Bitcoin mining pit, electricity fee mining trap: the magical realism story of gold mining in Qinghai

Text/Chen Yi

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The wind blew over the northeastern edge of the Qaidam Basin, still bringing the chill of winter. In February, the temperature in the small city of Delingha remained below zero, with occasional light snowfall.

A few months ago, miner Han Jie came here for the first time. He moved into a local factory with more than 20,000 mining machines. Delingha is rich in mineral resources and means "golden world" in Mongolian . Han Jie came here to realize his "gold rush dream". He mined Bitcoin.

A mine in Delingha. Picture from the Internet

At that time, Han Jie did not know that the cold winter in Delingha was far from over. The cold wind blew away the beautiful dream of low-cost electricity, 10-month payback and the rise of digital currency.

After a period of longing, joy, anger and helplessness, Han Jie woke up from his dream. He and three friends lost a total of 12.7 million yuan in deposits , and four mining machines were smashed. The so-called low-priced electricity was just a bait.

There was no future to talk about. They finally left Delingha.

Low-priced electricity

Everything starts with cheap electricity.

In the years when digital currencies such as Bitcoin exploded, many Chinese miners entered the market, driving the prosperity of derivative fields such as mining machines and mining pools. China has also gradually become a "computing power power" . According to statistics from Blockchain.info in 2018, China alone accounts for 8 of the top ten mining pools in the world, and the combined computing power accounts for more than 75%.

However, since the end of 2017, after failing to break through the $20,000 mark, Bitcoin has begun to fluctuate downward. As of press time, the price of the currency is less than $4,000, and 80% of its market value has disappeared .

Bitcoin price fluctuations, data source: inversting.com

Helpless in this situation, Han Jie looked for a larger mine with lower electricity prices.

In September 2018, Han Jie heard from a friend that Alien Mining, a subsidiary of Rijing Optoelectronics in Delingha City, Qinghai Province, was renting out equipment and charging a low price of 0.33 yuan per kilowatt-hour for electricity .

Han Jie did some calculations. "For more than 20,000 machines, based on the currency price at the time, it would only take ten months to recover the investment, and then it would be net profit," Han Jie told Zinc Finance.

A mine in Delingha. Picture from the Internet

Han Jie has been in the cryptocurrency industry for two years and has a clear understanding of the mining business model: for ordinary miners, as long as the mined coins are sold to exchanges and the income is enough to pay for the mining machines, electricity, and site fees, or even have some left over, he can maintain basic operations.

However, the price of coins fluctuates greatly and is out of control. The only stable factor is the price of electricity . The price of electricity is the key to this business, but even a slight difference in price will affect the profit and loss of mining income.

Han Jie saw an opportunity in the mining electricity business. He opened his own mining farm, selling sites and providing electricity to miners, mainly making money from the difference in electricity charges.

The picture comes from the Internet

Mines have always moved with low-cost electricity. For a while, Han Jie opened his own mine in Sichuan. Sichuan has rich hydropower resources and numerous hydropower stations. Every summer and autumn is the flood season, a large amount of hydropower is idle, and the cost of electricity is extremely low.

Han Jie revealed to Zinc Finance, "Building a mine next to a hydropower station is simply a commercial act. We just need to negotiate with the hydropower station."

At present, operating a Bitcoin mine in China is not illegal. Peng Xiaotong, a lawyer at Hubei Shanhe Law Firm, told Zinc Finance that according to the relevant regulations issued by the central bank and five other ministries, Bitcoin is a specific virtual commodity, and it does not prohibit people from establishing their own Bitcoin trading platforms or spontaneous RMB-Bitcoin transactions. In addition, as long as both power generation companies and mining farms comply with procedures, power transactions can be carried out directly .

The picture comes from the Internet

However, during the dry season, Sichuan does not have that much surplus electricity, so many people turn their attention to places like Xinjiang and Inner Mongolia, which are dominated by thermal power. In the cryptocurrency circle, there is a recognized chain of contempt for electricity consumption - in terms of price, hydropower < thermal power < wind power < solar power < State Grid . But in terms of stability, the State Grid is naturally the most stable, and hydropower has a lower stability because of its wet and dry seasons.

However, this logic is no longer applicable. At the beginning of 2018, the "Notice on Matters Related to Virtual Mining Enterprises" was issued by the Internet Finance Special Rectification Leading Group to all regions, which mentioned that it was necessary to actively guide enterprises within the jurisdiction to withdraw from the "mining" business. Since then, many regions have conducted sudden inspections to check the electricity usage of enterprises where mining sites are located, and many mining sites have been punished by power outages .

As a result, more and more regions and mines are added to the miners' blacklist. Both the mines and the miners are eager to find a way out.

Han Jie then turned his attention to Qinghai. Last September, Han Jie and three friends went to Qinghai, where they were received by Cao Quanfu, the investment promotion director of Rijing Optoelectronics.

After the inspection, the four of them signed contracts for a total of 150,000 seats and a deposit of 12.7 million yuan. Han Jie said that in the contract he signed, Rijing Optoelectronics promised to deliver a total of 20,000 seats in three installments before November 30, 2018, and agreed that a deposit of 100 yuan would be required for each seat, which could be used to offset the electricity fee, which was calculated at 0.33 yuan per kilowatt-hour.

The picture comes from the interviewee

"Cao Quanfu showed me a lot of documents, including the procedures for government approval, the power bureau and power facilities, which I think are very formal." Han Jie said that among them is a tripartite cooperation agreement "Blockchain Industry Strategic Investment Framework Agreement", which shows that Rijing Optoelectronics, Juying Network and Delingha Municipal Government jointly cooperate on the blockchain project, and has the seals of the Delingha Municipal Government, Rijing Optoelectronics and Juying Network. The signing time of the tripartite agreement is April 12, 2018.

"Rijing Optoelectronics is located in the Qaidam Circular Economy Experimental Zone Industrial Park, with more than 600 acres of land. It has a large area and high construction standards. It is a key enterprise in Qinghai Province," Han Jie added.

Zinc Finance checked online information and found that as early as 2016, a mine called "Alien Mining" appeared in Qinghai. As of last year, Alien Mining claimed that it had reached a reserve capacity to accommodate 500,000 mining machines .

Mining machine: The picture comes from the Internet

But Han Jie told Zinc Finance that until everyone left, Rijing Optoelectronics had only built 20,000 camera positions, far from the 150,000 positions it promised .

Han Jie also had doubts, but Cao Quanfu assured them at that time, which made them feel relieved.

On October 16, 2018, Han Jie and his friends officially entered the site with mining machines.

When it happened

Looking back now, low-cost electricity was Han Jie's first step into the trap. Four days later at 8 a.m., Huang Yi, the legal representative of Rocket, suddenly appeared in the factory. Rocket Technology was a company registered by Rijing Optoelectronics using the site.

The park was no longer peaceful, and the gold rush dream was shattered.

"Huang Yi asked us to shut down the power supply after half an hour. If we want to keep the power on, we have to follow the new standard. The electricity fee has increased from 0.33 yuan per kilowatt-hour to 0.42 yuan per kilowatt-hour." This means that under the new standard, the electricity fee has increased by nearly 30% .

Thermal power plant pictures from the Internet

Han Jie told Zinc Finance that he and his friends requested to cancel the contract and were ready to leave with the equipment immediately, but Huang Yi said that the previously signed contract was invalid and that Han Jie and others had to pay the initial fee of 0.42 yuan for electricity before they could leave.

Seeing that the situation was not good, on October 21, Han Jie and his team drove their car and planned to leave with the equipment. But the forced entry did not go smoothly. According to Han Jie's recollection, the security guard jumped on the moving car, smashed four machines , and threatened them that if they drove any further, all the equipment would be smashed.

A miner at the scene immediately called the police, and the police took the group to the Xincheng Police Station in Delingha for processing. Han Jie revealed to Zinc Finance that during the mediation process at the police station, Suncrystal Optoelectronics General Manager Lin Songlin and Rocket Guest Legal Representative Huang Yi expressed their approval of the security guards' actions, but still refused to allow the equipment to leave the site, and that night they deployed additional personnel and vehicles at the entrance of Suncrystal Optoelectronics Industrial Park to prevent the remaining equipment from leaving the site .

Screenshot of the live video Video outlined by the interviewee

The situation was at a stalemate. As time went by, Han Jie saw more than 20,000 idle mining machines. Most of these mining machines came from customers, and if they were not in operation, they would incur huge expenses every day. He was even more worried that these machines would be permanently detained in the small town of Deharing, which would be a greater loss.

Finally, Han Jie signed the electricity bill given by Rocket Guest. He did not even have time to consider the 2 million deposit and hurriedly left with the mining machine.

A month later, Han Jie, who was in Hangzhou, received the news. The Public Security Bureau of Delingha City, Haixi Prefecture, Qinghai Province, filed a case against Cao Quanfu, a criminal suspect in charge of investment promotion for Rijing Optoelectronics, on suspicion of forging seals and committing huge fraud. Cao Quanfu was arrested at Shenzhen North Station on December 13, 2018.

The picture comes from the Internet

Afterwards, Han Jie and others reported Huang Yi and Lin Songlin to the police for suspected destruction of property and extortion. However, there has been no new progress in the case so far.

According to Tianyancha information, Delingha Huojianke Digital Technology Co., Ltd. and Delingha Juying Network Technology Co., Ltd. are both subsidiaries of Rijing Optoelectronics. Huang Yi is the legal representative of the former, and Lin Songlin was once a senior executive of Rijing Optoelectronics, but currently has no connection with the three companies.

After this incident, Han Jie left Delingha, the place where he felt sad.

Where to go

What is puzzling is what kind of story is behind Rijing Optoelectronics, which lured Han Jie into the game. Why did a photovoltaic enterprise that was a key development in the local area become a speculator, using low-priced electricity as bait to deceive miners?

Han Jie recalled the scene when he first entered Rijing Optoelectronics. The spacious factory was sparsely populated and the roar of machines could not be heard .

Local factory buildings, picture from the interviewee

Han Jie knew that Rijing Optoelectronics was a photovoltaic enterprise that was being developed in the local area, but he was not surprised by what he saw. "Everyone knows that the photovoltaic industry is not so prosperous now. Basically, except for a few big giants, the rest of the industry chain are doing very poorly, so it is normal for them to stop their business."

After the crazy development in 2017, the photovoltaic industry fell from the trend. According to the statistics of the "China Photovoltaic Industry Investment and Financing Prospects and Strategic Analysis Report" released by the Forward-looking Industry Research Institute, from January to November 2018, the newly installed photovoltaic grid-connected capacity reached 38.22GW, a year-on-year decrease of 21.4% .

Photovoltaic panels, picture from the Internet

Rijing Optoelectronics is also struggling to survive. In 2016, Rijing Optoelectronics borrowed 17 million yuan from the Haixi Branch of the Postal Savings Bank. However, after the loan matured, Rijing Optoelectronics failed to repay the loan as agreed and was sued in court. On October 16, 2018, Rijing Optoelectronics appealed and hoped that the court would revoke the penalty interest. In its appeal, it wrote, "Due to the influence of the national photovoltaic "5.31" new policy, the mid- and downstream enterprises in the photovoltaic industry chain have basically shut down, and the market demand for silicon rods has basically stagnated, resulting in the company's complete suspension of production and the company's production is in serious losses ."

Rijing Optoelectronics also stated, "The company currently has no working capital and is seeking business opportunities to resume production, reverse losses and repay bank loans as soon as possible."

When Zinc Finance checked the China Judgments Online website, it found that in 2015, Rijing Optoelectronics defaulted on project payments to Jiangsu Nantong Sanjian. Four people including Rijing Optoelectronics' deputy general manager and company employees had a dispute with the other party's staff and seriously injured the other party . The four were sentenced to fixed-term imprisonment.

Zinc Finance once called Rijing Optoelectronics to try to find out whether Rijing Optoelectronics started the mining business due to poor management, but the other party refused the interview.

Cao Quanfu's circle of friends, picture provided by the interviewee

But if we consider another relationship, Alien Mining was established in 2016, then is Rijing Optoelectronics suspected of falsifying the nature of electricity usage?

It is a well-known method for mining farms to falsify the nature of electricity use. As long as the mining farms are affiliated with local energy companies, they can enjoy the state-subsidized electricity prices.

Han Jie told Zinc Finance: "Rijing Optoelectronics uses electricity for polysilicon production, and after adding all the expenses, the final electricity price is about 0.3 yuan per kWh. At that time, Cao Quanfu said that the approval document from above would be issued soon, and the electricity price could be reduced to 0.3 yuan per kWh, or even 0.2 yuan per kWh ."

At that time, Rijing Optoelectronics had already enjoyed low-priced electricity under the support of national policies. According to the market announcement issued by the Qinghai Power Exchange Center, on June 26, 2018, Rijing Optoelectronics had passed the approval and became an electricity user in Qinghai Province that could directly conduct electricity transactions .

The picture comes from the Internet

Since the implementation of a new round of power system reform in 2015, provinces across the country have begun to encourage power users to trade directly with power generation companies to reduce electricity prices and boost the economy. In recent years, thanks to direct power trading, power users have reduced their electricity purchase costs and eased their operating pressure.

Because it produces polysilicon, Rijing Optoelectronics is able to enjoy national government benefits, trade directly with local power generation companies, and obtain low-priced electricity.

After the incident, Han Jie encountered earlier victims of fraud. At that time, several people were standing next to the conference room at the entrance of the site, gathered together to discuss. "Suddenly, two people came next to me. I knew at a glance that they were not from Rijing. Later, I found out that they were deceived before and had not left." Han Jie said.

Delingha pictures are from the Internet

According to Han Jie, as early as April and July 2018, two groups of investors had entered the market. When the first group came, the agreed electricity price was 0.4 yuan per kilowatt-hour . Later, during the settlement, they were required to pay 0.5 yuan per kilowatt-hour.

"The customer almost went crazy. Rijing said the electricity meter was broken. The final electricity bill was based on the total electricity consumption of the entire factory, minus the electricity consumption of public facilities and some of its own machines. The rest of the electricity consumption was all charged to this person ." Han Jie said.

The second group of investors who entered the market finally left with Han Jie and his friends.

Leaders inspected the site. Photos provided by the interviewee

Han Jie still feels indignant when he recalls all this. "I had doubts during the process, and I even questioned the people at Rijing Optoelectronics when negative news came. But when the leaders of Qinghai Province came to inspect our work at the end of October, I was there, and I was more convinced. After the leaders came, many people who had not paid the deposit in full also made up for it ."

It is worth noting that at the beginning of 2018, the Leading Group of the Internet Financial Risk Special Rectification Office issued a document requiring all localities to guide enterprises within their jurisdiction to orderly withdraw from the "mining" business and regularly report on the progress of the work. Specifically, it includes basic information about the number of mining machines, power consumption, operating income, tax payment, and other revenue information, as well as preferential conditions such as electricity prices and site rentals, and environmental protection and security inspections.

Currently, many regions have tightened electricity discounts for Bitcoin mining farms. For example, recently, Inner Mongolia has stopped giving electricity discounts to local cloud computing and big data companies. Opening a mining farm has gradually become an increasingly difficult task .

The picture comes from the Internet

The general trend cannot be stopped. No matter what the outcome of Suntech Power will be, the winter for mines and miners will continue.

Han Jie had left Delingha for a long time, and he didn't want to spend his whole life there.

Note: At the request of the interviewee, Han Jie is a pseudonym in this article. All interview recordings have been backed up, and the interviewee is responsible for the data and authenticity of the article.