The Final Blow for Chinese Bitcoin Miners

"Mining is what makes me believe in Bitcoin. You see the costs: the machines, the cooling equipment, the labor... you realize that Bitcoin is not an intangible thing. It must have some inherent value - otherwise what is all this for?" A miner who is still expanding his mining activities in western China told the British media "Wired".

Mining is the nickname for exploring for cryptocurrencies, and explorers are also called miners. This year marks the tenth anniversary of the concept of Bitcoin, and the price of Bitcoin has fallen by more than 70% from its peak on December 17, 2017. But what is interesting is that in China, a country that has 70% of the world's mining capacity, some miners are still persevering.

Miners can generally be divided into three categories: speculators in the cryptocurrency craze, casual investors who have access to relevant resources, and believers with strong faith. Those miners who are still persevering today believe that the long-term value of Bitcoin will always increase, and as long as Bitcoin does not fall below the cost of mining, the income from mining can be realized.

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, which was fluctuating sideways in the first quarter of 2019, fluctuated around the cost price until an unexpected 20% surge in early April, when miners realized profits.

However, thanks to cheap labor in the west, the cost of mining in China is lower, at about $2,400, so even though the price of Bitcoin has fallen 83% from its peak at its lowest point, mining is still profitable.

Under current market conditions, mining is also more profitable than selling mining machines. Blockchain data shows that the hash rate, which measures the speed of mining, has steadily recovered from its lows this year.

In March this year, Coindesk cited miners in southwest China as saying that Bitmain has deployed about 200,000 mining equipment to take advantage of the low electricity prices of hydropower in summer. Southwestern provinces including Sichuan and Yunnan are expected to usher in the rainy season in May, and Bitmain has reportedly begun negotiating deals with local mines.

Is Bitcoin legal in China? As early as September 2017, the People's Bank of China had already banned ICOs and stopped on-site Bitcoin trading. However, holding Bitcoin assets is legal, and virtual property is protected by law; occasional over-the-counter transactions are not banned and are considered permissible; relevant regulations do not restrict retailers from accepting token payments, so some merchants have publicly stated that they accept Bitcoin payments.

Therefore, in China, Bitcoin is more like a carrier for storing value rather than a "currency" that is easy to circulate. The regulators have not completely banned Bitcoin and have a relatively open attitude towards blockchain technology, but they do not allow the establishment of related exchanges or illegal financing. Xinhua News Agency reported in July last year that the newspaper's reporter learned from the People's Bank of China that the global share of Bitcoin traded in RMB has dropped from more than 90% to less than 1%, basically achieving a risk-free exit.

Without legal on-site trading opportunities and ICOs, the only ways to acquire cryptocurrency assets in China are high-risk over-the-counter trading and mining. However, the "Guidelines for Industrial Structure Adjustment (2019, Draft for Comments)" issued by the National Development and Reform Commission on April 9 sounded a wake-up call for cryptocurrency miners.

In the draft for comments, industries are divided into three categories: encouragement, restriction, and elimination. The elimination category mainly refers to "outdated processes, technologies, equipment and products that do not comply with relevant laws and regulations, do not have safe production conditions, seriously waste resources, pollute the environment, and need to be eliminated."

The NDRC has listed "virtual currency 'mining' activities (the production process of virtual currencies such as Bitcoin)" as an "elimination" industry. The "mining" activities do not indicate the elimination period or plan. The NDRC noted that the relevant items are "national industrial policies have clearly ordered elimination or immediate elimination." The draft for soliciting opinions will end on May 7.

It is a fact that mining consumes electricity. As more and more people are mining, the difficulty of mining has increased to ensure that cryptocurrencies flow into the market at a relatively stable rate. Correspondingly, the computing power required for mining has also increased, and therefore more power is consumed. In the early days, ordinary laptops could mine cryptocurrencies, but a few years after the advent of Bitcoin, the mining business began to shift to large warehouses with "machines, cooling equipment, and labor." In 2017, the power consumed by mining worldwide was equivalent to that of the entire country of Denmark.

Last November, Mao Shixing, founder of the world's third largest F2Pool, told Coinbase that about 600,000 to 800,000 miners went out of business due to falling prices and hash rates. Now, mining may face a final regulatory crackdown. If one day, mining, a waste of resources, is also banned, miners may move overseas, but can their belief in cryptocurrency and mining profits still outweigh the increasingly high costs?