Chinese Bitcoin mines migrate overseas: Looking for places with both cold climate and relaxed policies

Looking back at 2017, the hottest words are "Bitcoin" and the underlying technology "blockchain". But behind the hot discussion, what exactly is Bitcoin? How is it produced? How does it work? Many people are still confused.

In August 2017, when the price of Bitcoin was soaring, Tencent Prism used its connections accumulated over the years to break through layers of barriers and finally gained access to the world's largest Bitcoin mine in Ordos, Inner Mongolia. Through videos and pictures, we unveiled the mystery of Bitcoin production to the outside world. We also gave a detailed description of the most unique group of "miners" in the Bitcoin world: how they search for cheap electricity, how they follow the electricity and migrate like migratory birds...

Thanks to China's well-developed power infrastructure and cheap thermal, hydro and wind power resources, Chinese power has always monopolized the upstream industrial chain of Bitcoin production - Bitcoin mines.

But as China tightens its regulation of virtual currencies, this situation will never return. At the end of 2017, the central bank, together with several ministries and commissions, decided to guide the "orderly exit" of virtual currency mines in China. According to Prism, after the release of this opinion, many mines located in Xinjiang, Inner Mongolia and Sichuan have been interviewed by local financial offices and asked to exit. Some mines have not yet been interviewed, but their preferential electricity prices have been cancelled, and costs have risen sharply.

Under pressure, miners have begun to look for overseas places to live. Popular choices are usually Russia and Canada, which have cheap electricity and a cold climate that is conducive to heat dissipation.

Chinese monopolize Bitcoin production

560 kilometers west of Beijing, in Ordos in August, the scorching heat waves are wrapped in sandstorms. At two o'clock in the afternoon, the security guard squinted his eyes and opened the door of the "mine" for Prism.

This is one of the largest Bitcoin "mines" in the world. The gate is a dividing line that separates two worlds. Outside the gate is a typical landscape of a fourth-tier city development zone in China, while inside the gate is a sci-fi scene like The Matrix.

Eight large blue-roofed factories are lined up, with tens of thousands of mining machines flashing red and green lights and roaring inside, producing digital currency Bitcoins day and night for this "mine". This once largest mine in the world controls about 4% of the computing power (production capacity) in the Bitcoin world. At its peak, it can mine more than 100,000 Bitcoins a year, which is worth more than 3 billion yuan, based on the highest price of 30,000 yuan per Bitcoin in August 2017.

Bitcoin was invented by Satoshi Nakamoto in 2009. According to the model he constructed, he used the computing power of the chip to continuously perform "hash collisions" in the blocks generated by the Bitcoin system to win the right to keep accounts and thus obtain Bitcoins rewarded by the system.

This boring and repetitive process is vividly called "mining" in the Bitcoin industry, and the professionals who do this work are called "miners."

In the first few years of Bitcoin's operation, an ordinary laptop could play the role of "mining". But the entry of Chinese miners completely broke the balance of this situation. Relying on professional mining machines designed and manufactured in China, they staged one Bitcoin computing power arms race after another, raising the threshold of "mining" by tens of thousands of times.

Ordinary computers have become history, and integrated circuit mining machines that cost tens of thousands of yuan have come on the scene. The mining machines produced by the Chinese companies Bitmain and Canaan Creative are sold all over the world, and the latter even tried to enter the capital market by backdoor listing in an A-share company.

After seizing the world's productivity of Bitcoin, Chinese miners have monopolized the upstream of the Bitcoin industry chain: Bitcoin mining, relying on cheap electricity costs in Inner Mongolia, Sichuan, Xinjiang and other places.

Ordos is a typical example. Benefiting from the abundant energy reserves and cheap electricity costs in Ordos, many large Bitcoin mines are hidden here. Like magical realism, tradition and future are magically intertwined in Ordos.

Another representative is Sichuan, where the electricity provided by abundant hydropower resources is much cheaper than the price of thermal power using coal. To facilitate mining, many mines are simply built next to hydropower stations. However, due to climatic conditions, Sichuan's rivers usher in a dry season in October every year, which also means the depletion of the most important material basis for mining - electricity.

Like migratory birds, these mines begin to migrate in autumn, and Inner Mongolia, Xinjiang and other regions with relatively cheap thermal power are their popular choices. Of course, there are also more radical ones who simply move the mines to Cambodia, the Philippines and other places, where rivers flow all year round, eliminating the pain of migration, but correspondingly, they need to bear the risks brought by different systems and cultures.

The story of Chinese miners has been going on for four years. They use real-world electricity to mine virtual currency Bitcoin in deep mountains, forests, ghost towns and deserts. During this period, the price of Bitcoin has fluctuated greatly from a few hundred yuan per coin to nearly 30,000 yuan per coin today.

The underlying technology of Bitcoin, blockchain, is attracting more and more attention and applications; the new financing method based on Bitcoin, ICO, has created a new round of wealth myths; competitive digital currencies such as Ethereum and Zcash have emerged, and miners have followed suit, causing a global shortage of graphics cards...

This is a crazy world, a magical world that is detached from reality.

The "Secret" of Ordos

One morning in mid-August 2017, The Intercept took a morning flight from Beijing to Baotou, and then drove two hours from Baotou Airport to Ordos. On that day, several people in the Bitcoin circle, including The Intercept, received special approval. Most of them were from the United States, Israel and the United Kingdom, and were allowed to visit one of the largest Bitcoin mines in the world.

Ordos, which means "many palaces" in Mongolian, has one-sixth of the country's coal reserves, one-third of its natural gas reserves, and half of its rare earth kaolin reserves. This energy capital, which once created a series of economic myths, once surpassed Hong Kong in GDP.

With a lot of money in their hands, the people of Ordos continued to invest in real estate. At the peak, the dream of "three houses per capita" was a reality. After the housing price boom, it was likely to surpass that of Beijing, Shanghai and Guangzhou. The illusory bubble began to burst as coal prices fell. The debt crisis led to a large number of construction sites being stopped and buildings being left unfinished. The prosperous scene was gone, and the deserted development zone was rarely visited, and was ridiculed by the outside world as a "ghost town."

It was not until 2013 that the barren development zone in Ordos attracted the attention of Bitcoin miners. Large tracts of land and low thermal power prices made this once prosperous city intersect with the world of Bitcoin for the first time.

Andy, who was responsible for hosting the visit, told The Prism that the two largest expenses of a Bitcoin mine are mining machines and factory buildings, and the second is the electricity needed to operate the mining machines. Compared with the former, the latter is more important. The price and sustainability of electricity determine the profitability of the mine.

In order to obtain reliable and stable power support, this Bitcoin mine signed a service contract with the local government and power grid company at the beginning of its establishment. Such large electricity users are quite popular with the latter. After signing the contract, the annual electricity bill paid is hundreds of millions of yuan. The construction and maintenance of the factory can also bring in considerable tax revenue and solve some employment problems.

Hou Jie, a Chinese who is in charge of maintaining the mining machines, is a native of Inner Mongolia. He studied computer science and first heard that there was a need for talents in "big data processing" here, so he came to apply for the job.

"I only found out that this is a Bitcoin mine after I came here." Although he had never heard of it, the good income and simple work content made him stay. He told The Intercept that miners only need to do one thing, which is to ensure the normal operation of the mining machines, so his job "is mainly to check whether the temperature and humidity are suitable, to see if the power grid is adaptable, and to send the mining machines with problems for repair in time."

"If the voltage is unstable or there is a temporary power outage, the mine may lose millions of yuan in a day." Similarly, the ventilation and temperature inside the mine warehouse will also affect the efficiency of the mining machine operation. Although these things are small and trivial, they will directly affect the final profit of the mine, so they cannot be ignored.

There are more than 20 other people who have the same responsibilities as Hou Jie. They are divided into three groups, each working eight hours a day to ensure that there are people on site to maintain the mine and mining machines 24 hours a day, 365 days a year.

The mine operates 24/7, so it is inevitable that some mining machines will be damaged. In summer, due to the unstable voltage, the damage rate of mining machines is higher. For this reason, the mine is equipped with a group of repair workers. The damaged mining machines are removed from the mine, repaired, and then quickly installed for mining.

Testing, maintenance, and repairs, miners in this desolate corner of the city do their monotonous and boring work day after day, supplying one virtual currency Bitcoin after another, each worth nearly 30,000 yuan, to the outside world.

Bitcoin saves “abandoned electricity”

Compared with the world-class mines in Ordos, more small-scale mines with poor bargaining power with power grid companies are hidden in Sichuan.

In Aba, Sichuan, 1,200 kilometers away from Ordos, the mine owned by Chinese youth Chen Zheng is built next to a hydropower station on a tributary of the Dadu River.

Nearly a century ago, the Red Army crossed the river here during the Long March, breaking through the encirclement and heading north smoothly. Today, the Dadu River, with its huge terrain difference, abundant water and narrow river valley, is considered by many miners to be an excellent location for mines because of its abundant exploitable electricity.

Chen Zheng was one of the miners who noticed this early. "Sichuan has the most water resources in the country. There are thousands of hydropower stations of all sizes. There is plenty of electricity. In fact, in many cases, due to oversupply of electricity, some water that should have been used for power generation has to be wasted. We call this 'wasted electricity'."

Bitcoin has saved these “wasted electricity”. The water that was originally supposed to be released from the hydroelectric power station is now used to supply electricity to Bitcoin mining farms. The hydroelectric power station earns huge profits, while the miners get the cheap electricity they have always dreamed of.

"I can't tell you the exact price here, but it's generally less than 0.20 yuan (per kilowatt-hour)," Chen Zheng revealed.

Whether the power grid is connected is also a key factor that miners need to consider when choosing a mine site. A miner contacted by The Intercept said that he had found cheap "abandoned electricity" in Yunnan and quickly invested in building a factory, but within less than a year, the hydropower stations in the entire area were merged by the Southern Power Grid. The power that was originally directly supplied to the mine was forced to be connected to the grid. The price of the power after the grid connection increased by more than 50%, so he had to look for a new site.

In contrast, Sichuan has obvious advantages, with more than 4,000 hydropower stations scattered across the province, many of which are small hydropower stations that do not require grid connection. Miners flocked to the area, and some even directly bought hydropower stations to ensure stable power supply.

As a miner who entered Sichuan earlier, one of Chen Zheng's side jobs is to find hydropower stations for investors, but he found that with more and more mines entering, it has become extremely difficult to find a suitable hydropower station. But this does not bother the miners. If they can't buy a hydropower station, why not build one themselves?

In September 2016, the Sichuan Provincial Government issued a document that completely blocked this path. The document, titled "Opinions on Further Strengthening and Standardizing Hydropower Construction Management," clearly stated that during the 13th Five-Year Plan period, Sichuan will strictly control the approval of medium-sized hydropower projects, completely stop the development of small hydropower projects, and no longer expand the capacity of existing small and medium-sized hydropower stations.

To find a suitable hydropower station, two indicators need to be checked: installed capacity and available power generation time. The former determines the power generation capacity of the hydropower station, while the latter determines the power generation of the hydropower station. "If the power generation capacity and power generation are not large, the mining machine cannot operate for enough days. To put it bluntly, the payback period is extended or the speed of making money is slow." Chen Zheng explained that the business model of the mining farm is simple and crude: mining site selection - purchase of mining machines - installation and operation. Mining machines are fixed investment, and electricity costs are daily expenses. After the value of the mined Bitcoin exceeds the mining machine and electricity costs, the mining farm can start to make a profit.

However, this model does not take into account the wear and tear of mining machines. Moore's Law still applies to the mining industry. With the addition of new mining machines, the computing power of the Bitcoin world is growing every day. Therefore, after reaching a balance in revenue, the mining farm needs to race against time to earn more Bitcoin before the mining machines are replaced. In 2015, when the price of the currency was at its lowest, Chen Zheng witnessed that many mining farms were unable to make ends meet. The coins mined were not even enough to pay the high electricity bills and replace more advanced mining machines, and eventually they had to abandon the mines and leave.

Migration of birds in the mine

Hydropower is cheap in China's western province of Sichuan, but its disadvantages are also obvious. In October every year, the rivers here enter the dry season, which means that the hydropower stations that maintain the operation of the mines run out of power.

Like migratory birds, the mines here follow the cheap electricity prices and migrate northward to Xinjiang, Inner Mongolia and other places.

Miners need to race against time to complete the disassembly, transportation and assembly of mining machines in the shortest possible time. Time is their enemy. If they delay for one day, they will lose millions of profits.

In August, Chen Zheng had to prepare for the upcoming mine relocation. He needed to go to the winter mine in Inner Mongolia to check to make sure the site was intact and to ensure power supply. In addition, he had to contact the fleet in advance, with three drivers assigned to each vehicle, who would take turns until the mining machine arrived safely.

Although it is troublesome, Chen Zheng, who has been operating in this way for two years, already has sufficient experience. He is familiar with the stable power supply of the mine in winter.

In contrast, Wang Wei, who had just entered the industry, had much worse luck. The dry season was approaching, and the mine he and his partners had invested in Yunnan had not yet found a suitable winter migration site. He tried to visit several cities in Inner Mongolia, but either the electricity price was too expensive or the thermal power plant refused to sign a power supply agreement with him.

"The leaders in the power industry are not familiar with the matter and don't understand why I need so much electricity, so they don't dare to give it to me easily." Wang Wei was a little distressed.

But he is still trying, and several of his partners are also working hard to find electricity in Xinjiang, Shaanxi and other places.

Some miners who are tired of traveling have found a new way and set their sights on Southeast Asia. The hydropower resources there are more abundant, and the lower latitude means that the dry season is greatly shortened. However, unfamiliarity with local policies and culture has also created new troubles to a certain extent.

Graphics card shortage: Miners turn to altcoins

The world of "miners" is a brutal fight.

While Bitcoin miners are fighting and begging in the battle for electricity, new miners are avoiding the competition and mining competing currencies.

Since the birth of Bitcoin, its strong vitality and high price have attracted countless miners, but the computing power has soared tens of thousands of times, the price of professional mining machines is tens of thousands of yuan each, and the stable and cheap electricity, etc., the entry threshold is often hundreds of thousands or even tens of millions of yuan.

The emergence of competing currencies has opened the door to low-threshold mining for miners. The most well-known of these competing currencies are Zcash, Ethereum, and Ethereum Classic.

Ethereum, a cryptocurrency launched in 2014, is seen as the strongest competitor to Bitcoin. Its system-specific smart contract capabilities make it superior to Bitcoin in data processing.

Based on this capability, most of the ICOs that have been popular around the world since 2017 are based on the Ethereum blockchain. These factors have driven the prices of Ethereum and Ethereum Classic to soar.

Unlike competing currencies such as Bitcoin and Ethereum, it requires less computing power and can be done by a computer graphics card GPU that is good at computing.

Then, a dramatic scene occurred. The graphics cards, which were originally produced at a relatively stable rate, were bought up in batches by miners. Even though the base price of graphics cards on the market was doubled, they were still out of stock.

E-commerce platforms and physical stores are out of stock everywhere, and the original target customers such as gamers and Internet cafe owners are completely dumbfounded. Occasionally, second-hand graphics cards appear in the market, but the price is more expensive than new ones, and the supply and demand relationship is completely unbalanced.

"I hope a mining accident (referring to a sharp drop in the price of coins) will happen soon so that we can buy graphics cards." A gamer pleaded on social networks.

“Don’t bother mining, a Bitcoin is already 30,000! Just buy a second-hand one first. Maybe you won’t even be able to buy a second-hand one next year.” Another player advised.

(At the request of the interviewees, Chen Zheng and Wang Wei are pseudonyms)