Mining pitfall avoidance guide: Finding electricity

“The annualized rate is conservatively 30%.”

Wang Weinan, a hardcore miner who has been in the industry since 2011, roughly estimated the average income level of Bitcoin mining. "Those old miners who keep saying that mining is going to fail, if you ask them to quit without any money, no one will really quit, but it's just not as good as last year and the year before."

Bitcoin mining has experienced an era of 400% annualized returns. Even in a bear market, the rate of return is far higher than that of traditional industries that are declining day by day. On the contrary, many traditional giants are buying at low prices, and large orders are waiting to receive goods. According to this logic, now is also a good time to buy at the bottom of the mining industry.

On the eve of the Spring Festival, news about mining machines being sold as scrap metal became popular and reached many traditional bosses. Odaily Planet Daily once saw an old lady with white hair standing in the back of a small, cramped meeting room, listening attentively. The reason she was so serious was that she really didn't understand anything.

The aunt told Odaily that she used to do traditional investment such as fruit and vegetable retail. She saw on the news that mining machines were very cheap recently and wanted to enter the market at a low price. Although she knew nothing about cryptocurrency, she and several friends rushed from Chongqing to Beijing overnight, staying for only one or two days, meeting people and learning non-stop.

Although we don’t know what happened to this aunt later, we can be sure that her road to the circle was not smooth. Because there are too many pitfalls in digital currency mining, every senior miner has stepped on the pits.

1. Why mining is always cut: non-standard industry, information asymmetry

“The mining industry, to put it simply, is a channel for attracting investment for mining machine dealers and mine hosting companies. However, there are some fake mining companies, or a small number of bad guys in the mining industry who, after they no longer want to do the business, often cheat new and old investors in the industry. Old investors have also fallen into many traps, such as stealing our second-hand mining machines or cheating us out of our money to buy mining machines. Not many people in this industry sign formal contracts in the strict sense, especially for small batches. Many people trade directly without ever meeting each other.” Wang Weinan said that even old investors can be cheated of their money, let alone newcomers.

“Newcomers have no resource and information advantages. Unless they persist in observing for more than a few months and have strong financial resources, they can still enter the market. Otherwise, they will be cut, either by the mining farm or the mining machine dealer. If they connect to an unreliable mining pool, they may be cut again.” Wang Weinan warned newcomers to find a reliable old team, whether it is a mining company, a mining farm, or a mining pool of a mining machine dealer.

Captain Yu, COO of the Mining Association, believes that the reason why there are so many pits in the mining industry is mainly because the industry is very "non-standard", there is no unified standard, and the information is very opaque. Although there are not many practitioners, there is no unified platform for information exchange between them, so it is easy to be deceived when you just get started. He and Aniu, the founder of the Mining Association, also hope that miners can unite, communicate and warn each other, so they established the "Mining Association" community. At the same time, they also hope to reduce the mining costs of miners.

Wang Xiaoyi used to work in the Internet industry. He entered the digital currency mining industry in 2017. The number of mining machines he owned increased from 10 to several thousand. He later sold a lot of them. Now he is still the owner of a mine, mainly using the container mine model for mining.

Odaily Planet Daily talked with Wang Xiaoyi and Captain Yu to see the pitfalls and essential resources in the mining industry.

"If you can hold cheap electricity resources, it will be your strongest support for getting through the bear market." Electricity is still one of the most important resources, but it is also a "deep water area" full of mines.

So what are the pitfalls in the process of finding electricity?

1. Electricity prices vary widely and are not transparent

Wang Xiaoyi said that the prices that private power stations sell to the State Grid vary from province to province, depending on the type of power generation (thermal power, hydropower, wind power, etc.) and the supply and demand of electricity. In general, the amount and price of electricity connected to the grid (purchased electricity) are related to the local industrial structure and economic development, and the State Grid will not purchase it without restrictions. This means that each power station may have surplus electricity to sell to the outside world. "I once learned that in underdeveloped areas like Ganzi, Sichuan, there is no limit on the price of electricity beyond the plan." The electricity price is basically sold according to the market price and fluctuates within a specified range, so how much you can get is "very complicated".

Wang Xiaoyi introduced three modes of mining owners seeking electricity: "Many are locals who build their own mines and then accept the trusteeship; some drive to Sichuan and other places to inspect; others obtain information through power plant intermediaries."

"But I never used an intermediary." Wang Xiaoyi said that he directly connected with power resources. During the conversation, he was unwilling to disclose the specific names of the companies, but he said they were relatively large domestic hydropower chain companies and some local thermal power plants.

As mentioned above, mining information is not transparent, intermediaries are everywhere, and it is difficult to distinguish the true from the false information from intermediaries. Odaily Planet Daily once reported that miners were temporarily overpriced by intermediaries during their electricity search, and later found that the electricity they used was not compliant at all.

It is difficult for newcomers to know how cheap electricity is. The public generally believes that electricity is below average, but if it is used to mine digital currency, it involves risks. The income from digital currency mining mainly comes from selling coins, and the price of coins fluctuates greatly. If you don’t have very low costs, you may not be able to bear the price drop.

"Many people in the market were getting electricity at 35-37 cents at the same time, but we gave up a lot." Captain Yu joined the industry in 2016. He believes that in principle, electricity below 30 cents is safe. "At that time, Aniu and I discussed whether to accept electricity at 33 cents. After Aniu's evaluation, this is already a high-risk electricity price."

In today's market where the price of coins has fallen even more, how much electricity is "safe" is another set of algorithms. Correctly assessing whether the electricity price is reliable and safe is also one of the necessary skills for mine owners.

2. The infrastructure construction period is too long and the power supply is unstable

Wang Xiaoyi told Odaily Planet Daily that he signed a contract with the power station in January 2018, but the power supply was not available until March. During this period, the price of the currency continued to fall, and he missed the best time to mine the currency. "(In fact) you are anxious when the price of the currency goes down, and you are also anxious when it goes up."

As a result, the "container mine" appeared in the mining industry. Wang Xiaoyi said that the advantage of the container mine is that it can be deployed quickly and is flexible to change locations. If the power supply is unstable, the location can be changed immediately.

The distribution of cheap electricity in container/mobile box mines varies in time and space. In terms of space, thermal power is mainly in Inner Mongolia and Xinjiang; hydropower is mainly in Yunnan, Guizhou and Sichuan. The advantage of hydropower is that it generates a large amount of electricity during the flood season, the electricity price is cheap, and the ratio of flood to dry season can reach 5:1 or even 7:1. Therefore, some miners even mine during the flood season and move or shut down during the dry season. Some miners will "follow the electricity", and the infrastructure of the mine is anxious. Mobile mines are designed to meet the requirements of these miners: to improve the convenience of mining and reduce the cost of mine construction.

There are many other factors that cause unstable power supply. For example, his "neighbor" once lost his job because of power supply. The so-called neighbor comes from the fact that sometimes several mines are built next to a thermal power station and share a power plant.

The power supply of the mining machine is the same as that of the mobile phone. There are original ones and those produced by third parties. The official power supply is configured according to the mining machine, but the third party power supply is not necessarily. "Some brands of power supplies will generate harmonics, which will affect the power supply. One unit is fine, but tens of thousands of units will have problems, resulting in unstable power supply."

3. Electrical compliance

If you come across cheap electricity, make sure you understand whether it complies with the regulations.

Once local government departments discover illegal use of electricity, they can seal it off at any time.

In the past few years, when the price of Bitcoin rebounded, large and small mining farms appeared in Ma'anshan, Sichuan and other places. Some mining farms bypassed the national power grid and directly negotiated with power stations for low-priced electricity; others directly illegally stole electricity. "Ma'anshan and Tangshan are the key places for stealing electricity, but the government has vigorously cleaned it up," said Captain Yu.

"After the power reform, electricity demand sides can sign agreements with power generation companies." Captain Yu said that point-to-point power transmission also needs to go through the State Grid, which will charge a transmission fee of 0.11 to 0.15 cents, otherwise it will be considered illegal electricity use.

"Stealing electricity is a red line, and it must not be touched. This may violate the criminal law. You are here to do business, there is no need to do this kind of thing, you can make money without doing anything wrong." Captain Yu came from the traditional energy-saving industry and is very disgusted with stealing electricity. "Stealing electricity is not sustainable and cannot be scaled up. The principle of stealing electricity is to use the part of the line loss, and the scale can only reach about 100 units."

In short, we must pay attention to compliance in all aspects such as power resources, environment, and factory construction.

4. Electricity prices follow the price of currency: contracts are ineffective

"I used to have two customers, one paying 50 cents for electricity and the other paying 45 cents. Later, I kept lowering the price to below 40 cents." As the price of the currency continued to fall, Wang Xiaoyi, the owner of the mine, could only lower the price for his customers. The price of the currency had fallen below the cost of electricity, so lowering the price became the only way to retain customers. "Otherwise, he would have to leave. If I let him live, I can live too."

"In this industry, contracts are ineffective," Wang Xiaoyi concluded. "Of course, they are still useful when disputes arise."

If the price of the currency drops, the mine owner will have to lower the price for customers. If the price of the currency rises, he may also encounter price gouging in electricity.

"After the mine owner built the mine there, he (the hydropower station) saw that the mine had a higher profit, so he thought he could do the same thing." At this time, the power plant felt that it should get a larger share. But Captain Yu believes that "this is actually quite professional. One is the operation and maintenance, and the other is that the ability to control the overall market (digital currency market) is relatively weak, so he will fall into a passive state. If the operation and maintenance is not done well, the mining machine will often malfunction, and the computing power will not be increased, resulting in huge losses for customers; at the same time, it is difficult to attract investment."

"The most hateful people are the scalpers. In 2017, we watched helplessly as the electricity price started at 27 or 8 cents at the beginning of the year, then rose to 30 cents at the end of the year, and then continued to rise to 35 cents, and then to 40 cents."

2. How to get an annualized return of 100%: The cost structure of the mine

Many people who are not familiar with the electricity market think that the raw electricity provided by the power plant can be used directly. In fact, a lot of infrastructure needs to be done. "The high-voltage electricity output from the power plant passes through our transformer and enters the mine."

"The electricity provided by the power plant is bare electricity, and the electricity contract signed is also based on the supply price of bare electricity. The prices of hydropower, thermal power, and power stations in different places across the country will be different. Under normal circumstances, it is about 0.3 yuan per kilowatt-hour. After the infrastructure is completed, the cost of each machine is about 500-700 yuan, so the mining farm mainly formulates a reasonable hosting electricity price based on market conditions. If the bare electricity cost and infrastructure cost are not well controlled, it is very likely to lose competitiveness in the market. This is a high-risk, high-return, and heavy asset industry." Wang Xiaoyi recalled that the hosting electricity price ranged from 0.45 yuan to 0.55 yuan in 2017, and was between 0.35 yuan and 0.55 yuan in 2018.

The infrastructure costs of a mine involve transformers, power distribution fees for strong and weak electricity, cooling costs, etc., which are difficult to explain in a few words.

"The cost of infrastructure construction mainly consists of civil engineering, switch cabinets, transformers and other low-voltage electrical equipment, followed by racks, water curtains, fans, and finally networks and routers." Captain Yu said that the cost structure is different for each company with different construction standards and construction plans because there is no unified standard. "The Mining and Ocean College also hopes to be committed to standard output. After the standard is unified, everyone can reduce a lot of costs."

He further said: "Because the construction costs are different, for example, the construction costs in Xinjiang are higher, and the costs of mines in Sichuan during the flood season are relatively low, this cannot be compared horizontally. We can only say that the standards of mines will become more and more unified in the future, the costs will be optimized, and the overall costs will gradually increase. Because you are not aiming for the short term, the goal during the flood season is to recover the investment in six months, and in the future we will consider the problem in terms of years."

"If you can earn 0.1 cent per kWh, assuming there are 10,000 kilowatts (about 650 machines), you can earn about 1,000 yuan per hour, 24,000 yuan per day, 700,000 yuan per month, and you can get your money back in more than 5 months (this involves infrastructure costs, assuming each machine costs 600 yuan, 650*600/2.4=162.5 days)." Unfortunately, these are just hypothetical perfect situations. He believes that in reality, the mine can only earn 5 cents per kWh, and the cost of operation and maintenance personnel has not been deducted. In short, everything is related to the price of the currency.

3. What kind of people are suitable for this: People with resources and the ability to bear risks

Today, the price of coins is low and the mining volume is shrinking. New investors are discouraged, but it is a good time for investors with strong funds to enter the market.

"What kind of people do you think are suitable for mining?" Odaily Planet Daily asked Wang Xiaoyi.

“There are power resources, bosses in the real industry, pure financial investors, and institutional investors,” he said. “They have money and want to make money, but they have to believe in blockchain.”

The prerequisite is to have strong capital and the ability to resist risks. Mining is not a business that is guaranteed to make money, and risk awareness must be repeatedly emphasized.

"I met a mining owner. After experiencing the bull-bear transition in 2013, he was not too greedy. When the price rose to the highest point in 2017, he sold 80% of his mining machines."

"Government resources are also needed. Formal mines must be approved." Like most mine owners, Wang Xiaoyi also believes that safe and compliant electricity can be stable. "It will be more convenient if you have both knowledge, connections and capital."

(Text | Lu Xiaoming; Produced by | Odaily Planet Daily (ID: o-daily))