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In China, where Bitcoin mining is booming, some people have already left the market in disgrace.
"I don't want to run a mining pool anymore, it's too tiring," Zhang Shuai (pseudonym), a manager of a mining pool company, told The Paper. He described his entrepreneurial experience as "a complete mess and a complete failure" with some sadness.
On the official website of its Bitcoin mining pool company, the latest mined coin revenue and hash collision difficulty are updated in real time. However, the last line of data displayed on this carefully designed webpage is forever frozen at 16:06 on December 7, 2017.
On January 2, The Paper exclusively reported that the Office of the Leading Group for the Special Rectification of Internet Financial Risks issued a document to all localities, requiring them to actively guide enterprises within their jurisdiction to orderly exit the Bitcoin mining business and regularly report on their work progress. Earlier, in mid-to-late November last year, the Internet Finance Rectification Office had already held a meeting to discuss the issue of guiding mining farms to exit.
"Many small mines have moved to Russia and Iceland, and some have been shut down by local governments due to electricity theft and leakage problems, but the large mines are still there," a person in the Bitcoin mining industry told The Paper.
Mining for financial freedom
Let’s go back to 2011. That was the year when Zhang Shuai first came into contact with Bitcoin and started his first “mining” in his life.
Mining is the upstream of the Bitcoin industry. Miners use the computing power of their machines to perform "hash collisions", that is, to solve a question in the Bitcoin system every 10 minutes. Whoever answers it first will receive a Bitcoin reward distributed by the system, which is also called a "block". At first, 50 Bitcoins were obtained, and then gradually reduced to 12.5. The final total number of these Bitcoins will reach 21 million, which will be mined in 2040. As of January this year, 80% of Bitcoins have been mined worldwide. In theory, the life of the mining industry should end completely in 22 years, but the emergence of more currencies such as Litecoin and Bitcoin Cash on the market has made it possible for this industry to continue.
In 2011, Zhang Shuai worked as a salesperson at a server hosting company in Shanghai. His boss at the time took him to "mine" the market, when graphics cards were the mainstream. In 2012, "Pumpkin Zhang", a doctoral student in the Computer Science Department of Beijing University of Aeronautics and Astronautics, began to make money by selling equipment. His mining chip Avalon was as efficient as hundreds of computers. It began to accept pre-orders in September 2012 and started shipping in the first quarter of 2013.
Also in 2013, as the price of bitcoins in his hands rose, Zhang Shuai sold his bitcoins to replenish mining machines. Later, he sold his mining machines to a large-scale bitcoin company in East China, and became one of the company's managers. However, due to differences in business philosophy, Zhang Shuai and his colleagues started to start a business on their own in 2016, which was a mining pool.
Zhang Shuai is undoubtedly lucky. In the early days, many miners who used computer CPUs and graphics cards mined just out of interest. At that time, the price of the coin was only a few yuan. After mining, there was a high probability that they would forget the wallet password, and these bitcoins would be "sleeping" in the network forever. But Zhang Shuai is different. Although he is not a devout "believer" of Bitcoin, he has an obsession that this coin, which could only buy two pizzas with 10,000 in 2010, will eventually bring him wealth. So when he first met the reporter from The Paper, he said proudly: "Bitcoin has brought me financial freedom."
At the peak, he owned more than 10,000 bitcoins, which would be worth 1 billion yuan if he had kept them until now. However, during the subsequent price fluctuations, he sold many of them and did not have much left, which is one of the reasons why he regretted it.
Viewing mining machines as money printing machines
I first met Zhang Shuai in an office building in a startup incubator park in Xiaoshan, Hangzhou in the summer of 2017. Zhang Shuai is in his thirties, slightly fat, with a dark complexion, and doesn't talk much, but he has a bold and unrestrained air. Wearing a striped T-shirt and flip-flops, he took the reporter from The Paper around the 50-square-meter startup company's office. In the office, there were a dozen young programmers, staring nervously at the strings of code on the screen.
The mining pools they manage are mainly responsible for the centralized hosting of independent mining machines. They maintain the various nodes in the network and transmit computing information to the Bitcoin network. If a mining machine in the mining pool they manage produces the correct result, the mining pool will distribute the obtained Bitcoins equally to all mining machines, mainly based on the computing power contribution. Therefore, the mining pool can be understood as "grouping together to fight monsters."
"The output of our mining pool is not high, probably only one percent of the global output," Zhang Shuai said.
One percent is not high indeed. China accounts for 80% of the world’s computing power, and Ant Mining Pool, owned by mining machine giant Bitmain, accounts for nearly a quarter of the computing power of the entire network.
At that time, Bitcoin was in an upward price range, and Zhang Shuai was optimistic that mining machines were money printing machines.
In fact, the price of Bitcoin has doubled since then, and the yield is even higher. An executive of a mining giant in the industry also told The Paper, "After buying a mining machine, you can get your money back in half a year, and you will make money after that."
But there is a limiting factor here, which is the huge power consumption. Calculated at a low electricity price of 0.35 yuan per kilowatt-hour, it takes 5,000-6,000 yuan in electricity to mine one coin. Morgan Stanley analysts previously stated in a report that virtual currency mining may consume 140 terawatt-hours of electricity in 2018, accounting for about 0.6% of global electricity demand.
"If you are interested, you can take a mining machine back and mine for fun. The profits will belong to you. However, this thing has high power and makes a lot of noise. It may be noisy if you put it in the office or at home," Zhang Shuai told The Paper at the time.
Mining industry "ant moving"
High yields cannot stop the pace of retreat, and the upcoming obstacle is the regulatory authorities.
On September 4, 2017, the central bank took action to crack down on ICOs (initial token offerings), which caused a stir in the Bitcoin industry. However, many people insisted that the central bank was targeting copycat coins and fake project financing that imitated Bitcoin, and that "legitimate" Bitcoin would not be affected. However, just 10 days later, domestic Bitcoin exchanges of all sizes received instructions from regulatory authorities to shut down on-site trading within a specified period of time.
Once the trading port is closed, the upstream mining industry will suffer. In November, the Internet Finance Regulation Office held a meeting to discuss the issue of guiding mining farms to exit. The People's Bank of China instructed local governments to start with power supply and gradually reduce the scale of Bitcoin mining.
Also on November 13, during this period, the Danba County Power Supply Branch of the State Grid Sichuan Ganzi Prefecture Electric Power Co., Ltd. issued a notice to small hydropower stations connected to the grid, stating that Bitcoin production was an illegal operation and that all grid-connected power stations had to stop Bitcoin production. However, the power company later said that it was hastily written when dealing with large-scale power restrictions, and it was not an official red-headed document of the company. The original intention was not to refer to Bitcoin mining as an illegal operation, but because some small hydropower stations failed to give priority to meeting the local people's livelihood electricity needs, violating the requirements of the power purchase and sales contract with the company.
Zhang Shuai began to panic. He repeatedly told The Paper that on the one hand, he was afraid that the mining farms would be hit again because of the tightening of regulations, and on the other hand, he saw that the price of Bitcoin was rising all the way, and he regretted selling it too early. He couldn't sleep all night, and under pressure, he put an end to his entrepreneurial project in December.
Zhang Shuai's hunch was correct. On January 2, the Office of the Leading Group for Special Risk Rectification of Internet Finance issued a document to all localities, requiring them to actively guide enterprises under their jurisdiction to orderly withdraw from the Bitcoin mining business and report on the progress of their work on a regular basis.
"I'm too tired. Why don't I do something else? I'll take a break and relax first," Zhang Shuai told The Paper.
More mining farms are "relocating". Several industry insiders told The Paper that many small and medium-sized mining farms have moved abroad under regulatory pressure, mainly to Russia and Iceland, where electricity is cheaper and regulation is more liberal.
Some mines are not so lucky. Some mines located in Anhui have been required to close down due to years of electricity theft.
But the big mines are still in production. An industry insider told The Paper that some mines were attracted by local governments, have contracts in place, and pay taxes to local governments, so neither the government nor the mines have any intention to move away for now. "For example, Guiyang is building a big data center and is also very interested in Bitcoin's underlying technology, blockchain, so they will not drive away mining companies."
But even Bitmain, which controls the absolute majority of the mining machine market share, has begun to transform. Surprisingly, the direction of transformation is not blockchain technology close to Bitcoin, but artificial intelligence. For example, at the World Artificial Intelligence Conference in November, Bitmain took the opportunity to promote its own custom chips for tensor computing acceleration processing developed with artificial intelligence technology.
A violent storm is coming.
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