Chinese regulators have cracked down on crypto mining, citing environmental concerns. Miners, forever on the lookout for cheap electricity, are packing their bags and moving out.
Photo from CFP
By SI Linwei
In years to come, May 19 might be seen as the day when the crypto-castle began to crumble, said SONG Fei, a crypto miner from Hunan Province.
But the cracks that have begun to show are not the crashing price. Prices crash all the time, and systems generally recover. The question is over the bitcoin network’s overall computational power, an indicator of how many mining machines are diligently applied to their work. Swings in computational power are normal, but things are different this time. An unusually large number of machines, most of them in China, have simply shut down and are showing no signs of ever coming back up again. The crackdown is real.
As cryptocurrency prices rip through the roof, crypto mining, a computation-intensive, energy-hungry process, has become more lucrative than ever, along with a vibrant supporting industry. Over US$30 million (192 million yuan) worth of bitcoins are minted every day. Only a tiny amount of that goes on electricity.
China became a crypto mining hub largely thanks to its cheap electricity. Efficient mining machines were widely available and there was a whole tunnel system of regulatory blind spots. Eight of the top ten bitcoin mining pools in the world are backed by Chinese companies and the country meets over 50 percent of the world’s bitcoin demand, around five times more than any other country.
There are plenty of reasons for governments and other vested interests to both hate and fear bitcoin, but the field most have chosen for the battle is the environmental one: bitcoin mining uses absurdly high amounts of energy. On May 18, a State Council committee led by Vice Premier LIU He, joined the environmental fray, announcing a crackdown on crypto mining, citing energy-consumption concerns among others. The next week, Inner Mongolia, a mining hotspot, issued tough rules that come close to an outright ban and a panicked scramble ensued.
Crypto exchange Huobi and mining pool operator BTC.TOP immediately shut up shop in mainland China and other miners followed suit. Publicly traded companies declined to comment. Sudden tranquility descended on the cacophony of the online crypto community.
China’s miners are on the move. Chinese crypto miners, in fact, have been looking overseas for quite a while, to places with cheap electricity, a cold climate, or friendly regulations. The industry’s center of gravity is shifting away from China in any case, as prices rise and overseas miners, many institutional investors, round up mining machines. North America and Central Asia hold great appeal, despite cautionary tales against tax and legal nuances. BIT Mining (previously 500.com), for example, has committed more than US$35 million to crypto farms in Texas and Kazakhstan. Bitmain and Canaan Creative, two leading mining machine makers, report large overseas orders. The hype has been further fueled by Elon Musk, who tweeted that a “bitcoin mining council” had been created to increase the currency’s sustainability.
Crypto news website 8BTC reported that the computational power of the United States, Russia, and Kazakhstan has increased to 24 percent of the global total, while China’s has gradually decreased from 70 percent to around 50 percent. The shift is likely to accelerate given China’s new position. Sichuan, another crypto mining province, will introduce new restrictions soon. For the thousands of anxious miners, there is little hope.
Eleven years since the creation of bitcoin, the crypto mining industry has become highly specialized and professional. Each cryptocurrency has its own requirements for mining equipment and algorithms — Bitmain and Canaan mining machines are good for bitcoin, Nvidia and AMD graphic cards for ethereum – giving rise to highly sophisticated networks of machine manufacturers, pools and farms, and institutional miners.
As the networks grow in power and power consumption, miners are pouring in unprecedented amounts of money. The total computational power of bitcoin is up 25 percent this year. Ethereum computational power has doubled. The investment is well worth it. A widely used machine generates about US$50 dollars of Ethereum every day, at a cost of less than $3 in electricity.
Despite many warnings and no encouragement whatsoever, public companies and institutional investors have been irresistibly drawn to crypto mining from governments and central banks worldwide. At the same time, however, the industry, which so far has eluded regulation, is reckoning with its sustainability.
Crypto mining gobbles up a humongous amount of energy and it is getting hungrier every day. The US$7.6-billion industry is frequently compared to the Netherlands. Both the Netherlands and crypto mining consume about the same amount of electricity. For the same juice that powers the cryptos’ US$7.6 billion, the Dutch create a GDP worth US$900 billion.
Estimates for China’s share of the pot come in between 50 - 70 percent. Most of the operations are based in the western part of the country, thanks to its cheap local power. Of the large hubs, Inner Mongolia and Xinjiang are both major coal producers, with cheap high-pollution power supplies, while the southwestern relies heavily on hydropower, with seasonal fluctuations in price. As a result, miners migrate every year, spending the rainy season in the southwest and the dry months in the north.
Inner Mongolia acted against mining operations early this year, and a full-blown ban is on the way. Industrial parks, data centers, and power plants that serve crypto miners will face harsh punishments. Some miners have already fled overseas, many to Kazakhstan. Those in southwestern provinces wait their turn.
A miner in Sichuan said that most farms have no electricity or are running at limited capacity. His own is one of the few still running normally, but it won’t be long before the last humming server vanishes from the mountains forever.
On May 19, the day when the price of bitcoin fell 30 percent overnight. Song put down his chopsticks and wondered if he could all be wrong about the future. It might be seen as just a tiny blip on the crypto-march to world dominance, or whatever.