The hidden rules of going to the Siberian "mine", the full text of the Bitcoin miner's oral account

More and more people are joining the ranks of "mining" digital currencies such as Bitcoin. In 2018, when domestic regulations became stricter, many large mining farms began to seek to go overseas, with Russia, Norway and Iceland being popular candidates.

Sitting in front of Blockchain Muddy Waters, Lu Hui quietly talked about his "legendary experience":

"Russia is a bit chaotic. I feel more at ease after buying a gun and putting it in the car. A gun worth more than 2,000 yuan, plus 1,000 yuan, can be sold to someone without a gun license..."

"Before, Xinjiang and Inner Mongolia had a need to attract investment. Mines were directly settled there in the name of cloud computing and big data, but the government investment management department is more important. They recognize that the project is a high-tech company, so they can obtain large, stable and low-cost electricity resources."

What surprised us is that a long time ago, mining began to "securitize assets" - senior miners are trying to split the computing power, package it into "financial products" and sell it to retail investors, "Convert my computing power into ETH and sell it. The return is better than many financial products!"

However, as digital currency prices fall collectively, miners are also worried.

Since the beginning of the year, Bitcoin has plummeted by 40%. In addition, Ethereum ETH was quoted at $466.24, down more than 20% in 24 hours, hitting a new low in nearly three months.

The price of mining machines, which were once priced at more than 30,000 yuan per unit in the market, has also plummeted. Currently, they can be purchased at a price of 14,000 yuan on the manufacturer's official website.

The computing power is increasing, but the profits are getting thinner. Is a mining accident coming?

"Domestic regulations are getting stricter, so we went to Russia"

On March 14, Blockchain Muddy Waters met the protagonist of today’s story, miner Lu Hui, in a coffee shop on the corner of the street.

Different from the faith and technological revolution that blockchain followers often talk about, he even said to Blockchain Muddy Waters (WeChat ID: BlockResearch) with some self-mockery that blockchain also has a contempt chain, and miners are at the end of the contempt chain, "because miners don't have much sentiment, and don't study technology very much, making money is the first priority."

Everything is for the purpose of making money. After removing the identity of a miner, Lu Hui is still an MBA from a top domestic university, a long-term entrepreneur, and works in the film and television industry. But when he started mining, he realized that annualized returns of 100%, 300%, and 400% were easily obtainable.

He told Blockchain Muddy Waters that in January this year, the market began to hear rumors that the country would soon regulate, and the miners' panic was not a big deal, because as long as the machines were running and there was no power outage, they could continue mining; however, some umbrellas, the people who provided electricity to the mines, they began to panic and stopped providing electricity.

This has caused two effects. First, the domestic electricity cost has increased. Last year, it was generally 2.5 to 2.8 cents per kWh, but now it is more than 40 cents, and in more expensive places it may have been 60 cents. Second, the cost of the power supply side is increasing, and once panic occurs, they are unwilling to sell electricity. Therefore, the cost at the front end is also increasing.

Seeking to go overseas for mining seems to have become a consensus. It is understood that the main destinations for mining are Iceland, Norway, Russia and other regions, in addition to the United States, Canada, and some countries in Central Asia. Some of these countries have sparse populations, some have suitable temperatures, and some have cheap water and electricity and a relatively safe environment.

As for making money, there are always people exploring the way. Lu Hui said that there are already special service providers who help mining farms transfer machines abroad. "One machine costs about 80 US dollars. You don't have to worry about the rest. Just tell the service provider how many machines you have in total, and they will help you with international logistics."

But as mentioned above, a mine needs stable electricity, a safe environment, and background support, so it is not easy to find a suitable place. According to Lu Hui, his team has spent three months looking for a suitable place in Russia.

"I found someone with a background in Russia through my classmates, who is equivalent to the second generation of officials in China. I found several places in Novosibirsk, including the local power supply department and the local gangs. I had to explain all kinds of relationships. "Russia is a bit chaotic. I bought a gun and put it in the car to feel a little more at ease. A gun worth more than 2,000 yuan, plus 1,000 yuan, can be sold to someone without a gun license..."

Lu Hui said that they have another team going to Canada because the water and electricity bills there are cheaper, about 1.8 yuan. However, he also admitted that he didn't want to go abroad, because he was unfamiliar with the place and there was nothing he could do if he was bullied.

"So it is critical to have resources to ensure safety on the periphery. We must have such resources, and it cannot be done by just telling me and signing an agreement. The mine uses your electricity, which will involve infrastructure. I can pay for the infrastructure, but we cannot pay in cash. The money for deployment must be paid by the local power supply party. The partner provides the space, or sells electricity, and we must be able to see that we are doing these things," said Lu Hui.

"Even our partners have invested some money in our mines and tied this up together. Otherwise, it's still unsafe. Just a few tens of millions of dollars have been invested. You are not my real brother or sister. After a few months, if you find something to do with me or cut off the power, what can I do? Therefore, safety is a very important thing, and it is difficult to ensure safety."

For them, the most ideal place for mining is in Xinjiang, but in the past two months, the mine where he works has experienced power outages three times, and the "delicate" graphics cards can't stand it. Therefore, going overseas is an urgent matter for them.

According to Lu Hui, his team currently has tens of thousands of BTC mining machines and nearly 10,000 graphics card mining machines in Inner Mongolia; there are 3,000 in Yunnan, which are being transferred to Inner Mongolia; and the mining farm in Russia is preparing to get 30,000 mining machines.

Mining by yourself is outdated, now it’s all about “cloud mining”

If miners are at the end of the blockchain contempt chain, then spending money to buy machines to mine may be the initial stage of the mining circle.

Lu Hui told Blockchain Muddy Waters (WeChat ID: BlockResearch) that there are many business models for mining. The most basic one is like what he did, where he bought a machine with money, worked hard to dig, and then counted how many days it would take to get his investment back and how much money he could make every day.

The traditional model of mining is to mine coins, earn money, pay electricity bills, and sell the remaining coins when the market is high. Some people mine coins every day and sell them immediately, exchanging them for legal currency to recover their investment; another type of people start hoarding coins after recovering their investment, and they are people with faith; and there is another type of people who don't even need to invest and directly hoard coins, and sell them when they are short of money to pay for electricity.

"These are all relatively low-cost and are essentially production behaviors involving heavy asset investments," said Lu Hui, adding that many other models have been derived on this basis.

If you have a high degree of freedom, your own mines are easy to enter and exit, you can take another approach: when the money earned from mining is enough to buy a batch of new mining machines, you can order new mining machines. At this time, the mine can not only wait for the price of the coin to rise before selling it, but also wait for the price of the mining machine to rise.

It is understood that in 2017, the mining machine market was frenzy, and a Bitmain Antminer S9 could cost more than 20,000 yuan, and some merchants even said that they sold each machine for 35,000 yuan. But now, the price of such mining machines on Bitmain's official website has dropped to 14,000 yuan. Obviously, as the digital currency Huobi has risen and fallen sharply, the price of mining machines has also become part of speculation.

In addition, Lu Hui said that mining also has a to C-end business model, which is to exchange the resources of the mining farm for cloud computing power and give it to retail investors.

"For example, we were chatting in December. You want to mine with a 400% return rate? Is that possible? Of course. But there is a threshold for the mining farm. For example, if you don't have 500,000 to 1 million yuan, we won't talk to you about this. But you only have 50,000 yuan, what should you do? Cloud computing power."

"I have a mining farm. I can broadcast it online, install two cameras, and show retail investors. Then, I convert my computing power into ETH and sell it. An S9 professional Bitcoin mining machine cost more than 30,000 yuan when the market was high, but now it costs more than 10,000 yuan. The cost of the machine plus the computing power cost, electricity cost, etc., is converted into an annualized rate of return, which is better than many financial products. The way to buy it is the same as buying other financial products."

For mining farms, as long as they find retail investors, they can split and sell the computing power even if they have not yet deployed it, and they can also add 30%-40% to the price. When they sell it, they can recover all the investment, without any risk, and they can get 30%-40% profit. But in contrast, retail investors have to wait a long time.

However, this model obviously has the intention of "cutting leeks". The mining farm has complete control over the resources and is in an absolutely advantageous position. Regardless of the market conditions, the mining farm charges a fixed management fee and can also intercept the profits behind the scenes. "When the market conditions are good, there are many ways to cut leeks. For example, if the maintenance is not notified a week in advance, but there is no power outage, they will tell you that there will be a power outage for 3 days, and one tenth of the monthly profit will be gone; if the market conditions are bad, it doesn't matter, there is an agreement before, and blockchain investment is originally high-risk and high-return."

Lu Hui said that their mining farm mainly relies on professionalism and scale, and is optimistic about long-term holding. It does not engage in derivative businesses that focus on customer expansion. However, this is the ultimate business of the mining farm facing the C-end, and its essence is crowdfunding mining. "If your target is more knowledgeable about mining, then it is crowdfunding. If the target is pulled over from the field of Internet finance, then it is cloud computing power."

The hidden costs of mining

Although Zhou Xiaochuan once said that he did not like creating a speculative product that would allow people to have the fantasy of "getting rich overnight", which was not a good thing, almost everyone who entered this circle did not want to make money.

"In the blockchain circle, the first way to make money is through exchanges, the second is ICO (but 90% of ICOs in China fall below their issue price), and the third is mining," said Lu Hui. He made no secret of the money mining brought him. According to him, the annualized rate of return of his mine last year was 400%, and the investment could be recovered in three months; but this month it was a little worse, with a rate of return of around 100%, which is not profitable for miners.

"In the last 12 months of last year, I invested 1 million yuan in mining, and the dividends in January this year were around 250,000 to 280,000 yuan. If you mine too much, the investment returns of other traditional industries are simply not worth mentioning. Mining is really very profitable."

Who wouldn't be serious if they could realize the fantasy of "getting rich overnight"? In 2017, the price of Bitcoin rose sharply, more and more miners appeared, the computing power increased, and the mining business also derived an industrial chain. Most notably, mining machine manufacturers made a lot of money. According to reports, Bitmain's revenue in 2017 was about US$2.5 billion (about RMB 15.8 billion).

However, not everyone who participates in mining can get a share of the profits. There are countless examples of people spending money on mining but ending up not being able to cover their costs. Blockchain Muddy Waters and Lu Hui calculated the cost of mining together.

“At least you know that mining is not done with a shovel, right? Someone asked me before how those foreigners buried so many coins in Xinjiang and Inner Mongolia when they first invented Bitcoin,” Lu Hui’s words made everyone present laugh.

The reason for the above joke is that many mines are set up in Xinjiang, Inner Mongolia, Sichuan and other places. The rich power resources in these areas have attracted countless mines to move here.

According to Lu Hui, there are generally two types of teams in a mine: the first is the operation team, which is engaged in technology; the second is people with external resources. The preparation of a mine requires a lot of external resources, and the core resource is electricity. How to obtain a large amount of stable and low-cost electricity resources is crucial for a mine.

“For external resources such as electricity, we have three conditions:

First, electricity costs are low , but this is a necessary but not sufficient condition.

Second, the electricity must be stable , the technical facilities for power supply must be sufficient, the number of maintenance and overhaul should not be too many, the duration should not be too long, and the voltage and current should be relatively stable; in fact, this is difficult to achieve, especially for hydropower stations in the southwest, which have a dry season, with plenty of water in summer and no water in winter. In the past, there were not many people mining, and they all migrated like migratory birds, but this is obviously unrealistic for large mines.

The third most important thing is safety . For example, no one can disturb us. This is a very profitable business. Local tyrants cannot come to blackmail us. Others know that you are mining. Each machine has a fan for heat dissipation. The entire factory has fans for ventilation. There are many devices densely arranged. We cannot attract complaints from residents.

Therefore, when all these are added together, it is not enough for the technical operation team to do it alone. We need a local partner, who is an external team responsible for the entire peripheral environment, including various management and power supply. "

There are many ways to obtain the electricity resources most needed for mining. Civilian electricity is insufficient, industrial electricity is too expensive, and there are not many ways for mining farms to obtain electricity, or it can be said that there are very few ways to obtain electricity in a legal way.

In Xinjiang and Inner Mongolia, there are a lot of thermal power resources, and some energy-intensive energy industries are often built near power plants. Lu Hui said,

The state will give independent approval authority to such large-scale energy projects with high energy consumption, and provide dedicated cables and electricity fees. Therefore, there will be two ways for mines to take:

One is to have self-provided electricity. For example, if Inner Mongolia invests in a chemical project, it will have an independent line, and even build an independent power plant to serve the factory. The power for the factory will definitely be a little bit more, and that surplus space can meet the power needs of 10,000 or tens of thousands of machines in our mine.

"For factories, they get electricity at a very low rate, add a little money, and sell it to us to make a little more money, so why not? But this requires very strong connections, because although it is not illegal, it violates the rules and violates the power supply contract. Self-generated electricity is not allowed to be sold to anything outside the contract."

Second, Xinjiang and Inner Mongolia also have a need to attract investment. Mining farms are directly settled there in the name of cloud computing and big data, but the main leaders of the government are more important, and mining farms can also pay appropriate taxes. "For us, we add up all these costs and call them electricity fees." However, Lu Hui also said frankly that this method was okay last year, but it is not so good this year. After all, Bitcoin is more sensitive, and for local governments, making money is not as important as official positions.

In addition to these two borderline ways, there is another way to steal electricity, such as stealing near factories, or colluding with leaders of power supply departments to open private accounts. "This kind of stealing electricity is illegal. If it is illegal, the tools used to commit the crime must be confiscated. The first two ways are illegal, but the things cannot be confiscated. We will never steal electricity." Lu Hui emphasized to Blockchain Muddy Waters .

For miners, computing power has been increasing, while profits have been plummeting. Whether they can withstand the rising electricity costs is the key to survival. Although the current situation is not optimistic, there is still no shortage of new entrants who are diving in with enthusiasm.

"It's a bear market now, and the price has just reached the thigh. The real mining disaster is that it will keep falling to the ankle. It's not a good time to buy at the bottom yet. Just cut a little bit when you come in." If, as Lu Hui said, the price of digital currency drops further and the computing power increases further, miners will not make any money and mining disasters will come.

But there is a group of people who have recovered their mining costs and have saved enough electricity for a while. Therefore, the mining story will continue for them, and Lu Hui's team is obviously among them.

This legendary conversation lasted nearly 4 hours.

Blockchain Muddy Waters does not want to ask or mention how much money Lu Hui himself has earned through mining. What is more attractive to us is undoubtedly the mirror image of the various relationships and interests behind "mining".

As he was talking, Lu Hui, who was sitting opposite him, suddenly lowered his head and whispered: "Look at the man behind you, he's listening so attentively."

(Note: Lu Hui is a pseudonym)