Bitcoin miners invest again as cheap summer electricity may boost profits

According to foreign media Coindesk on March 5, with the summer approaching, Chinese miners are busy buying second-hand equipment and trading with mining farms and hydroelectric power plants. They are betting that sufficient water resources this summer will allow them to make a fortune again.

Because in the summer, hundreds of hydroelectric power stations will produce a lot of cheap electricity, especially in Sichuan and Yunnan in the mountainous areas of southwest China. For Bitcoin miners, this price of electricity will greatly save costs and improve competitiveness. With the bear market already affecting the mining industry, such profit opportunities are rare.
Hashage, a company in Chengdu, Sichuan, operates six mining farms with more than 200,000 machines. The company's head said that in the summer, the cost of electricity in Sichuan may vary depending on the hydropower station, but it is generally 0.25 yuan (about 0.037 US dollars) per kilowatt-hour.
The company's CEO Zheng Xun told reporters that in the past month, the company has been negotiating with individual miners and some large mining farms with a total demand for mining chips exceeding 1 million slots. According to Zheng, these individual miners want to have 1,000 to 3,000 mining equipment on average, while these large mining farms want to have more than tens of thousands of equipment on a larger scale.
He added that although the local hydroelectric power station will not determine the exact electricity price until March this year, miners have already started looking for resources and have negotiated with the mines so that there is enough time to put equipment in place before the season arrives.

“Miners will definitely be interested,” Zheng added, “especially miners in China’s Inner Mongolia and Xinjiang regions, where they use fossil power and the electricity cost is usually 0.35 yuan per kilowatt-hour, or about $0.052.”

Even if the difference in electricity prices is only 0.01 yuan (about $0.0015), it is of great significance to miners, especially in the current bear market, when the price of Bitcoin is only $3,721 at press time.
Taking Bitmain’s AntMiner S9 as an example, it consumes about 30 kWh of electricity per day, which is only 1 kWh more than the average American household consumed in 2017.
This means that each machine can save $0.045 per day. This number is insignificant, but it adds up. For a miner with 10,000 machines, this can save $450 a day, or $13,500 a month.
Demand for used equipment
Zheng said it’s not just the cheap electricity costs that make miners happy, but also the lower-cost second-hand ASIC miners, especially AntMiner S9s. A second-hand S9 sells for about $150, depending on the degree of damage, and has a computing power of just over 10 terahashes per second (TH/s).
In fact, some wholesalers in China are currently selling used S9s on Alibaba for $100 to $200. While the price of a brand new S9 on the manufacturer Bitmain’s official website is around $450, other wholesalers are also providing alternative channels for users to buy new S9 devices for around $300.
Tyler Xiong, chief marketing officer at Bixin, agreed, saying that the supply of second-hand equipment increased in late 2018 as miners stopped production.
Tyler Xiong said: "S9 is now like the AK-47 in ASIC. But the price-performance ratio is the best on the market." Bixin also plans to increase its mining capacity in Sichuan this summer, but declined to disclose specific details of the plan.
Adding up all the estimated supply from the major mines in the region, the Zheng project would provide around 1.5 million positions in total.
He explained that mining farms typically sign agreements with power plants to purchase 80% of their capacity in advance, meaning that a mining farm must pay for the power in full, regardless of whether it can consume it or not.
Zheng said that because of this, in addition to providing hosts for miners, his company also plans to deploy about 20,000 second-hand ASIC devices for mining on its own.
He further estimated that the hash rate of the entire Bitcoin network could even reach 7,000 quintillion hashes per second (EH/s) this summer, well above the network’s previous all-time high of 61 EH/s set in the summer of 2018.
In fact, over the past two months, Bitcoin’s hash rate has shown steady growth, from an average of around 35 EH/s in early January to around 42 EH/s now, according to blockchain.info.

“We used to think that the overall supply would be greater than the demand. However, the total number of ASICs on the market plus new machines produced by major manufacturers will definitely meet the total supply. The question now is how many miners are willing to bet on it,” Zheng said.

Market shift
Every summer, the Ganzi and Ngawa Tibetan areas in western Sichuan receive abundant rain and water sources, so there are many mines in these areas.
However, what is different this year from previous years is that market dynamics have changed.
Hashage co-founder Yun Zhao, who has left company management to start a mining organization in Sichuan called Mining Sea, explained that the market used to support not only mining farms but also mining equipment manufacturers.

“In a bull market, it’s hard to buy mining equipment and find space in a mine because the cost of electricity isn’t too much of an issue. But in a bear market, we have to come together and find better ways to utilize our resources,” he said.

Tyler Xiong, chief marketing officer of Bixin, shared the same view, “In this round, market dominance will shift to any miner and mining farm that can obtain cheap electricity.”

“Mining machine manufacturers may not have much willingness to participate in this round (in terms of selling new equipment) because people may prefer old equipment. So the market is no longer on their side now.”

Adequate power supply
In addition, local governments have openly allowed private hydropower plants to participate in market-driven electricity trading to sell excess energy to private companies in energy-intensive industries, which has also increased the interest of miners.
Taking a step back, China's private hydropower stations can be divided into two categories: those that are integrated with the national grid, and those that are not involved in the integration.
For those hydropower plants that meet the integration conditions, the State Grid usually purchases a certain amount of electricity from them so that their income source can remain stable. But for those hydropower plants that do not have this ability, they need to compete for stable customers who use this electricity.
The Sichuan provincial government issued a notice in August 2018 as a practical guide for “deepening power reform” in the region. Although the notice did not mention specific industries, it emphasized “expanding the scope of customers who can participate in power trading” and “reducing administrative intervention in the market.”
Regardless, the government’s ultimate goal will be to make better use of excess electricity generated in the region that would otherwise go to waste. The notice also mentioned that the government will continue to try to establish industrial parks near factories with severe excess electricity.
According to another notice issued by the Ganzi prefecture government, in 2017 alone, hydropower stations in the region generated 41.5 billion kWh of electricity, but more than 16.3 billion kWh was wasted.
It's still an adventure
But even with such tantalizing opportunities, risks remain.
Both Zheng Xun and Zhao Yun said that the main risk is that the price of Bitcoin could fall below the $3,000 threshold, even with low electricity costs. According to the mining machine profit index provided by f2pool, the fourth-ranked mining pool in terms of hash power, the S9 mining machine has an average electricity cost of $0.05 per 1 kWh, which can still generate a marginal daily profit of $0.60 per machine.

“But if prices fall below the $3,000 mark in the summer, many miners may have to shut down production again,” Zhao added.

While it is a common practice for miners to short bitcoin futures contracts to hedge against potential losses, Zhao said a potential risk in this case is that there may not be enough counterparties to go long.
Zhao added that another long-standing problem in the industry is the lack of self-management to protect miners from bad practices, an area that Mining Sea is working on improving, and will notify its members if it finds any bad practices at a mine.
For example, he said, some mining farms secretly switched the network addresses of the mining equipment they provided to customers to their own network addresses at 2 a.m., just to mine for two hours themselves.
There are also some mining farms that attract miners with low electricity prices, but after they install the machines, the price goes up, Zheng said.

“Those miners have no choice but to accept it,” he added, citing a similar situation that happened recently in China’s Qinghai province.

Zheng concluded:

"This industry is always like gambling. The risks are always multi-faceted, especially in this bear market period, the risks on the market side are greater."