The Bitcoin mine that was “sealed”

Throughout 2018, Bitcoin plummeted by 77%, and its market value evaporated by 1.6 trillion yuan. As of April 25, the price of Bitcoin hovered around $5,410. After a long period of low prices, although there are signs of recovery, the income from mining still cannot cover the electricity bill.

For more than a year, there has been no sound from Li Xin's mine.

This mine is located next to a hydropower station in Ganzi Prefecture, Sichuan Province. It has rows of iron frames several meters high, on which are placed more than 10,000 shoebox-sized machines. When the machines were turned on, green light would jump from time to time, just like the eyes of a wolf.

Li Xin once "mined" hundreds of millions of wealth here. But throughout 2018, Bitcoin plummeted 77%, and its market value evaporated 1.6 trillion yuan. As of April 25, the price of Bitcoin hovered at $5,410. After a long period of slump in the price of the currency, although there are signs of recovery, the income from mining still cannot cover the electricity bill. After weighing the pros and cons, he decided to close the mine.

In November 2018, Mao Shixing, founder of F2Pool, one of the world’s three largest mining pools, said that about 600,000 to 800,000 miners had gone bankrupt due to falling prices and hash rates.

What’s even more serious is that the government’s supervision of mining is becoming increasingly strict. On April 8, the National Development and Reform Commission issued the “Guidelines for Industrial Structure Adjustment (2019, Draft for Comments)”, which listed “virtual currency ‘mining’ activities (the production process of virtual currencies such as Bitcoin)” as an “eliminable” industry.

This also sounded a wake-up call for virtual currency miners.

He Ping, director of the Blockchain Finance Research Center of Tsinghua University School of Economics and Management, said that the National Development and Reform Commission has clearly listed virtual currency mining as an eliminated industry because it is a high-energy-consuming industry and mining cannot bring any value to society. However, mining is only listed as an eliminated industry, which does not mean that it must be closed. It is mainly affected by the market. When the price is high enough, the mining cost can be covered, and it will be profitable.

However, Li Xin said that this policy was issued at the national level and it is more instructive. In the future, local governments at all levels may issue a series of specific policies to more strictly manage mining, so the issuance of this policy may be a small matter or a big matter.

Since the mine was shut down, Li Xin felt that his money was flowing away like water, which was also a sign of danger. "Look at me, I am just an ordinary player. Although I have 100 million in my pocket, I sometimes wake up from my dreams, worried that this money will leave me forever one day."

Closing the mine

In Li Xin's opinion, if the mine is sold, it means that the miner will completely leave the cryptocurrency circle.

But he is an "optimistic" person in the cryptocurrency circle. In 2018, Li Xin temporarily closed the mine, leaving some people to look after the mining machines, while he traveled around and lived a carefree life.

He later heard from people in the industry that in Xinjiang, Northeast China, Inner Mongolia and other places, many small and medium-sized mines were for sale, with a total of about 5,000 mining machines.

A merchant on a second-hand trading platform said that he mainly recycles broken mining machines sold by kilograms from all over the country, and then sells them. He said that different models have different prices. If you only mine coins and don’t have high requirements for other things, the cheapest price of a mining machine is only about 100 yuan.

He also said that several mining farms with which he had established a good cooperative relationship were running out of money, and some were on the verge of death. Not only were the mining machines for sale, but the mining farms were also looking for buyers. "Everyone knows that the market is not good now. Although the price of virtual currency has recovered a bit, the machine is making money as soon as it is turned on, and the income from mining coins still cannot cover the electricity bill."

Li Xin admitted that the low coin prices, small mining pools and insufficient computing power were the main reasons for the closure of the mines.

In 2018, the price of Bitcoin fell, dropping 12% in one day, 42% in one month, and 77% in one year, with a market value of 1.6 trillion yuan evaporating.

Not only virtual currency speculators, but also cryptocurrency trading companies are facing the risk of bankruptcy.

Yihang Internet, a company listed on the New Third Board, made a lot of money from cryptocurrency speculation in 2017, but in 2018, Yihang Internet's investment in the cryptocurrency market yielded almost zero returns. This directly led to a 257% drop in its net profit, from a profit of 1.51 million yuan in the same period of 2017 to a loss of 2.39 million yuan.

The sharp drop in virtual currency also caught Li Xin off guard.

"I pay close attention to the prices and trends in the cryptocurrency market. Once there is any sign of trouble, we will make corresponding adjustments, but this time it was really beyond our expectations," said Li Xin.

In Zhang Xin's view, as the two major dealers of virtual currency, the decline in Bitcoin price is related to the computing power battle between Craig Wright and Jihan Wu.

“Some people say that this is just a fight between two people, how could there be such a significant price reduction? But I think it is very possible, as the computing power of the two of them accounts for half of the world’s total.”

But Li Xin still persists. He always believes that the price of virtual currency will rebound and continue to rise, eventually bringing a new round of prosperity. He said that the cryptocurrency market also has cycles, with ups and downs, and it will rise again after a fall. "I personally think that 2019 is a year of rebound."

Crazy coin price

Ten years ago, the world's first batch of bitcoins were mined, and this virtual currency designed by a person code-named "Satoshi Nakamoto" was officially born.

According to Satoshi Nakamoto's design, the total amount of Bitcoin is fixed within 21 million. The difficulty of calculation will continue to increase, and the reward will continue to decrease.

At that time, Bitcoin was unknown and 1 US dollar could be exchanged for 1,309 Bitcoins.

At the beginning of 2019, when Bitcoin celebrated its 10th birthday, its "value" had skyrocketed 2 million times.

The time when the price of Bitcoin broke through its historical high was in mid-December 2017, when the highest price of Bitcoin was close to $20,000 and its total market value exceeded $300 billion.

It took only seven years for Bitcoin's market value to grow from 0 to $100 billion. This is a legend compared to some companies. Amazon worked hard for nearly 20 years to achieve this result, while Apple took 31 years.

Bitcoin has become the dream of many investors to get rich overnight.

"Mining coins is like mining gold." Li Xin said that the process of obtaining Bitcoin is called "mining" and the participants in mining are "miners."

Miners can generally be divided into three categories: speculators in the virtual currency craze, accidental people who have relevant resources, and believers with strong faith.

Today, the price of Bitcoin has fallen by more than 70% from its peak on December 17, 2017, but in China, a country that accounts for 70% of the world's mining capacity, some miners are still persevering.

Li Xin is one of the supporters. He said that Bitcoin is like a money printing machine, and the return on investment is higher than in other fields. The mining machine is there, visible and tangible, and the money will be transferred to your account the next day. "If you entered the market around 2015, you may have hundreds of millions of assets now."

According to research by JPMorgan Chase, the global cost of producing one bitcoin was about $4,060 in the fourth quarter of 2018. Measured at this level, bitcoin fluctuated around cost price in the first quarter of 2019, and miners did not realize profits until an unexpected 20% surge in early April.

Over the past ten years, Bitcoin has evolved from an initial niche product to a fairly complete industrial chain from production and trading to application.

In Li Xin's view, cryptocurrency speculators belong to the lowest-end players and are often called "leeks". They bear the biggest risks in the cryptocurrency circle, but it is difficult for them to make a profit.

Li Xin said that if a person who trades in cryptocurrencies says that he has made money, then he may be lying to you. "I know people who trade in cryptocurrencies, but no one makes money anyway. They are all speculators and don't think about the deeper issues at all."

Higher than the cryptocurrency traders are mine managers. Li Xin said that if you become a mine manager, you can avoid certain speculative risks and achieve stable returns.

Li Xin believes that the establishment of a mine is not speculation but a business operation of the company. The profit logic of the mine is to obtain profits through investment costs.

"If I could go back to 2013, I would choose to become a mining machine manufacturer," Li Xin said. At that time, mining machine technology was simple and inefficient, and you could get involved without too much cost. But now there is no such opportunity. Whether it is Canaan Creative or Bitmain, they invest hundreds of millions of dollars in chips every year and basically have industry barriers." Li Xin said.

In Li Xin's view, controlling the manufacturing technology of mining machines means controlling the computing power, but no matter how high the computing power is, one is just a player and cannot set rules and standards.

“Wu Jihan and Craig Wright are world-renowned computing tycoons. They are like gambling, but even the best gamblers can lose.”

“But if you open a casino, the probability of losing money is smaller.” Li Xin said that the highest-end players in the cryptocurrency circle are trading platforms. The platforms are not necessarily the most profitable, but they have the lowest risks and can make a lot of money.

Li Xin said that if the exchange is not forced to shut down by the government, it may be the most stable and profitable link in the industrial chain, but different links have strict thresholds, and this threshold is capital.

Expensive electricity

Li Xin, who had worked in Beijing for many years, earned his first pot of gold in a short period of time.

In 2000, his first job was in the IT industry, earning more than 20,000 yuan a month, when the price of a house in Beijing's second ring road was only a few thousand yuan. Before starting his own business, Li Xin had accumulated wealth over the years, took out 600,000 yuan in savings, plus 400,000 yuan from a friend, and after some research on Bitcoin, decided to open a mine.

For a "mine", electricity is a permanent investment and the foundation of "mining". Electricity costs account for 90% of the cost of a mine.

What puzzled Li Xin was where to build the mine. He said that first-tier cities would not work because most of the electricity in these cities was supplied from other provinces, which was not only unstable but also expensive. He believed that the mine must be built in a remote area and close to a power plant.

At first, Li Xin had several locations that he was interested in. The first was Heilongjiang, which is located in the mountains and forests, with an open space and many small private power stations nearby. Then he considered Inner Mongolia, where the electricity price was relatively low, and the third was Sichuan.

Li Xin finally decided to locate the mine in Sichuan. He said that he and his partners are from Sichuan, and it is more convenient to open a mine in their hometown. In addition, the mine is located in a remote rural area with abundant water resources. Most power plants are hydropower plants, which have more stable electricity and low cost.

"When I was negotiating with several small hydropower plants, I also met several colleagues who were also planning to build mines. After some discussions, we found a hydropower plant in the suburbs of Ganzi Prefecture, where there was a lot of 'waste electricity', the price was cheap, and the cost of hiring villagers was also low," said Li Xin.

In Li Xin's view, hydropower costs less than thermal power and is more stable than wind power. In addition, hydropower plants generate a large amount of "waste electricity", which can be centrally utilized by mines to improve utilization efficiency and reduce waste.

He Ping said that mining farms are the most basic facilities in the virtual currency industry, and the distribution of mining farms depends on the energy cost of mining, that is, the cost of electricity. In the future, mining farms will be concentrated in places with relatively low costs.

Research by PowerCompare, an energy price comparison service website, shows that the amount of electricity used for Bitcoin mining in 2017 exceeded 29.05 terawatt-hours (1 terawatt-hour is 100 million kilowatt-hours), which actually exceeded the average annual electricity consumption of 159 countries in the world.

Morgan Stanley reported in early 2018 that about one-third of the cost of mining Bitcoin comes from electricity, and the electricity demand for mining Bitcoin and other digital currencies will reach 120-140 trillion watt-hours in 2018. According to data from the International Energy Agency in 2015, Argentina's annual electricity consumption is only 125 trillion watt-hours.

The media has reported that a small mine with 3,000 mining machines can bring more than 1 million yuan in revenue to the hydropower station every month.

But being close to a reservoir naturally brings higher risks. Li Xin's friend Zhang Yi also opened a mine in Sichuan. To reduce costs, he built the mine on the riverbed. At first, he didn't care, but one day, it rained heavily for several days and the mine was washed away by water.

At that time, Li Xin went to help retrieve the mining machines. Once water enters these electronic products, there is a possibility of short circuit. They could only retrieve them and put them on the ground to dry, but some villagers threw the mining machines away at random. The loss this time exceeded one million.

In Li Xin's view, the loss of his friend's mining accident is just a small matter, and it is easy to make back the money. What he is more worried about is that the price of Bitcoin continues to fall, and the income from mining cannot cover the cost.

Today, Li Xin has shut down his mine and is traveling abroad for a long time. "I am waiting for another boom to come, but whether it is the cryptocurrency or blockchain industry, it is difficult to have investment opportunities as good as those in 2015."

Taxation “ambiguity”

When creating the mine, Li Xin's mine operated in the same way as a trading enterprise.

He said that the mine adopting this company model can help the mine reduce risks and facilitate negotiations with power plants. "It is easier to get lower electricity prices and land when you negotiate in the name of the company."

Li Xin also said that he heard that small and medium-sized mining farms are not operated as companies, but directly buy mining machines to mine coins and put the mined coins into their own accounts. "How should I put it? The tax on virtual currencies is very vague."

"We put the bitcoins into our wallets, and the tax bureau has no idea how many coins we have collected or how much money we have made." Li Xin said that if the tax bureau comes to check, many of his colleagues have transferred their funds to the Internet, even to the dark web, and they cannot be traced at all.

Before the rise of virtual currencies, the United States was the only country that set the tone for imposing taxes on virtual currencies.

In March 2014, the United States recognized that virtual currency is property. Payments made with virtual currency need to be subject to the same 15% capital gains tax as other property payments, but few actually collect the tax. In the first half of 2018, the IRS once again released a report stating that virtual currency transactions are subject to tax like other forms of property, and taxpayers must include virtual currency income in their annual tax returns.

Behind the United States, Japan is following closely. In 2017, the National Tax Agency of Japan announced that capital gains from virtual currency exchanges would be classified as "miscellaneous income". At the end of July 2018, the South Korean government, which claims to be "cryptocurrency trading for all", announced the "2018 Tax Law Reform Bill", stating that it would impose taxes on technology investment companies in the quaternary industry. Among them, next-generation technologies and startups such as blockchain and quantum computers, as well as financial technology companies can receive up to 40% tax exemptions. However, the exemption does not include the sale and purchase of encrypted assets and the intermediary industry (virtual currency exchanges). Taxation of virtual currency exchanges will be implemented in 2019.

In addition, the United Kingdom, Russia, South Africa, Venezuela, Canada, Brazil and many other countries, whether they regard virtual currencies as intangible assets, investment products, operating funds, or have not yet defined them, always find a way to bring them up to the tax level, with their own different tax ranges and policies.

He Ping believes that in the future, the government's legislation and taxation on mining activities will depend on its views on virtual currencies. If the government does not believe that virtual currencies are a valuable innovation and does not allow virtual currencies to circulate and trade in the country, then mining machines will naturally not bring social value. Therefore, legislation depends on the government's views on virtual currencies. If this issue is not resolved, the positioning of the mining farm will not be clear, and there will be no discussion on how to regulate or collect taxes.

Eliminate industries

In fact, while the Bitcoin industry is "growing wildly", my country's policies and regulations on Bitcoin supervision mainly include the "Notice on Preventing Bitcoin Risks" and the "Notice on Further Strengthening Bitcoin Risk Prevention Work" issued by the People's Bank of China and five other ministries in December 2013 and March 2014.

In November 2017, Pan Gongsheng, deputy governor of the People's Bank of China and head of the leading group for the special rectification of Internet financial risks, convened a symposium on the rectification work for directors of financial offices in key regions to discuss issues such as virtual currency "mining", over-the-counter trading and "going overseas", including the orderly exit of the "mining" industry of virtual currencies such as Bitcoin.

On January 2, 2018, the Office of the Leading Group for Special Risk Rectification of Internet Finance issued a document to all regions, requiring them to actively guide enterprises under their jurisdiction to orderly withdraw from Bitcoin mining business and report work progress on a regular basis.

On April 23, 2018, the central bank announced that all ICO platforms and Bitcoin transactions had safely withdrawn from the Chinese market.

On April 8, 2019, the National Development and Reform Commission issued the "Guidelines for Industrial Structure Adjustment (2019 Version, Draft for Comments)" (hereinafter referred to as the "Draft for Comments"), which involves three categories of industrial activities: encouraged, restricted, and eliminated. "Mining" activities (the production process of virtual currencies such as Bitcoin) are in the eliminated category.

The Draft for Comments shows that the items without a deadline or plan for elimination are industrial activities that have been explicitly eliminated or immediately eliminated by national industrial policies, including virtual currency "mining". The main reason is that mining consumes a lot of electricity and is a high-energy-consuming and low-efficiency industry.

On the same day, the price of Bitcoin fell sharply, with the maximum drop reaching 4.23%.