A 60-day visit to a Bitcoin mine: a look at the mysterious gold-digging paradise

Author: Nakamoto So

Editor丨Menren

Operations: One Hundred Little Stones

In June this year, Zhao Dongyang, a miner in Handan, and his four partners bought 600 second-hand mining machines at a price of 2,000 yuan per machine. At that time, these mining machines had a daily income of nearly 10,000 yuan. However, just half a year later, the daily income was less than 2,000 yuan.

As the price of coins fell, Zhao Dongyang's 600 mining machines had to face the risk of being eliminated. At the same time, Zhang Lei, a local miner in Sichuan, had completed the layout of low-power and high-computing power machines.

Currently, 4 million second-hand machines are on the way to being eliminated. As mining machines are upgraded and the difficulty of mining increases, some miners have to make a choice: should they replace them with low-power, high-computing machines, or continue to use old mining machines for mining?

However, the high cost of high-computing machines and the uncertainty of the market have undoubtedly increased the risk of mining. In the face of the halving of Bitcoin, is Bitcoin mining still a gold-digging paradise for miners?

"Small miners enter the mining circle again"

When I contacted Zhao Dongyang again, he was having dinner at his home in Handan. At this time, Bitcoin had fallen to $6,909. Zhao Dongyang opened his mobile phone to show me that S9i 13.5T, a single machine can mine 0.00026 Bitcoins per day, and after deducting the electricity cost, the daily income is only 2 yuan.

While Canaan Inc. became the world's first blockchain stock, regulatory authorities in Shanghai, Shenzhen and other places successively rectified the chaos of ICO and pyramid schemes in virtual currencies. Multiple exchanges and coin issuance projects were investigated, and the currency price fell accordingly.

Half a month ago, Zhao Dongyang moved the mining machine to a new mine that can run on electricity all year round, with a year-round hosting electricity price of 0.31 yuan. "If the price of the currency continues to fall, we will have to consider shutting down the machine."

"Did the mine allow us to shut down the machines?" I asked Zhao Dongyang.

"When I signed the contract with the mining farm, they agreed that if the income was not enough to cover the electricity bill, we could shut down the machine." Zhao Dongyang's electricity price is relatively cheap. At present, the electricity price for mining machine hosting in mining farms in Xinjiang, Inner Mongolia, Sichuan, Yunnan and other places is generally between 0.35-0.37 yuan.

One morning in early August, my colleagues and I drove 50 kilometers along a winding mountain road to the largest local Bitcoin mine. The mine was built next to the highway, surrounded by mountains on all sides, and the top of the mountain was shrouded in clouds and mist.

A hundred meters away, there are five huge black factory buildings with rows of giant exhaust fans hanging on the walls. Within 50 meters, the roar of 40,000 mining machines can be heard.

Zhao Dongyang was the first Bitcoin miner I met in Sichuan. When I first met him, he was squatting on the ground repairing a mining machine.

In 2018, Zhao Dongyang was mining in Handan. At the end of that year, as the price of Bitcoin fell to the shutdown price, he chose to sell the mining machine. The EOS in his hands, like the mining income, was shrinking.

In June this year, with the arrival of the flood season, the price of Bitcoin rebounded significantly, and a series of mining machines, mainly Antminer S9, were restarted in the valleys, villages, or near a dam in Sichuan and Yunnan. From mid-May to early July, the average computing power of the entire Bitcoin network returned from 47.98 EH/s to 64.85 EH/s.

That is to say, at the beginning of the flood season, about 1.25 million small-computing-power mining machines were restarted.

It was at this time that Zhao Dongyang came to Sichuan and re-entered the mining circle.

Together with four other Handan miners, he bought 600 second-hand 13.5T S9i trucks at 2,000 yuan each.

Zhao Dongyang and others drove from Leshan to Ganzi Prefecture and then to Aba Prefecture. After several twists and turns, they finally placed the machine in a mine in Aba Prefecture.

Zhao Dongyang checks the computing power data of the mining machine on site

"Excluding the 0.25 yuan cost of water and electricity, the net profit of one machine is 14-16 yuan per day."

Most of the mining machines in this mine are S9 and T9+ series mining machines. These machines emit heat waves 24 hours a day, forming high-temperature airflows that spray towards this northern man.

Although the mine includes operation and maintenance, Zhao Dongyang felt more at ease without being on site in person, so he rented a 50-square-meter room near the mine with an indoor bathroom but no kitchen. The rent was 800 yuan per month, with two people taking turns to stay on site for one month.

Two months later, Wang Chunhua, one of Zhao Dongyang’s partners, sold the machine to four other people. Wang Chunhua told me: “It is still lower risk to buy the coins directly.”

Based on the price of 9,700 U.S. dollars at the time, the daily income of these 600 S9i units was about 9,600 yuan. Due to the increase in computing difficulty, the decline in coin prices, and the increase in electricity prices during the dry season, the daily income is now between 1,200 and 1,800 yuan.

"Layout of big miners"

Miners invest in mining machines and electricity to mine Bitcoin, and then sell it on the secondary market. They have to add the profit difference. Therefore, in a bull market, the price of the currency is much higher than the mining cost. In a bear market, the price of Bitcoin reaches the shutdown price, and it is more cost-effective to buy the currency directly.

Mining is equivalent to miners using money to bet on the market expectations for the next year. Therefore, Wang Chunhua chose to buy coins, while Zhao Dongyang and others chose to continue mining.

“Then why didn’t you buy a high-power mining machine?” I asked.

"One is the high cost of high-computing power mining machines. The other is that the current mining cost is 1 yuan/T. After the halving, the mining difficulty will increase and the mining cost will be 0.5 yuan/T. In addition, a high-computing power mining machine costs about 13,500 yuan, and may be 6,000 yuan after halving." For Zhao Dongyang, high-computing power machines are not urgently needed.

Zhang Lei is a native miner from Sichuan.

In May this year, Zhang Lei began to lay out the layout of high-computing power machines. He first ordered a batch of S17 series mining machines from Bitmain, but due to the official sales policy and insufficient production capacity of Antminer at the time, he then turned to Shenma Miner.

"Ant's previous sales policy was speechless. You pay first and then the price is set. There is no clear sales unit price. Will you buy it? And there is no production capacity. You just order a batch of machines and ship a few every day." Zhang Lei couldn't help but complain.

"Is it because you are short of money?" I asked.

"Several manufacturers should be short of money, but Ant's sales policy is really speechless, which fully proves that Lao Zhan (Zhan Ketuan) does not know how to do business."

"Shenma's price is clear, and our average purchase price is around 207 yuan/T." Shenma's high-computing power machines arrived at Zhang Lei's mine as early as early August, but the machines in September and October were delayed.

In September, although the high-computing power machines were not fully put on the shelves due to delays, Zhang Lei still cleared out all the S9 series machines in the mine in advance. At that time, the average price of S9 was around 1,700-1,900 yuan. At the end of 2018, such machines were sold by miners for 600-1,000 yuan.

With the halving of Bitcoin, the rising difficulty of mining and the uncertainty of the market, mining benefits and risks coexist, and miners need to think more carefully.

Different from Zhao Dongyang's idea, Zhang Lei's logic is that high-computing-power mining machines do not have to worry about the problem of a long payback period, because the Bitcoin production capacity will be halved in 2020, coupled with the increase in difficulty every month, the coins mined in one day now are equivalent to the coins mined in three days after the halving.

Zhang Lei believes that the static shutdown price of a high-computing-power machine can be maintained at around 23,000 yuan. At this time, the computing power difficulty will drop by another 50%. It is estimated that the shutdown price of the machine can be maintained at 12,000 yuan.

At present, Zhang Lei has completed the layout of high-computing power machines in a four-year cycle. Zhang Lei told me: "If the price of coins soars, then sell the coins and the machines."

“Why sell machines when the price of coins is rising?”

"This is the inspiration brought by S9. Would you sell an S9 that costs 30,000 yuan now? But at that time, 90% of people chose to mine by themselves, including me." Speaking of this, Zhang Lei still regrets that he did not sell the S9 that he bought at a low price. That was at the end of 2017, when Bitcoin was 19,000 US dollars.

For Zhang Lei, he is not afraid of bull or bear markets.

"Mining machine manufacturers divide the market cake"

The production of Bitcoin will be halved in May 2020, and the difficulty of Bitcoin mining will rise by another order of magnitude, leading to price speculation and mining machine upgrades coming ahead of schedule.

In August 2018, Canaan Creative took the lead in developing 7nm chips, but the chip design caused problems with tape-out. It was not until early October this year that it launched the new generation A11 series of high-computing power mining machines with a rated computing power of 61 TH/S.

But since May this year, Bitmain and MicroBT have begun to divide the market pie.

On September 8th, at the Wanda Reign Hotel in Chengdu, the organizer of the conference, Innosilicon, released the new generation T3+ 56T high-computing power mining machine. As the fourth largest mining machine in the industry, Innosilicon was launched one month ahead of Canaan Creative.

The venue was almost full, with miners and mine owners from Inner Mongolia, Sichuan, Xinjiang and other places sitting in the audience "listening to the lecture". The speakers on the stage analyzed the mining benefits but avoided market risks.

People outside the venue recommended people. These people came from mining machine manufacturers, mining pools, mining companies, cloud computing platforms, mining machine power supply manufacturers, currency loan companies and quantitative teams. They flew from Shenzhen Huaqiangbei or an office building in Beijing or Shanghai to Chengdu to look for target customers.

At the same time, Bitmain dispatched all its mining machine sales staff.

Previously, Bitmain was facing the embarrassment that miners could not get S17 spot due to chip production capacity issues, while MicroBT had already delivered 100,000 M20S/M21S.

A person close to Bitmain said that Bitmain has its own market analysis team, which will formulate mining chip production capacity and mining machine prices based on market expectations. These top leaders often argue until they are red in the face.

In February this year, Bitmain began to customize chips, but it did not expect the market conditions to pick up suddenly.

According to statistics, from the beginning of 2017 to the first quarter of 2018, Bitmain sold more than 3 million mining machines, including more than 2 million S9 mining machines, with sales of about 30 billion yuan and a gross profit of about 60%; Bitmain's production capacity in some single months reached more than 10% of TSMC's production capacity, making it TSMC's second largest customer in mainland China after HiSilicon.

At this point, Bitmain officially dominated, and in the past three years, Antminers have occupied 70% of the market share.

An investor of MicroBT believes that Yang Zuoxing is the hero of the Ant S9 mining machine: "Zhan Ketuan has never made the best chip. In the market, the best S9 mining machine chip is made by Yang Zuoxing."

In August this year, when we visited 13 Bitcoin mines in Sichuan, high-computing-power mining machines had not yet been put on the shelves in batches, and most of them were still Ant S9 and T9+.

Bitcoin mine at the foot of the mountain

But the market cake has been redistributed by Yang Zuoxing and Zhan Ketuan.

According to previous media reports, the total sales of Shenma Mining Machines this year reached 6.7 billion yuan. According to the investors of BitMicro, Shenma Mining Machines' market share is about three times that of Ant, with 6-7 billion orders. Ant will only have production capacity in December, and all the production capacity before December is fully booked.

Zhang Lei believes that Shenma has a dominant position in shipments this year, with a market share that may be close to 50%, while the remaining companies account for a total of a little more than 50%.

If these data are accurate, a comprehensive analysis shows that in the "cake" of low-power and high-computing-power mining machines, Whatsminer's share is close to 50%, Antminer's share is about 16.7%, and the remaining 33.3% is shared by Innosilicon, Avalon, and Ebit.

However, during the period when Zhan Ketuan led Bitmain, he fought back against MicroBT, resulting in the arrest of Yang Zuoxing on suspicion of infringing on Bitmain's trade secrets.

Later, Wu Gang, the founder of Bixin, who took over MicroBT, revealed that Shenma Miner will release a new machine M30S. According to Fengchao Finance, people in the mining circle said that the performance index of the mining machine is 38 watts per T computing power, which exceeds the best-performing mining machine Antminer S17 series on the market.

Three days later, Bitmain also announced that the Ant S19 chip had been sent to TSMC for wafer production, and the performance index of the Antminer S19Pro could reach up to 30 watts/T.

A person familiar with Canaan Technology's IPO said that he learned from TSMC that Bitmain's chip production in October was 10,000 pieces. Another long-established competitor, Canaan Creative, will also reach a chip production capacity of 10,000 pieces in January next year. In addition, December is the beginning of the official mass entry of Bitmain's Antminer into the mining field.

In response to the halving of Bitcoin, the competition among several major mining machine manufacturers to seize the market share of millions of high-computing power mining machines in the next 4-5 years has just begun.

Putting aside many factors such as the price cost of mining machines and the price of coins, if the approximately 3.9 million small-computing-power mining machines on the market in the past were all replaced with large-computing-power mining machines with a capacity of more than 50T, the difficulty of mining in the future can be imagined.

"Second-hand mining machines are on the way to being eliminated"

In the past six months, second-hand mining machines have been restarted and then eliminated again.

At the beginning of 2019, the price of Bitcoin passed its historical lowest point, and the computing power of the entire network and the difficulty of mining began to rise sharply in two stages. The first was the flood season in June, and the second was the batch launch of high-computing power machines in September.

With the arrival of the flood season, the price of the currency surged above $8,000. By mid-August, the computing power of the entire Bitcoin network increased from 53 EH/s to 71 EH/s, and the computing difficulty increased from 7.41T to 9.99T. This is the stage where second-hand mining machines are restarted.

Since September, second-hand mining machines have been on the road to being eliminated.

High-computing-power mining machines were put on the shelves in batches, and second-hand mining machines were taken off the shelves in batches, causing the two indicators of computing power and mining difficulty to rise sharply again. Even after the flood season ended and the coin price fell to a low of US$6,514, the computing power of the entire network still remained between 85-100 EH/s.

Bitcoin network computing power: reached a low point in December 2018 and surged since late May this year

Wang Chunlei travels around various mines in Sichuan all year round, making money by reselling second-hand mining machines. From August to December, he handled nearly 30,000 second-hand mining machines, with an average profit margin of 250 yuan per machine.

In mid-September, a miner asked him to help sell 300 13.5T S9i units. Wang Chunlei offered a price of 980 yuan per unit, and then sold them for 1,300 yuan per unit. However, the customer thought the price was too low, and the deal was not completed.

"If this batch of machines could be sold for 1,900 yuan a month ago, but if they are not sold now, they will only be worth a few hundred yuan in October," Wang Chunlei advised the other party. In November, Wang Chunlei sold 7,000 14.5T S9j machines, the first batch for 800 yuan each, and the second batch of the same model for only 690 yuan each.

Compared with mountainous Sichuan, mines in Xinjiang are generally located in flat areas, and the scale of a single thermal power mine is much larger than that of a hydropower mine in Sichuan.

This year, a Beijing company built a 200,000-ton Bitcoin thermal power mine in Xinjiang. In early September, I met a business manager of the mine in Chengdu, who was in Sichuan discussing machine hosting with several major customers.

When he was contacted again, the mine had already managed 100,000 load positions during the flood season, and there were still 100,000 load positions that had not been filled.

Currently, 70% of these managed machines are high-computing machines, with Shenma accounting for 40% and Xindong accounting for 60%. Starting from December, the investment standard is: the annual managed electricity price is 0.35 yuan, and only the annual electricity and high-computing machines are accepted.

MicroBT founder Yang Zuoxing said at another mining summit in September: "Bitcoin will probably reach around $110,000 in 2021. As predicted by the cryptocurrency community, this is the highest point, and it may fall. In the short term, based on the information I have collected and our current production capacity, this year (Bitcoin's total network computing power) is estimated to be around 120 EH/s."

Innosilicon is more aggressive, predicting that the total network computing power will reach about 150 EH/s by the end of this year. But Zhang Lei disagrees with these predictions: "During the dry season, the power resources are limited. By the end of the year, the total network computing power is expected to increase by another 8%."

Zhang Jun is a medium-sized miner in Yunnan. I asked him if this data was exaggerated. He thought: During the flood season next year, the minimum hashrate of the Bitcoin network will reach 200E EH/S. Now 10,000 Ant T17s arrive in Shenzhen Huaqiangbei every month, and the minimum monthly increase is 5E EH/S.

Zhang Jun revealed that a few days ago, at a mining farm in Inner Mongolia, Bitmain just sold 10,000 14.5T S9j mining machines, each costing 700 yuan, and replaced them all with high-computing power machines.

"Then why are some mines not fully staffed yet?" I asked.

“The reason why we didn’t recruit enough people is that small miners didn’t buy machines with high computing power, so the S9 was shut down passively. Large miners not only have machines with high computing power, but most of them have their own mining farms.”

In fact, the mining income of miners is determined by four factors: mining difficulty, power consumption ratio of mining machines, currency price and electricity price.

Data source: Bitcoin Hashrate

Data source: F2Pool

Data source: BTC.COM

When the coin price, electricity price and power consumption ratio remain constant, the greater the mining difficulty, the lower the daily coin-based income; when the coin price, electricity price and mining difficulty remain constant, the lower the power consumption ratio, the lower the mining electricity cost, but the final decisive factor in mining income is still the Bitcoin price.

Based on the data from Bitcoin Hashrate, F2Pool and BTC.COM, in October 2018, the computing power of the entire Bitcoin network began to decline from a maximum of 53EH/s to 36.55EH/s, and the mining difficulty gradually decreased from a peak of 7.5T to nearly 5T.

This period is the starting point of the bear market and the end of the flood season. Mining machines are being shut down and migrated, and second-hand mining machines are sold by weight. Those miners with high hosting electricity prices and insufficient cash flow were once washed out of the mining circle.

"Behind the "gold rush" paradise, benefits and risks coexist"

Since the BBQ era, Bitcoin miners from Northeast China, Hebei, Henan, Guizhou and other places, like the gold diggers in the westward movement of the United States in the 18th century, have gone deep into the mountains and plains, continuously exploring electricity resources. Over the years, from north to south and from east to west, they finally opened up four major "mining areas" in Sichuan, Yunnan, Inner Mongolia and Xinjiang.

But when any industry develops to the industrialization stage, its structure becomes a game among capitals.

In essence, mining is an asset-heavy industry. On the one hand, mining requires the investment of tens to hundreds of millions of yuan in mining machines, and on the other hand, it is necessary to ensure sufficient cash flow to pay for electricity bills. However, due to the high volatility of Bitcoin prices, the risk of mining is much higher than that of general traditional industries.

At present, miners can be roughly divided into the following categories: the first is the early miners who started out with graphics card mining. These miners have accumulated deep capital. The second category is powerful companies in the mining circle, such as Bitmain, MicroBT, Xindong and other major mining machine manufacturers and Litecoin Mining Pool, Bixin and strong mining companies; the third category is local miners with electricity resources. These miners generally have their own mines; the fourth category comes from traditional industries and Internet giants, who regard mining as the tertiary industry, but they generally only mine and do not build mines; the fifth category is medium and small miners with dozens to hundreds of machines.

Taking Bitmain as an example, there are 12 registered cloud computing branches in China, including 2 in Sichuan, 3 in Yunnan, 4 in Inner Mongolia, and 3 in Xinjiang. A native mine owner in Ganzi Prefecture, Sichuan told me that there is a mine here where Bitmain has placed mining machines with a load of 50,000.

In mid-October, my colleagues and I drove for eight hours to a county in Liangshan Prefecture, Sichuan, and only then did we see the real appearance of the local large mines. One of the mines was hidden on the hillside at a fork in the road. If we had not contacted them in advance, we would probably not have heard the roar of the 80,000-ton load machine.

Mine on the hillside

This mine was built by miners from Anhui Province who came from traditional industries. The mine manager told me: "There are about 14 mines in the area. Due to the abundant hydropower resources, the smallest mine has a load of 40,000 tons or more."

The first four types of miners either produce their own mining machines, or have their own mining farms or mining pools, or have all three advantages. The key is that their cash flow is sufficient. In the face of market bull and bear cycles, their ability to resist risks is unmatched by small and medium-sized miners.

Due to Bitcoin's technology and investment attributes, many supporters in both the currency and mining circles believe that Bitcoin will rise to $20,000 or $100,000. Even more exaggerated is that Bitcoin will eventually rise to $500,000 or even $1 million.

Wu Jihan, who is known for his calmness and restraint, believes that each bear and bull market of Bitcoin is prolonged. It is possible that the bull market will not come during this halving. As for the impact of future halvings, I personally think there are still many uncertainties. If I were an investor in mining equipment, I would be more conservative, but I would continue to invest.

Compared with the bear market reshuffle at the end of 2017, the halving of Bitcoin production in 2020 has led to a decrease in mining revenue. The mining revenue of small computing power machines cannot compete with that of large computing power machines, and the investment cost of large computing power mining machines has increased. The uncertainty of Bitcoin prices and many other factors have undoubtedly aggravated the current mining risks.

As early as July this year, an analyst from an industry investment institution expressed his views on the market: Previously, the average cost of Bitcoin mining was US$3,000. Based on the consensus price of US$5,600, Bitcoin will fall to US$6,000 in the second half of the year, and then by May next year, Bitcoin could rise to as high as US$18,000.

Mining depends on the price of electricity. If the price of electricity is cheap enough, we can outperform most miners. Zhang Jun has repeatedly stated that if the price of the currency rises, we will make money. If the price of the currency falls, the computing power will also fall, and we will mine more Bitcoin.

Based on the Bitcoin price of $7,499 and the mining machine hosting electricity price of 0.36 yuan, the Shemma M20S 68T mining machine can mine about 0.001308 coins per day, with a daily net income of 42.44 yuan and a payback period of 318 days. The Ant S9i 13.5T mining machine has a daily income of only 1.46 yuan.

Bitcoin halving pushes the mining machines to upgrade, and also pushes miners to choose low-power, high-computing mining machines. If the price of the currency drops to $6,500, and Zhang Lei's mining machine is not upgraded, he may have to face the risk of shutdown like Zhao Dongyang. At this time, Zhang Lei was drinking tea in a teahouse in Chengdu.

(Note: In this article, Zhao Dongyang, Wang Chunhua, Zhang Lei, Zhang Jun, and Wang Chunlei are all pseudonyms)