Bitcoin "power restrictions" have not yet been implemented, and experts are worried that the rectification notice will become a dead letter

100,000 yuan worth of Bitcoin and 0.1 yuan electricity price

Bitcoin "power restriction" has not yet been implemented. Experts worry: local governments are reluctant to give up the interests of "mining farms" and the rectification notice may become a dead letter

IT Times reporter Wang Jianjun

When the price of Bitcoin soared and a single coin reached the RMB 100,000 mark, domestic supervision was strengthened again. Recently, some media reported that the Leading Group of the Internet Financial Risk Special Rectification Office (hereinafter referred to as the Internet Financial Rectification Office) issued a document requiring local rectification offices to comprehensively adopt measures such as electricity prices, land, taxes and environmental protection to "guide relevant enterprises to exit in an orderly manner" and report the basic situation of the "mining" enterprises under their jurisdiction and the situation of guiding their exit before January 10. This is considered to be another effort to regulate the Bitcoin market from the source of Bitcoin mining fields after the regulatory authorities warned of the risks of Bitcoin transactions and closed Bitcoin trading platforms.

However, January 10 has passed, and as of press time, no relevant response measures have been found in various places. Many miners told the IT Times reporter that they are currently observing policy trends and are prepared for limited investment and scale. They may consider "going overseas" in the future. Some small and medium-sized operators said they would "continue mining" and "hoard coins for valuation."

Some industry insiders believe that the Internet Finance Regulation Office has no direct leadership over local governments. When "mining" brings financial benefits, local governments lack the motivation to shut down Bitcoin mines. Experts suggest that multiple departments jointly govern and introduce relevant assessment systems, otherwise the regulation notice may become a dead letter.

Many "mines" are still operating normally

In a mountainous area at the border of Sichuan and Tibet, Liu Fei (pseudonym), a veteran Bitcoin player and a "big miner", is thinking about the future of mining operations. After seeing the news of the Internet Finance Regulation Office's announcement, he felt that he had to prepare for a rainy day, even though the local government had not made any moves and mining was proceeding normally.

Liu Fei's "mining farm" has more than 20,000 mining machines "mining" all day long. The so-called "mining" refers to using the computing power of chips to solve the "hash puzzle" given by the Bitcoin blockchain network. Whoever solves it first has the right to record the block and gets a reward from the system, a bitcoin. Therefore, having a "mining machine pool" with strong enough computing power is the key to obtaining more bitcoins, and the most important consumption cost of mining machines is electricity.

In June 2017, Liu Fei, who had been engaged in "mining" in Xinjiang, moved part of his site to the Sichuan-Tibet border, where there are a large number of abandoned industrial plants and old production workshops, with affordable rents and, more importantly, cheap electricity prices, less than 0.4 yuan per kilowatt-hour. This is a very attractive price. Liu Fei once calculated that if the electricity cost exceeded 0.6 yuan, it would be difficult to make money from mining.

In this "mine" of about 10,000 square meters, 20,000 "mining machines" are roaring day and night. Each mining machine consumes about 25-30 degrees of electricity a day, and the electricity cost is about 10 yuan. "The daily cost of electricity alone is 200,000 yuan." In order to build this "mine", Liu Fei spent a lot of money. He bought this batch of "mining machines" at a price of 8,000 yuan each in the second half of 2016, spending a total of 160 million yuan.

This notice from the Internet Finance Regulation Office was not the first time that Liu Fei felt the policy risks. In September 2017, China began to strictly regulate Bitcoin, and all trading platforms were shut down. Although the spearhead was not directed at the "mining farms" at the time, he was a little nervous and once rented a large number of trucks to store the mining machines, ready to transport them to more remote places at the first sign of trouble.

This time, the policy is aimed directly at "mining". Liu Fei feels that the "shoe" is finally about to drop. He is closely following the policy direction. "If necessary, we have to move abroad."

Similar to Liu Fei, another person in charge of a "mine" in Xinjiang admitted that he was prepared for the limited investment and scale. However, the local government has not yet issued specific policies. "We have to keep a low profile and actively cooperate with the government's policies," the person in charge said.

According to an investigation by the IT Times reporter, some small mines in the eastern and central regions of Anhui, Zhejiang, and Shanghai are still operating normally and have not received any relevant "exit" instructions or notifications. A "miner" in Zhejiang told reporters that he runs a mining business on a farm and earns about several thousand yuan a day. Recently, due to the unstable price of Bitcoin, he started mining Ethereum, but he did not sell it, and planned to "hoard" it until the bull market.

Shi Pengfeng, CEO of Wangdaizhijia, analyzed that the "guiding the orderly exit of Bitcoin mining" mentioned in the notice should mean that mining is not allowed. The regulators (central bank) believe that mining causes a large waste of resources without generating substantial value. At the same time, they also hope to further restrict the development of various factor markets of virtual currency in China in this way, thereby reducing the speculative enthusiasm of individuals and enterprises to participate in virtual currency.

The price difference between electricity in the east and west is seven or eight times

The "guiding measure" that regulators are looking at is power rationing, which is interpreted by the outside world as "suppressing mining activities by raising electricity prices."

Although the current policy direction has not yet been transmitted to the end "mines", Wang Qingyun, the former co-founder of Bitcoin Exchange, believes that the era of low electricity prices may become a thing of the past. He believes that in some areas in the west, the electricity price is likely to increase from less than 0.3 yuan per kilowatt-hour to around 0.5 yuan in the future. "This is a relatively reasonable price, but for mining companies, because of the huge amount of electricity consumption, it means that the cost will rise sharply."

Wang Qingyun did some calculations for the reporter: For a large-scale mining farm, with the current electricity price of less than 0.4 yuan per kilowatt-hour, the annual electricity cost is between 200 million and 300 million yuan. But if it rises to 0.5 yuan, the cost of electricity alone will increase by more than 100 million yuan.

The above-mentioned "miner" in Zhejiang also told the reporter from IT Times that he is now mining based on the agricultural electricity price, which is 0.6 yuan per kilowatt-hour. Because he hoards coins and does not sell them, he needs to advance tens of thousands of yuan in electricity bills every month. In the short term, the pressure is not too great, but if he hoards coins for too long, it will become unsustainable.

In several WeChat chat groups, many "miners" have a common lament that "electricity is too expensive." Electricity is mainly used for industrial purposes, and the price in many eastern regions is 0.8 to 0.9 yuan per kWh. The high electricity cost makes them lose confidence and interest in "mining." They often lament that "mining is really hard work" and "the profit from mining cannot cover the electricity cost."

This is the important reason why "miners" are looking to the western region. According to Lv Tianwen, secretary general of the National Data Center Energy Conservation Committee, the current guidance price in Inner Mongolia is 0.5 yuan per kilowatt-hour, and a few regions can even offer a low price of 0.26 yuan. Xinjiang has a large number of wind power and photovoltaic power, and a large amount of electricity cannot be transported out, nor is it connected to the national power grid, so it is not market-oriented and the price is low, usually below 0.4 yuan per kilowatt-hour. The electricity price in Tibet is 0.2-0.3 yuan, and the price in the border area between Sichuan and Tibet is even lower, with the lowest price being only about 0.1 yuan per kilowatt-hour. The price difference between the east and west is as much as seven or eight times.

In Wang Qingyun's view, "Mining is all about electricity charges. Even just one cent can make a huge difference in profits." This time, the Internet Finance Regulation Office requires an increase in electricity prices, which will be a huge test for mining companies and individuals.

A single paper notification may not be effective

However, compared with the crackdown on Bitcoin trading platforms in September 2017, the implementation of the policy of limiting power supply to Bitcoin "mines" this time does not seem to be as vigorous. Caijing previously reported that although the central bank intends to stop Bitcoin mining, it does not conform to administrative practices and has no basis for closing the mines, and the statement of closing the mines within a time limit is not rigorous.

An industry insider also expressed a similar view to the IT Times reporter. Judging from the scope of authority and responsibilities, the central bank's move seems to be an overstepping of authority, and the Internet Finance Regulation Office is not a direct leadership body of the local government. Therefore, the local government has little motivation to actively promote this move.

Wang Qingyun believes that Bitcoin mining has a positive impact on local governments, such as increasing fiscal revenue and driving economic development. At the same time, the upstream and downstream industries of mining machines can also create certain jobs, which are very important to local governments. "Especially in some western provinces, where fiscal revenue is limited and electricity resources are abundant, there is also some waste water and electricity during use and output. Mining can make full use of resources and create great economic value and benefits."

Lv Tianwen believes that there are several major problems with Bitcoin mining. On the one hand, the power consumption is very high. According to relevant data, as of November 20, 2017, the annual power consumption of Bitcoin mining in the world is about 29.05TWh, which exceeds the annual power consumption of more than 150 countries. On the other hand, Bitcoin is a virtual currency and does not bring any actual economic value. Instead, it may cause financial risks. "It is equivalent to this virtual commodity consuming a huge amount of national energy, but it does not bring much benefit to the country." He also revealed that the national power department, the Ministry of Science and Technology and other departments are actively planning the construction of power informatization and big data. In the future, there will be a better detection of power loss in various places, and high power consumption or power theft will be tracked in a timely and effective manner.

However, regarding the current notification requirements of the Internet Finance Regulation Office, Lu Tianwen is also worried that the thunder is loud but the rain is small. If there is no actual execution and binding force, it may eventually come to nothing. He suggested that the National Development and Reform Commission should be joined forces with multiple departments to jointly govern, and at the same time, this matter should be included in the government officials' assessment system to achieve twice the result with half the effort.

The future of “miners”: going overseas or being “exited”

Under the current situation, Liu Fei and other large-scale mining farm owners are planning to expand overseas. The reporter also noticed in multiple Bitcoin WeChat circles that some people are now mining by building hydropower stations in Southeast Asian countries such as Laos and Cambodia without connecting to the national power grid; others are mining with nuclear power in Russia and Ukraine. The above-mentioned industry insider said: "Even if the country does not allow them to play, these senior players and bigwigs are not afraid and can go abroad."

According to a previous report by Wall Street Journal, Bitmain, a Beijing-based mining machine company that owns the world's largest Bitcoin mining pool "AntPool", is currently establishing its headquarters in Singapore and also has mining operations in the United States and Canada; the third largest mining pool BTC.Top has also opened a branch in Canada; the fourth largest mining pool ViaBTC has also landed in Iceland and the United States.

Shi Pengfeng said that the waste of electricity resources is a major drawback of cryptocurrency mining, but this is determined by the reward mechanism based on proof of work (PoW).

Not long ago, Ethereum announced that it would switch from PoW to PoS+PoW hybrid consensus mechanism. This will greatly reduce the consumption of electricity. Shi Pengfeng therefore determined that the mining industry may gradually retreat from the center of the stage of the virtual currency and blockchain world to the edge of the stage in the future.

The so-called PoS and PoW are both consensus protocols, and the difference between the two lies in the different reward rules for stakeholders. PoW is the abbreviation of Proof of Work, which means that the currency is distributed according to the workload contributed by the miners. The better the computer performance, the more mines will be distributed; while PoS (Proof of Stake) is based on the number of digital currencies currently owned by miners, and the interest is distributed according to the amount and time of holding the currency. Under the PoS model, the "mining" income is proportional to the age of the currency, and has nothing to do with the computing performance of the computer. This consensus algorithm will seek to virtually replicate the mining process of Bitcoin without wasting electricity.

In the early morning of January 11, 2018 (Beijing time), as of press time, the price of Bitcoin on Huobi.com was shown as US$14,860 per coin, equivalent to RMB 96,400.