Babbitt Observation丨The overseas mining boom under heavy regulatory pressure: It is not easy for leading mining companies to "go overseas", and small and medium-sized miners are collectively waiting and watching

In May, the mining craze that was in full swing suffered a heavy blow.

The Financial Stability and Development Committee of the State Council issued a document to crack down on Bitcoin mining and trading activities. Some areas in Sichuan and Xinjiang "suspended power supply to mines". Inner Mongolia established a reporting platform for virtual currency "mining" companies... The mining industry has entered a tense period.

At present, a large number of mines have stopped operating, computing power has plummeted, and the price of mining machines has fallen by nearly half. However, the overseas mining market has ushered in a new spring, with large mines seeking to "go overseas", and mine hosting is hard to find. Some mining companies have begun to seek joint ventures or independently build mines.

At the same time, most small and medium-sized miners are still waiting and watching. The risks of "going overseas" are unpredictable, and they lack the strength. In the midst of the storm, what can they do?

01 Regulatory policies are coming one after another, and small and medium-sized miners have not yet considered "going overseas"

On May 21, with the order from the Financial Committee of the State Council to "crack down on Bitcoin mining and trading activities", the supervision of cryptocurrency mining has been stepped up, and the action to crack down on the mining craze has begun in various places.

On May 25, Inner Mongolia issued eight measures (draft for comments) to crack down on and punish virtual currency "mining" activities, aiming to further clean up virtual currency mining activities; on June 2, Sichuan held a virtual currency "mining" symposium to fully understand the relevant situation of virtual currency "mining" in Sichuan.

Before this, there was a situation of "suspension of power supply to mines" in parts of Sichuan and Xinjiang, and Inner Mongolia even set up a reporting platform for virtual currency "mining" companies to comprehensively clean up and shut down virtual currency "mining" projects.

As we all know, most of the domestic mines are located in areas with sufficient power resources and cheap electricity, such as Inner Mongolia, Xinjiang, Sichuan, Yunnan, etc. As regulatory policies in these regions came one after another, mining practitioners were in a dilemma for a while.

The most direct impact of the policy is the plummeting price of coins, followed by the fluctuation in the price of mining machines.

"Mining machine prices have dropped by at least 30% from the peak in April, and are still falling," Jahon Khabilov, CEO of cryptocurrency mining pool Sigmapool, told 8btc. He said that the prices of some mining machines were even close to being halved.

At the same time, with the shutdown of a large number of mining farms, it can be seen that the computing power of the entire Bitcoin network has dropped significantly.

According to OKLink data, on May 30, the difficulty of the entire Bitcoin network dropped by 15.97% to 21.05 T. The computing power has been declining every day throughout the difficulty cycle. Correspondingly, the income of Bitcoin miners has also shrunk. In May, the income of Bitcoin miners was 1.466 billion US dollars, a decrease of 14.09% from the previous month.

On the other hand, in response to regulatory policies, many well-known mining pools and related companies are also divesting domestic related businesses. Well-known mining pools such as Litecoin Mining Pool have suspended the provision of mining machine purchasing and hosting services to mainland China; mining pool service providers BitDeer and Mars Cloud Mining have blocked IP access within mainland China.

At the same time, mining machines going overseas has become the hottest topic in the mining circle. "Going overseas" is actually not a new trend. Since 2018, there have been miners in the domestic mining circle trying to go overseas. There are many Chinese miners in Canada, the United States, Russia, Iran... They live in the pursuit of electricity. Where there is cheap electricity, there will be them.

However, to this day, for most miners, exporting mining machines overseas is still not a major trend.

"We haven't considered going overseas. If we can continue, we will continue. If we can't, we will stop for a while." Chen Jie (pseudonym), the head of a mine in Yunnan, told Babbitt. He said that many small and medium-sized mines are still waiting and watching, waiting for the implementation of regulatory policies.

Senior miner Yang Tao (pseudonym) also said in an interview with Babbitt, "Both the mining and cryptocurrency circles are disordered capital markets, and capital is the master. The policy does not have much impact on me at present. If there is a substantial crackdown in the future, I may choose to go overseas."

As they said, in fact, at present, the overseas mining of mining machines may be more of a choice for large mining companies and some medium-sized mining farms. Jahon Khabilov, CEO of Sigmapool, told Babbitt that currently only large and medium-sized mining companies are seeking mining machine hosting or building mining farms in Kazakhstan, and there are no small mining farms.

Martin, a senior miner in the United States, said bluntly: "Most Chinese miners do not have the ability to go overseas because their scale is too small."

Obviously, since "going overseas" faces many risks and difficulties such as policy changes and insufficient mining strength, it has not yet become a general trend.

There is no way to know what the future will be like, but currently the vanguard of "going overseas" will only be medium and large mining companies with strong capital advantages.

Martin believes that "mining will eventually become an oligopoly." As he said, capital is concentrated in the mining industry, the head effect is becoming more and more obvious, and the process of de-Sinicization of computing power may be irreversible.

02 The rise of overseas mining

“In general, Chinese regulatory policies have created a huge demand for mining farms in Russia and the CIS (Commonwealth of Independent States) countries from Chinese miners,” said Jahon Khabilov. “Almost all well-known mining farms are fully staffed and there is no idle capacity.”

Compared with the hesitation and anxiety of domestic miners, foreign mining practitioners appear optimistic and calm. They even regard China's crackdown on mining as an opportunity.

"At present, we can see that some Chinese miners are planning to transfer their mining machines to other countries or regions. This may be a good opportunity for foreign data centers to increase the number of Chinese customers hosted on their mining platforms and make the global computing power distribution of BTC more decentralized. In the next few months, some computing power migration is expected." Antony (pseudonym), the head of a well-known overseas mining pool, told Babbitt.

Due to risk considerations, medium and large mining companies that accelerate their overseas expansion will more likely choose the United States, Russia and Kazakhstan.

“Large mining companies seek safe and legal mining operations, so they prefer to negotiate with the largest hosting companies in the above-mentioned regions. As far as I know, Russia and Kazakhstan can offer a fair mining price (a little higher than Sichuan, but relatively stable), and the climate in these regions is very suitable for mining (lower temperatures, which can save cooling costs for mining machines)” said Antony.

According to it, the average hosting price for each mining machine in Russia and Kazakhstan is about US$0.047-0.049 (about RMB 0.3-0.31), which includes management and maintenance costs, but does not include repair costs.

As for the United States and other North American regions, on the one hand, the policies are stable and the degree of compliance is high. On the other hand, some mining companies such as Bitmain already have other businesses there, so it is relatively convenient to transfer their mining machines and industries to North America.

However, even if large mining companies want to "go overseas" now, it is not easy.

“The reality is that most miners are just looking for available capacity, which is a difficult task in itself because the vast majority of data centers are already overloaded and have no hosting space at all,” Antony admitted.

He said that this is why it may take some time for miners to move. Data centers cannot currently accept such a large number of mining equipment, so they are in urgent need of expansion. It is reported that some data centers have sold out the slots for the next 1-3 months in advance, or even more.

Even if some platforms still have hosting slots, they will become more picky and strict in their selection of mining machines and customers.

For example, they find it difficult to accept older generation mining equipment like Antminer S9, and prefer new generation mining machines such as Antminer S19 pro.

For hosting providers, the main reason is limited space. Hosting providers are interested in selling electricity to miners, and one spot on the shelf can accommodate an Antminer S9 or S19, but the S19 consumes more power, so they obviously prefer the latter.

In addition, it is more difficult to maintain the old generation of mining machines. In contrast, most of the Antminer S19 mining machines are new and easier to maintain. Of course, nothing is absolute, and the hosting provider can also accept the old generation of mining machines, but the premise is that there are a large number of equipment.

“But electricity prices for such miners are likely to be higher,” Antony added.

In Kazakhstan, there are actually some smaller hosting platforms that have idle slots and can even offer lower electricity rates. However, the risks brought by these platforms will also increase.

“In Kazakhstan, there are still companies working illegally, and customers may be attracted by low electricity prices. But in reality, the service provider can steal electricity, which can be the reason for the closure of the mine or even jail time,” Antony said.

Due to various restrictions and risks, some capable mining companies are seeking to establish their own mines overseas, and some mining companies will choose to establish joint ventures with local mining companies.

On May 24, BitMining (formerly 500.com) announced that it had partnered with a Kazakhstan company to jointly invest in the construction of a mining farm in Kazakhstan, planning to invest 60 million RMB (approximately 9.33 million USD) to build and operate a mining farm with a load of 100 megawatts.

On June 2, Canaan Inc. also announced in an analyst conference call that it will launch its own mining in Kazakhstan in early June.

03 Embrace regulation and look forward to the future

Although policies have been introduced one after another, most practitioners still have hope for the industry. While they agree that regulation is necessary, they also hope that there is room for policy easing.

On June 2, Zhang Nangeng, chairman of Canaan Technology, said in a conference call that the regulation of Bitcoin and its mining industry is more aimed at financial fraud and other behaviors that disrupt the normal market order, as well as preventing the transmission of personal speculation risks to society. Therefore, financial regulation is constructive rather than destructive to the Bitcoin mining industry.

He believes that in the long run, financial regulatory policies will be conducive to the healthy and orderly development of the cryptocurrency industry and promote the maturity of blockchain and ASIC chip design technologies behind cryptocurrencies.

Sichuan held a much-anticipated virtual currency "mining" research seminar yesterday. According to The Paper, a staff member of the Sichuan Energy Supervision Office emphasized that "we are just trying to understand the situation on a small scale first, and we have not yet formed any specific inclinations or ideas for subsequent actions."

In this regard, a senior miner in Sichuan believes that "at present, generally speaking, no news is good news. The main discussion in Sichuan at this meeting was about the severity and losses of water abandonment by power stations. In addition, the "orderly withdrawal" mentioned in the Xinhua News Agency article also gives a lot of room for imagination. At present, at least based on the actual situation in Sichuan, the flood season will definitely be able to pass. Of course, there will be a need for cost increases in electricity prices, so at present, it is still certain whether mining can continue and the safety of mining machines."

As for China's regulatory policies, most foreign mining practitioners also hold a positive attitude and agree with the necessity of legality and compliance.

“The cryptocurrency market is highly risky, it’s like the Wild West — no rules, no principles. Some investors don’t understand why they can lose all their savings in one day. The government is trying to protect them,” Khabilov told Babbitt.

It is reported that as early as June last year, the Minister of Innovation and Aerospace Industry of Kazakhstan announced plans to attract $738 million in digital currency mining investment within three years. In September, Kazakhstan planned to raise more than $700 million for cryptocurrency mining. In May this year, Kazakhstan formulated a roadmap for the development of the encryption industry and blockchain technology.

Kazakhstan is already on the path of legal mining. Although the two countries have different positions on mining, Khabilov still agrees with China's regulatory actions.

He said that as a member of the Paris Agreement, China has the ability to reduce its carbon dioxide emissions. "As far as I know, in the dry season, Bitcoin mining mostly obtains electricity from coal-fired power plants. The Chinese government has put together climate and energy principles and made it clear that all industries, including cryptocurrency mining, will abide by these rules. Obviously, this is as it should be."

Prior to this, MicroStrategy CEO Michael Saylor also expressed a similar view: "The crackdown on Chinese miners will fundamentally reduce the carbon footprint of Bitcoin mining, reduce China's FUD (fear, uncertainty and suspicion), and support the progress of ESG (environmental, social and corporate governance) goals."

On the other hand, Khabilov said that despite the sharp drop in the price of mining machines due to regulatory reasons, there is still a great demand for mining equipment. Most data centers in Kazakhstan order mining machines from China (they help customers buy them or customers bring their own equipment).

“China’s mining pool hashrate is declining, but its share remains strong. I don’t think China will lose its number one position in the near future,” he said.

Antony believes that the introduction of new regulatory policies has had a great impact on profitability. The policy caused the price of Bitcoin to plummet and some mining farms to be closed, but the subsequent decrease in the difficulty of Bitcoin mining has undoubtedly increased the profits of mining machines.

As mentioned above, the difficulty of Bitcoin's entire network has been reduced by 15.97% to 21.05 T. According to BTC.com data, the difficulty of Bitcoin mining is expected to drop by another 12.84% to 18.34 T in 9 days and 15 hours.

“Miners can enjoy lower difficulty for a while and prepare for a new price increase,” Antony said.

Antony's attitude is very optimistic. He said that the upcoming new policies may lead to another price fluctuation. But in the long run, Bitcoin will definitely hit a new high.