Although winter has arrived, mining machines never sleep

150 kilometers west of Urumqi, a strong wind blew across the Shihezi Gobi Desert. At the end of November, a snowfall had just occurred and the temperature suddenly dropped to -15 degrees Celsius.

Miner Hu Haifeng was busy directing the temporary workers to unpack the 10,000 bitcoin mining machines that had just arrived and move them to the newly expanded factory. The chimneys in the distance spewed thick smoke, and the setting sun shone through the gray air, casting a yellow glow on the silver metal shell of the mining machines.

Bitcoin was invented by Satoshi Nakamoto in 2008. According to the model he built, the computing power of the chip can be used to continuously perform "hash collisions" in the blocks generated every ten minutes in the Bitcoin system to win the right to record accounts and obtain Bitcoins rewarded by the system. This boring and repetitive process is vividly called "mining."

In the first few years of Bitcoin's operation, an ordinary laptop could play the role of mining. But the entry of Chinese miners has made mining a big business. With professional mining machines designed and manufactured in China and cheap electricity costs in Xinjiang, Sichuan and Inner Mongolia, they have monopolized the upstream of the industrial chain: Bitcoin mining.

Hu Haifeng is a typical example of a Chinese miner. More than a year ago, he obtained a preferential electricity price of 0.28 yuan per kWh from Shihezi Power Company in the name of "cloud computing", rented a factory building of a ceramic processing company, and transformed it into a machine position capable of accommodating 40,000 mining machines. In order to provide more stable power supply to the mining machines, Hu Haifeng even spent more than 20 million yuan to build a substation with two transformers.

Behind the high investment is the temptation of potential high returns. In Shihezi, there are dozens of mines like Hu Haifeng's, large and small. In order to avoid attention, they hide in factories with cloud computing and technology companies as their signs. According to incomplete estimates, during the peak period, nearly 500,000 mining machines roared here. In 24/7 operation, these mining machines consume 500 million kWh of electricity per month, which is equivalent to the total electricity consumption of 100 million households in one day.

Now, they are in danger.

Since November, the price of Bitcoin has been in free fall, falling from a high of 45,000 yuan to a low of 25,200 yuan, a drop of 40%.

In the continuous decline, the price of Bitcoin has broken through the cost price of multiple mining machines, that is, the income from mining is not enough to pay for electricity and management fees. According to data from F2Pool, one of the largest mining pools in China, the Shemma M3 mining machine, which cost 20,000 yuan at the beginning of the year, has already reached the shutdown price.

Some small and medium-sized mining farms have been unable to maintain their operations amid the continuous decline in the price of cryptocurrencies, and have been forced to sell their mining machines second-hand to clear their stocks. The Antminer S9, the most popular mining machine model among miners, was sold at a high price of 30,000 yuan a year ago. As the price of cryptocurrencies continued to fall, the lowest second-hand transfer price was only more than 600 yuan.

In panic, large mining farms with lower electricity prices and better costs started a "land merger" campaign. Second-hand mining machines were transported and placed in new mines, where they continued to operate after being plugged in.

Bitmain and Canaan Creative, which have gone through the last cycle and become "mining giants", have also begun looking for suitable mining farms and cheap electricity prices in various places in Xinjiang. Their principle is "selling mining machines in the bull market and mining in the bear market."

Migration with electricity, staggered competition, hedging with financial instruments... in the midst of maneuvering and shifting, a war has already begun in which low electricity prices will eliminate high electricity prices, and large mines will eliminate small mines.

But even the victor of the war of annexation cannot predict his own fate and can only wait for spring during the long winter.

As miners were born with the tide of the times and faded away with the tide of the times, Tencent's "Qianwang" visited many mines in Xinjiang and recorded it all.

From 30,000 to 600 mining machines

As the price of coins continued to fall, Luo Yonghao, who owned 2,000 Avalon A741 mining machines, was the first to "unplug the power".

Unlike the sophisticated technology of Bitcoin, the business model of mining is simple and crude: if there is a surplus of coins after paying for the mining machine, electricity and site fees, the operation can be guaranteed. Once the price of the currency drops, the coins mined are not enough to pay the electricity bill to cover the cost. In order to stop the loss in time, the miners have to unplug the power supply of the continuously roaring mining machine and shut it down temporarily.

Electricity is the lifeline of a mine; its price and stability determine the mine’s profitability.

Due to the size of the mine, generally speaking, the electricity price that a small mine can negotiate when it moves in is much higher than that of a large mine. As the largest expense item for a mine, the electricity price means that the competitiveness of a small mine is far weaker than that of a large mine.

Luo mined a total of 25 bitcoins during this period. According to the quotation, he earned more than 500,000 yuan, but his electricity bill was 600,000 yuan. "For the same mining machine, a large mining farm may break even, but for me, the more I mine, the more I lose. I might as well just shut it down."

Panic began to spread. On November 25, a big negative line appeared again, and the price of Bitcoin approached 25,000, which is also the shutdown price of the Ant S9 model mining machine, which is the most popular among miners.

More small miners joined the liquidation team. But the situation was worse than they imagined. Four or five days ago, the market price of second-hand S9 was generally around 1,200. As the price of the currency approached the shutdown price, the price of S9 was directly cut in half to 600.

"This was a machine that cost 30,000 yuan a year ago!" A small miner who was forced to liquidate and leave the site was emotional. Like a lamb that has gone astray, he has no control over his own destiny at the point when the cold winter comes.

An old miner told Tencent’s “Qianwang” that from a timing perspective, miners who entered the market after November last year have almost all been unable to escape the fate of being lambs. The worst of them were those who entered the market in January 2018.

At that time, the price of Bitcoin reached a peak of 120,000 yuan after a year-long surge. Mining machines that could "produce" Bitcoin were regarded as the goose that laid golden eggs, and they were still out of stock even though the factory price doubled or tripled.

Those were the days of revelry for the mining machine salesmen. In order to get the goods, some miners in Xinjiang gave the salesmen coins, cars, and even houses as gifts. They firmly believed that "as long as they could get the mining machine, they could earn back what they spent."

Ten months later, they have not even recovered the money they paid for the mining machines. The price of second-hand mining machines has continued to fall, "which is equivalent to a 90% loss in fixed assets. It can be said that they have lost all their money," said the old miner.

Migrate to areas with lower electricity prices

As winter approaches, the jungle law of the cryptocurrency world becomes apparent. Small mines that have been liquidated one after another have become prey for large mines. Mining machines that were reluctantly sold second-hand by small miners have flowed into large mines in batches, connected to the power supply, and continue to roar.

Hu Haifeng believed that this was his opportunity. The electricity price of 0.28 yuan and the warehouse of 40,000 machines gave him an advantage in this round of computing power reshuffle. "If the current price of S9 is still the same, I can get my money back in three months." He paused and added: "Anyway, if you don't mine S9 on the market, someone will buy it and mine it."

Unwilling to give up, medium-sized mines are also looking for a way out. To find a lower-cost electricity supply, they are looking to the vast Xinjiang border.

Huocheng and Yining, near the border, are the lowest electricity prices known to miners. However, because Yining has repeatedly conducted sudden inspections of the nature of corporate electricity use, many mines have been punished by power outages and are on the miners' "blacklist." Miners also use the metaphor of "JQK," which means "start with low electricity prices to lure you in, then trap you, and finally beat you up."

However, the falsification of electricity usage has happened from time to time in the past. Some mining farms are affiliated with local energy companies and apply for electricity in the name of thermal power. After enjoying the national subsidy, the electricity price is only more than 0.1 yuan. However, such operations are only suitable for the stage when the currency price is high. They often earn back the money invested in mining machines before being found to have used electricity illegally.

Some have also set their sights on similar countries. In Uzbekistan, not far from Xinjiang, the price of industrial electricity is only RMB 0.23, and the price is also low in Russia, about RMB 0.25.

But correspondingly, they need to bear the risks brought by different systems and cultures, as well as possible security risks. Some miners chose to locate their site in a sparsely populated old industrial area, but they were robbed by masked men who had been there before within a few days, and the mining machines that had just been installed were looted.

Infrastructure construction is also an important reason that restricts mining farms from moving abroad. After visiting more than a dozen countries, a person who is looking for mining farms for Bitmain, the world's largest mining machine manufacturer, summarized to Tencent's "Qianwang" that in terms of power generation and infrastructure, China is still the best. "Especially in Xinjiang, the 750 kV high-voltage ring network is particularly stable, and the coal resources are rich, and the power generation is also sufficient, which is very suitable for mining."

It is for this reason that Bitmain still owns a mining farm in Xinjiang with 50,000 mining machines, and pays tens of millions of yuan in electricity bills to the local government every month.

Tencent's "Qianwang" learned that in addition to its own mining farms, Bitmain has recently increased its computing power investment in Xinjiang. At the end of November, Bitmain just placed an order for 50,000 mining machines for hosting in a mining farm near Shihezi. Canaan Creative, another domestic mining machine manufacturer, also placed an order for 10,000 units in the region.

Bear Market Survival Tips

Retail miners are cleared out, and large capital enters the market, providing more cash flow support, lowering return expectations, and lengthening the investment cycle.

Compared with a month ago, the total computing power of the Bitcoin network has dropped by 14.8%, which also means that the difficulty of mining has dropped by 14.8%. The continuous departure of retail miners has brought about a reshuffle of computing power. In the new round of melee, miners are looking for survival strategies.

"Last year, when I entered this industry, I felt that money was too easy to make, but this year I feel that it is dying too quickly," said Jin Xin, founder of Mamba Miner. "To survive in a bear market, you must have appropriate costs and survival skills."

Before entering the mining circle, Jin Xin started several projects in succession, but all of them failed due to negligence in cash flow. In October 2017, he began to study mining and set his sights on graphics card mining machines, which have a relatively small market. Unlike the ASIC mining machines produced by Bitmain and Canaan Creative, graphics card mining machines correspond to digital currencies such as ETH (Ethereum), XMR (Monero), and Zcash that use the PoS algorithm. Among them, Ethereum is the fundraising currency for ICO activities that have swept the world. At its peak in January 2018, it was about 11,000 yuan per unit.

Two months later, he excitedly told Tencent's Qianwang that "the money I made in these two months is more than what I made in the three years of starting my business."

But the huge profits only lasted for two months. In 2018, as the overall digital currency hit bottom, he, who was particularly sensitive to cash flow, cut off the ASIC Bitcoin mining machines in his mine and invested all in graphics card mining machines.

Compared with ASIC mining machines, although the operation and maintenance costs are higher, graphics card mining machines have slightly lower power consumption, and the global computing power distribution of the anchored digital currency Ethereum is also more dispersed. More importantly, the core component of the graphics card mining machine, the graphics card, can be disassembled at any time and returned to the game market except for mining. For gamers playing games in Internet cafes, there is no difference between a graphics card that has been used for mining and a new one.

“There is a big price difference between the graphics card mining machine in the miner and game markets. Miners price the mining machine according to the current coin price, while in the game market, the value of the graphics card, the core component of the mining machine, is constant.”

Based on this, Jin Xin formulated his own bear market survival strategy: he collected second-hand graphics card mining machines from miners who had liquidated and left the market, and when the coin price could cover the cost and had a slight surplus, he plugged in the power supply to expand the computing power. Once the coin price fell to the cost line, he shut down the machines and sold the graphics cards. If the coin price rose and waited for a bull market, he would collect graphics cards and sell them to miners.

As the bull and bear cycles change, graphics cards flow back and forth between miners and gamers. It seems that this is a nearly perfect strategy.

"But what if the price of the currency continues to fall?" asked The Periscope.

"Then I have no choice but to admit it." Jin Xin's answer was also clear and neat.

At least for now, Jin Xin's strategy is working effectively. He is also studying how to reduce the energy consumption of the mine by 10%, and use part of the computing power to undertake artificial intelligence computing orders from commercial companies.

At the end of November, Sichuan, another distribution center for domestic mining farms, ushered in the dry season, which brought him a large number of second-hand machines. His team is busy testing and putting them on the shelves, and then connecting them to the power supply.

What makes him proud is that as more mining machines are put on the market, the mine now has 1% of the computing power of the Ethereum network, "which is equivalent to obtaining shares of Ethereum."

Mine coins and short the price of coins at the same time

The last bear market of Bitcoin lasted for two years. The miners who worked hard and hoarded the coins without selling them received amazing returns in the subsequent Bitcoin bull market, and became a legend in the industry.

Four years later, the rule of hoarding coins that was regarded as the golden rule by miners in the last round is no longer applicable in this bear market. Miners are facing a more complex market: there are more than 4 million more bitcoins in circulation, the market value has increased by trillions of yuan, and there are thousands of more exchanges for cashing out.

The new generation of miners rarely hoard coins anymore. The mushrooming exchanges provide them with more and more financial tools. Learning hedging to lock in profits in advance is one of the necessary skills for them to survive in the bear market. The factory model of Bitcoin production has been upgraded to a financial model.

Hedging, in simple terms, is the simultaneous buying and selling of the same quantity but in opposite directions in the spot market and the futures market. The hedging mechanism is established by taking advantage of the principle that futures and spot prices rise and fall together, and the profit of futures is used to make up for the loss of spot.

"For example, I will produce 30 coins in the next month, but the price may continue to fall by 10% one month later according to the trend. Then I will place a short order on the exchange, sell at the current price, and deliver 30 coins one month later." Jin Xin explained that in this way, he can lock in the legal currency income for the month without suffering greater losses in a declining market.

However, the frequent hedging operations of the miners have made them, intentionally or unintentionally, the biggest short-selling force in Bitcoin.

"Everyone is shorting. In the end, everyone wants to protect themselves while letting the price of the currency continue to fall, but a fall in the price of the currency is not conducive to the operation of the mining farm." Jin Xin smiled bitterly, "It's a bit like surviving in the wilderness. If you don't short, you will be eliminated. If everyone shorts, everyone will die together in the end. It's heroic!"

The backlash of financial instruments has opened its mouth wide, and Bitcoin futures, which were originally intended to be a safe haven, have become a form of speculation.

In the game between each other, every step must be taken cautiously to see the appearance of spring.

It’s not over yet

On November 28, Bitcoin, which had been falling continuously, temporarily stopped its downward trend and rose 11% in one day to return to above 30,000.

Canaan Creative even used this as an excuse to immediately announce discounts on several of its new mining machines.

But the general trend could not be stopped. After one day of brief recovery, the price of the currency turned around and continued to fall.

Winter continues. Hu Haifeng's 10,000 mining machines have been plugged in, Jinxin has received a batch of second-hand goods, and Lao Luo is hesitating between liquidation and migration.

Another dealer in Shihezi of Chint Electric was hesitant. A young man came to the dealership and asked for 50,000 power switches. He couldn't believe the huge order that suddenly fell on his head.

The 50,000 switches are just for the 50,000 managed mining machines that Bitmain has just ordered. Winter goes and spring comes, and winter comes again. Selling mining machines in a bull market and mining in a bear market is the truth that past experience has taught them.

It was also during the last bear market that Bitmain took over a mining farm in Dalate Banner, Inner Mongolia from Canaan Creative, which invented the world's first ASIC Bitcoin mining machine. In the reshuffle of computing power, Bitmain became a rising power.

Such stories inspire the miners who spend the winter. On December 2, Shihezi had its third snowfall since the beginning of winter. The temperature was minus 18 degrees Celsius, and the wind was blowing. The miners hibernated, waiting for the spring. Hundreds of thousands of mining machines were still running and roaring, carrying their hopes and never sleeping.