC) hints at the possibility of a complete ban on cryptocurrency mining. And for the people at the top of Chinese cryptoeconomics - including the tycoons I talked to - it's a clear call to mine as much money as possible before it's too late.
Miners support the cryptocurrency network by serving its infrastructure - the blockchain - by solving a sequence of complex computational problems needed to connect transactions to clusters, or the blocks that make up the chain. This makes cryptocurrencies relatively decentralized, as well as theoretically resistant to hacking. For algorithmic work, miners receive cryptocurrency.
In order for the new currency to appear gradually, over time, the mining process becomes more complex and energy-consuming, and the computing power used for mining is growing. Therefore, a few years after the launch of bitcoins in 2009, mining began to move from private houses and desktop computers to giant warehouses, where there are tens of thousands of cars and complex cooling systems that prevent them from overheating. Teams of engineers are working around the clock to ensure that no machine is disconnected from the network, and management teams - on logistics and establishing relationships with local electricity suppliers.
The unstable value of bitcoins - reaching $ 20,000 in December 2017 before crashing to $ 3399 in February 2019, and since then stabilized at $ 4,000 - $ 5,000 - does not particularly affect the business of miners. As long as the cost of bitcoin does not fall below the cost of mining, and miners believe that the general trend will tend to increase (and will not fall to zero, as some predict), their income will remain stable.
Globally, according to the JPMorgan Chase study , “the weighted production cost of creating one bitcoin on average in the fourth quarter of 2018 is $ 4060”, that is, given that the cost of bitcoin in recent months fell below $ 4000, it seems that it will soon become unprofitable . But only in China, the abundance of cheap electricity allows miners to maintain the cost of bitcoin mining at $ 2,400.
“The reason for the large mining volume in China is simple,” Jingyang Zhang, one of the first Chinese Bitcoin investors, told me. “There is access to cars, cheap labor to support them and build factories, and, most importantly, extra energy that needs to be sold at least for how much - therefore, why not use it for mining.” If people who trade bitcoins stare at their screens all day, checking the cost of bitcoins on different exchanges, miners are more interested in the cost of a kilowatt of electricity, and where they can find stable reserves that the local government will not cut off.
“Mining made me believe in bitcoin,” Gao says, reclining in his chair in the sterile space of the VIP branch of the brilliant business center in Chengdu, the capital of Sichuan. - Having seen all the cost - cars, cooling, labor, you understand that bitcoin is not something ephemeral. It must have some kind of intrinsic value - otherwise, why is it all? ”He says, waving a telephone in the air with a photo of the factory that he just showed me: a huge number of warehouses squeezed between the Sichuan mountains.
Sichuan factory worker inspects mining equipment
Even before the news of the commission’s decision appeared, the legal status of bitcoins in China was blurred. In 2016 and 2017, people actively speculated with bitcoins and other cryptocurrencies, there was an explosive growth in ICOs and the creation of new exchanges. Many of these businesses were fraudulent, including China's very first ICO in 2012. In that case, a certain character under the pseudonym “fried cat” launched an online sale of computers for mining of his own design, and then disappeared without a trace with other people's money, realizing that his computers were not keeping pace with the rapidly developing market.
The Chinese government, worried about the number of bankruptcies caused by cryptocurrencies, quickly intervened and launched large-scale reforms. ICOs were banned, and online exchanges could not work due to the ban on converting ordinary money into cryptocurrency and vice versa. Most of the companies closed, some left the mainland, but they must still obey the laws of China if they are convicted of taking money from Chinese citizens. For this, citizens need to use a VPN, also a prohibited technology, to access such exchanges.
As a result, if in 2017 90% of all exchange operations with bitcoins included yuan, today this percentage has fallen to 1%, according to statistics from the library of the US Congress. It is interesting that in China it is not officially forbidden to own bitcoins or exchange them. However, you can not use the yuan to buy bitcoin, or change bitcoin to yuan. Given that the scope of cryptocurrency is already quite limited, in China, bitcoins can only be used as a way to store values - ephemeral values that exist only in the form of cryptocurrencies.
However, there is by no means a small amount of informal trading that does not go through exchanges. They are carried out through the WeChat and Alipay payment applications, when the user sends money to someone and receives the corresponding amount of cryptocurrency in response. However, such operations require trust on both sides, and attract various scammers who are not facing legal prosecution.
From a regulatory point of view, cryptocurrencies are a headache for a state that extremely strictly controls the ability of users to withdraw money from the country. “In China, money is like a lobster trap,” says JM Bell, a researcher from Shanghai who has studied how wealthy Chinese move their money. “It’s easy to enter money into the country, but it’s very difficult to withdraw money back - this state of affairs is beneficial for the government.” Decentralized cryptocurrencies pose an existential threat to government control over citizens ’wallets, which is why Beijing has treated the exchanges so strictly. However, given that bitcoins and the underlying blockchain may have potential for the future, the government is in no hurry to completely ban cryptocurrencies. The ICO law is hedged by saying that “blockchain technology should serve the real economy.”
Given the lack of legal exchanges and the inherent risk of informal trading, mining remains the safest way to get cryptocurrency in China. Due to the fact that coins in China are born in a legal marriage, it may seem that cryptocurrency mining there is a political matter, although there is a clear difference between Chinese miners and their cryptanarchist counterparts in the United States and other countries. When I asked about the politics of the founder of mining factories ChouGe (the name literally means "freak brother"), he rejected these suspicions. “Of course, I'm not an anarchist. I am not even a liberal. I’m a nationalist, and I believe that this will help our state, ”he said, repeating the phrase that became popular during the reign of Xi Jinping . “I think this is just a new version of the assets available to people.”
With the closure of exchanges and ICOs and the lack of a legal way to convert cryptocurrencies to Chinese yuan, mining remains the last pillar supporting this ephemeral system. If the government decided to completely destroy the cryptocurrency in China, it would only have to ban mining. The NDRC directive addresses this possibility. The document hints that the mining process itself may be banned as part of a package of 450 different economic activities that are suspected of "wasting resources, environmental pollution, breach of security or violation of laws." The miners I spoke with are not surprised at this news, and are not particularly afraid of it. One noted that even if such a law passes, the process will not be instantaneous, and all checks will first go in a relaxed mode. Another was already exploring the possibility of moving abroad, and this situation simply spurred him on, forcing him to redouble his efforts.
So far, mining serves a unique purpose unique to China: crypto mining in some circles is considered an effective way to utilize the excess electricity that is generated and lost in vain in areas of the country in which supply greatly exceeds demand.
Mining Factory HaoBTC, photo from 2016. Located in a remote mountainous region on the edge of the Tibetan Kunyuyosyan plateau in Sichuan, China. The strategic location near the hydropower plant ensures reliable generation of cheap electricity.
From the USA to Canada, from Europe to China, critics often claim that cryptocurrencies are an environmental disaster, showing statistics such as, for example, that in 2017, bitcoin mining around the world spent as much energy as a country like Denmark. This is so - but it is also true that in 2016, Yunnan in southwestern China wasted 32 billion kWh of energy, which is roughly equivalent to Denmark's consumption that year. The uneven development and incredible growth of China has led to the construction of power plants that generate electricity that no one needs, as the economy has slowed down and moved from intensive construction to home consumption and service services aimed at digital payments.
This is especially felt in areas such as Inner Mongolia and Xinjiang, where coal-fired power plants emit toxic smoke over arid deserts, as well as in Sichuan and Yunnan, where hydroelectric power plants dominate, and dams have flooded countless villages, forcing millions of people to relocate. There are more than 6,600 dams in Sichuan, and the provincial government had to ban the construction of new small dams, which were built specifically for mining bitcoins.
In Inner Mongolia, coal-fired power plants fueled economic growth until 2012, when coal prices collapsed and then fell again when the country's government announced increased environmental controls. In 2014, Beijing was suffocating due to thick black smog, and schools with airports in the northeast had to be closed for several days in a row. Subsequent attempts by the Chinese government to remove the country from a coal needle led to the economic decline of many regions of Inner Mongolia, where entire cities were built in anticipation of future growth, and now they are almost empty.
Cryptocurrency seemed to breathe new life into these areas. Ordos, the capital of Inner Mongolia - including the infamous ghost town of Kanbashi - offered miners electricity rates at a discount. Bitmain mining equipment manufacturer with a capitalization of more than $ 10 billion was offered electricity at only $ 0.04 per kWh. This was 30% lower than typical commercial rates in that area. Just 200 km from the main Bitmain factory, in the outskirts of Ordos is Haerusu , China's largest quarry. Everyone thought that Bitmain would start mining again.
But these hopes were not destined to come true. According to the report of the Library of Congress, “in January 2018, the leading Chinese group to eliminate financial risks on the Internet demanded that the local government exclude all tariff preferences for mining factories.” True, this decree is being implemented through a stump deck, and some of the miners with whom I spoke suggest that double-dealing is still flourishing there. However, monitoring of such behavior by local authorities was increased, and many mining computers were confiscated .
And yet, compared to traditional mining, the impact of bitcoin mining on the local economy was meager. In addition to the initial construction of the factory, the crypto mine requires a small number of technicians serving the machines; This is a dull and monotonous job, in fact, which is a constant replacement of failed processors. During normal operation on the computer, a green light is on, and if it breaks, it is red. A few members of the team of these factories spend all day playing video games and watching streams, periodically changing with those who are looking for red lights in the neon-green sea.
Worse, because of the difference in electricity prices from coal burning and from hydroelectric power stations, in April / May most factories move to Sichuan or Yunnan, preparing for spring rains - so much hydroelectricity is generated during this period that its cost drops only only up to a few jiao (1/10 yuan). In the local media, this process is compared with the migration of birds - the flight of thousands and thousands of mining computers looking for pasture with more succulent grass.
Gao is also moving his factories closer to home, from Xinjiang, to a larger factory he built in the Sichuan mountains. During our conversation, he sometimes jumps up and walks to the window with floor-to-ceiling glass to discuss some logistical issues by telephone; sometimes I hear words like “trucks” and “mountains”.
After one of these pauses, I ask how he started cryptocurrencies. Gao is a former television announcer who is also fond of cooking, and once owned a portion of a crab restaurant in Sydney. It is unlikely that such a past could be expected from a person professionally involved in crypto mining. “I started selling bitcoins early,” he tells me. "First bought them in 2013 at 3,000 yuan and sold them when they grew to 6,000." He shakes his head. “Everyone has a price. I do not regret anything; it wasn’t in my nature to keep them until the price went up to $ 20,000, although then I would, of course, be very rich today. “No,” he says confidently, “everyone has a price.”
China’s major infrastructure projects created an excess of energy, which in turn reduced the cost of bitterness-minded electricity.
In China, three types of people are mainly involved in mining bitcoins. Some follow fashion trends and hope for big profits; others accidentally did this, gaining privileged access to cheap energy (directly or through acquaintance); still others sincerely believe in the idea.
The Chinese have a saying “weed the bow”, often used to describe people who blindly dive into a certain industry in the hope of making money. Onions grow quickly, and after the assembly of one batch, another soon grows. Chainalysis, a Bitcoin blockchain research company, claims that $ 812 billion worth of transfers were made in bitcoins, which is substantially less than the $ 3.3 trillion that Satoshi Capital Research advertised in January 2018, claiming it was six times more money than PayPal transfers. Fully fictitious transactions in which cryptocurrency owners exchange them with each other to create the impression of large volumes and interest in this topic; they do not differ from “pumping and dumping” schemes that are prohibited for use in ordinary markets.
The lack of sufficient knowledge and the incredible influence that large figures have on the markets make investing in cryptocurrency very difficult. The Credit Suisse report states that 97% of all bitcoins are owned by 4% of market participants, which gives the latter significant leverage. In 2017, Bob Xu, manager of Zhenfund and one of the most famous angel investors in China, at a private meeting, the results of which he asked not to share, advertised the blockchain as a revolutionary innovation, so fundamental that anyone who rebels against it is destined to die. Naturally, his statements leaked to the Internet. And the next day, shares of Chinese companies associated with the blockchain jumped 5.7%.
Even today, when exchanges are closed and ICOs are prohibited, there are still thousands of groups dedicated to bitcoin and other cryptocurrencies on WeChat that are beaten to failure (the maximum number of members in the WeChat group is 500 people). They send information about new currencies, illegal options and the best VPN services, or about the most interesting mining farms.Checking all the information that appears in these groups with a machine-gun speed is almost impossible. In another group called “Xiaomitsuan” (lit. - “secret group”) it allows influencers with access to information to monetize their knowledge, taking a fee in the form of cryptocurrencies or real money for entering the group. In any other market, this would be considered illegal trading using insider information. The Chinese regulators closed this group, but it reappeared under the name “Planet of Knowledge” and continues to do the same.
That's how they collect onions. Many miners who started this business in 2017 were hit hardest by the drop in bitcoin value. They bought computers when they were expensive: the brother-freak mine boss told me that he bought a bunch of D9 computers for 40,000 yuan during the boom, and he could only watch how their cost falls along with the cost of BTC. After that, he sold them in the wake of a drop in prices of several hundred yuan apiece, and reduced the volume of his factories from 30,000 computers to 7,000. The cost of mining is high, and it takes time to build and launch mines - that's why miners trying to enter the market when a certain value of bitcoin, often find themselves in a disadvantageous situation when the market buzzes. According to Coinbase, around 600,000 miners closed during a sharp drop in value around the world.Most of them were in China.
Over the past two decades, thanks to deepening economic reforms in China, there have been two waves of improved wealth. The first was related to real estate, and the second to an exchange boom; however, exchanges collapsed in 2015, just as bitcoin began to attract attention. For those trying to get rich during the first two waves of people, the idea of the inevitable growth of cryptocurrencies became too attractive to abandon it. Moreover, the government advertises instances of the sudden enrichment of ordinary people — the story of the founder of Alibaba, Jack Ma, who rose from teachers to the richest man in the country over two decades, is a textbook example — examples of what can be achieved through hard work (and sympathy for the Communist Party) . Thus, it creates an environment in which people believe that everything is possible.If they succeeded, why not succeed with me? If ailliterate peasant woman from Guizhou can build a billion-dollar global empire based on sauces, is it so strange to invest in digital currencies extracted from ether using mathematics?
My friend Xiaomi Getszy (using the nickname “rice dove” online), whom I met at the crypto Monday meeting in Chengdu, helped me meet some of the miners I interviewed for this article. On the way to one of these meetings, I asked him if he had ever invested in bitcoin. “I lost this salary for ten years,” he answered me with quiet sadness. Later, when I asked if he wanted to take a taxi and ride together, he said that he had moved far beyond the Chengdu ring road to a sleeping suburb, which you need to travel to for two hours by train and bus, and which is technically generally considered neighboring the city.
However, miners who remain in the industry with access to electric power sources or who truly believe in this market hold their ground and pray that the NDRC directive will not cover their shop.
They have already seriously invested in the equipment of physical factories and organized complex work, so they can only wait. But they say that they have already experienced similar storms in the past and selected from complex and often mutually exclusive rules of work; it’s just another hurdle on the long road to wealth.
Before the announcement of the NDRC, most miners with whom I said that the events on the market after the collapse of bitcoin last year are similar to what happened after the crash of dotcomsin the early 2000s. They believe that this event drank all random investors, and only serious players remained on the market who would help make this industry more professional and adult.
This has its own irony. The collapse of the dotcoms carried away with them the idea of a decentralized global Internet. After it came technological monopolies capable of arguing with governments, as well as tools ideally suited for totalitarian regimes to manage their citizens. Balkanization is observed on the Internet , and China has hidden behind a fiber optic curtain. In the same way, the recent onion harvest has left only the major Bitcoin miners, who, like Gao, can build factories for tens of thousands of computers.
Jingyang Zhang, one of the first investors to buy bitcoins back in 2011, when in China they didn’t even have their own name (in Chinese they sound like “BBC”), he placed several at home as a hobby computers for mining. It was once part of the great decentralized ideal invented by Satoshi Nakamoto , the invisible founder of bitcoin. He laughed when I asked him if he was still mining. “It's too complicated, risky in terms of local laws, and expensive. Now I'm just investing in cloud mining. ”
Perhaps if China decides to ban mining, the market will again be able to become decentralized, but this is hardly believed. Major Chinese miners are already looking abroad, suggesting future changes in laws. Bitmain, whose computers at the Financial Times compared shovels during the gold rush, announced last month that it plans to deploy 200,000 of its computers in factories in Sichuan to take advantage of cheap hydropower from the rainy season and subsequent floods. In my conversation with one investor who has a large stake in their company, he mentioned that he helps them negotiate with customers from the Middle East. There is no doubt that if the NDCR decides to save China from cryptocurrency mining, then the miners will simply move somewhere else.
When I asked what Gao plans to do with the laws of the NDRC, Gao abstracted about plans to move abroad - perhaps to America, where he seems to have a more stable legislative climate - but he believes that he still has time to as long as new laws begin to be enforced. When asked what he would do until then, he said that it’s not very convenient to discuss such things now. He also refused to predict the value of bitcoins for next year. He has more urgent matters; transportation of computers, negotiations with the local government to ensure that it will not be closed, as well as searches for places with stable electricity and preferential rates. From his point of view, bitcoin is the same victim of a political showdown, like everything else in China.
When I asked why he was doing this, if not just because of the money, his eyes lit up. “I believe that this is the future, and even if not, then something else will appear after that. I want to someday tell my son that I did not just watch how all this passes by. I was part of it. ”