China, the land of Bitcoin Mining, still?
January 25, 2020 | Written by Eric Choy
There’s an idiom in Chinese that goes “开源节流“ (kai-yuan-jie-liu), which in its figurative meaning means to increase income and reduce expenditures. Its literal meaning means to open a water source and reduce outflow. And as I walk along the riverside towards a mining farm located deep in a Sichuan village, some 3 and more hours outside of Chengdu, I can almost mentally tie this idiom into the booming mining industry that has spawned up in China the past decade.
Recently I was invited to check out a bitcoin mining farm in Sichuan (I will keep the exact name of the location anonymous for competitive reasons) which was literally right next to a dam along the river 嘉陵江, a major tributary of the Yangtze River. What was more interesting was the fact that this bitcoin farm was gated within the dam’s security entrance. But nevertheless, I had a chance to see in person the currently reality of Antminer S9s being junked giving way to the more state of the art efficient miners coming out in the market. Two young guys were manning the farms on a daily schedule with no access to the ever convenient 外卖 (food delivery) service that you can order with a few taps on your smartphone in any city in China these days, a set of dorms to sleep and eat, and a couple of out of service Mobikes that were apparently taken from the nearest city.
Most of everyone in the crypto industry knows that China has been a huge, an understatement, influence to not only bitcoin, but also to blockchain technology. If you take a look at any announcement or major news that comes out of China related to this space, Bitcoin’s price takes an immediate price reaction with the latest being an almost 40% jump this past October thanks to what many in the space are calling the Xi Shill.
In terms of Bitcoin mining, which is the fundamental task of creating blocks to maintain the blockchain and receiving a reward for that service in bitcoins, China is home to the world’s largest bitcoin mines, thanks to cheap electricity and breakneck speed of getting things done. At one time the country accounted for 95% of the volume traded in global markets(1). China’s mining dominance in this aspect is over 60% from latest reports by both CoinShares and TokenInsight’s 2019 Annual Mining Report with some reports suggesting China has more than a 70% ownership in terms of bitcoin miners. If you want to use mining pool dominance (hash rates) as a proxy, current hash rate data shows that 9 out of the top 10 bitcoin mining pools are Chinese pools. At the time of writing, these 9 pools control more than 80% of the total network hash rate which is at all-time highs of 112 EH/s.
In a Hashr8 podcast titled “The 2020 North American Bitcoin Mining Explosion”, Nick Hansen, CEO of Luxor Technology, goes off the whim to elaborate the magnitude of China’s supremacy of the bitcoin mining scene:
“I feel like I just blinked and one day I just realized that China just owns everything” — Nick Hansen, CEO of Luxor Technology
But does this all come to a surprise for us? Not really. If you look at the past decade, it could be safe to say that China just outcompeted the rest of the world on all fronts. Many media outlets titling the 2010s as China’s decade. I clearly remember back in early 2011 when a Chinese classmate of mine, back in the US, was using this bland looking designed messaging app called WeChat. Two or three years later, everyone in China is using it. Nine years later, it’s the one thing I NEED to use out here in Shanghai.
The Chinese are hustlers no matter the circumstances. And it’s only appropriate that we pivot to another area in mining the Chinese also played a huge role in. Before you continue reading on, you might wonder what the following examples has to do with bitcoin mining…well, minimal at best, so just take it with a grain of salt. But if anything to extrapolate out of it is the spirit of a culture and parallel similarities that one can observe from the sidelines.
The Chinese mining during the Gold Rush
Long before China became the epicenter of bitcoin mining, we only need to look back two centuries ago, to a different type of mining: The Gold Rush, when back in 1848, the first wave of Chinese came flocking into the California gold mines looking for new wealth as their homeland struggled with famine and high taxes resulting from the aftermath of the Opium wars(2). Between 1849 and 1853, about 24,000 young Chinese men immigrated to California forming the first ever Chinatown area of San Francisco, which is considered to be the largest and oldest Chinese community in the US(3). By the end of the 1850s, Chinese immigrants made up one-fifth of the population of the four counties that constituted the Southern Mines(2).
With any of the immigrants during that time, the Chinese were also subject to racism and violence. This actually gave way to the Chinese Exclusion Act in 1882, which basically halted all Chinese immigration for about a century and was the first immigration law passed in the US against a specific ethnic group. To this day, most Chinese Americans don’t even know about this piece of American history. It wasn’t until 2016 when Cal State Assemblyman, Ed Chau, made action to make the Chinese Exclusion Act taught in public schools.
“Despite the discrimination that the Chinese were given during the time, they were still respected for their work ethic. Talk to any gold prospector today, and they will tell you that prospecting in an area that the Chinese were working it can be tough, even impossible to find any gold left behind. While the White miners would usually move on when pickings got slim, the Chinese would work an area so thoroughly that there was hardly a speck of gold left when they were done.”(4)
It was actually a result of their hard work ethic and supremacy on these mines that led to the exclusion act because “the Chinese were thought of as competing too successfully” stated Frank Wu, a distinguished professor at the University of California Hastings College of Law and chairman of The Committee of 100.
Even after the gold rush ended and gold mines were emptied, the Chinese continued to be a part of the economic boom in the west helping to build the trans-continental railroad connecting the east and west coast of the US, contributing as laborers in other industrial jobs, and contributing millions of dollars to the state of California’s tax revenue. In particular, during the year of 1870, Chinese miners contributed more than $5 million to state’s coffers through the Foreign Miners Tax, almost one quarter of state’s revenue(2).
More mining in…Africa?!
As gold prices have increased in the past decade, so has the mining activity. And so has the influx of Chinese into Africa, the hotbed of gold.
Especially in Africa where China has poured billions of dollars into, with many mainland companies expanding business in the hopes of tapping new revenue streams. It could almost be thought of as natural for the Chinese to go into Africa during that time and dig for gold.
Chinese miners have been flocking to Ghana, Cameroon, and other parts of West Africa, areas deemed as abundant in gold mines. At the height of the miners’ gold rush in 2012–13, more than 30,000 Chinese were mining Ghanaian gold, according to a newspaper owned by the Chinese Communist Party mouthpiece People’s Daily. About 90% of them hailed from Shanglin county in southern China’s Guangxi Zhuang autonomous region, the report said(5).
Interestingly enough, most Chinese that came during the California Gold Rush were from southern China. And in fact, most Chinese that were part of the first wave of immigrants into America and other parts of the world hail from southern China. Just go to any Chinatown in the world and most likely you will find them speaking Cantonese, which is a major dialect in Southern China/Hong Kong.
And as in mirror fashion during the California Gold Rush of the 1800s, the Chinese have had to deal with violence and tensions amongst the locals. Some even resulting in deaths on both sides as the Chinese are criticized for taking advantage of lax regulatory guidelines on small scale mining. Although if u peer through any forums or blogs related to this controversial matter, some would rather blame the corrupt African government rather than the Chinese for the mess.
Pivoting back to Bitcoin mining
Now to understand how China became the epicenter of Bitcoin mining (besides their tenacious head down hard work ethic cited in the previous examples), we need to understand the other factors they have that gave them their competitive advantage: low electricity costs, a robust transportation system, and proximity to dominant ASIC manufacturers.
To expand on the former, let’s take a quick dive into China’s leading role when it comes to electricity. By 2011, China became the world’s largest electricity producer surpassing the US producing about 5.4 trillion KwH over US’s 4.1 trillion(1). It also helps to have one of the lowest electricity costs in the world.
But in some parts of China such as Sichuan and Yunnan provinces, electricity costs can get as low as $0.4/KwH thanks to the abundance of hydroelectricity. The bitcoin farm I had a chance to visit was smacked down right next to a dam on the river utilizing the cheap hydroelectricity as well as suiting their mining farm buildings with water curtains used to keep their ASIC machines cooled during the summer.
To reiterate the idiom above:
开源节流
And yes have they been using their water sources to the best of their advantage.
What is special about Sichuan, which is considered to have most of the bitcoin mining power in all of China, is that it experiences a relatively higher average yearly rainfall than other provinces(7). It’s also littered with rivers and mountains. The name Sichuan, 四川, is mistakenly referred to as the land of four rivers: 金沙江，嘉陵江，岷江，and 沱江. This makes it the ideal spot for producing hydropower. Over the past decade, in order to support its aluminum producing industries and eliminate coal production, the Chinese government has commissioned dozens of new dams and hydroelectric producing facilities to be built along the 金沙江 “River of Golden Sands”, JinSha river (just another name for the 2,300 km upper stretch of the Yangtze River), which runs through Sichuan and Yunnan. And lets not forget, China is already home to one of the largest dams in the world with the Three Gorges Dam. To this day, all the dams built on the JinSha river are capable of generating more than 60 GW, more than all 4,000 hydroelectric generating stations in the US put together(12).
As aluminum and other commodity prices dropped in 2014, an excess amount of yearly production of hydroelectric power was available, sometimes around 70% of net production(7). As a result, some plant owners have decided to sell their surplus energy, with reports stating as low as $0.1/KwH, or even setting up their own mines(8). In a 2017 report by energy giant, BP, from 2005 to 2015, China had one of the highest annualized growth rates in hydroelectricity consumption at 10.9% right below Vietnam’s 13.2% and Belarus’ 11.5%, and the highest consumption amount in 2016 with about 263 million tons oil equivalent. To this day, China consumes about 30% of the world’s hydro power and accounts for 76% of the world’s growth in hydro-power consumption in the last 10 years(9).
It also helped China’s bitcoin miners to have the largest ASIC manufacturer, Bitmain, in the same country.
What’s next for China and bitcoin mining?
In November of 2019, China’s National Development and Reform Commission decided to backtrack on its decision of eliminating bitcoin mining as a recognized industry. For many people within the inner mining circle in Sichuan, this came as a no surprise as some would say most government officials were already in support of this innovative industry. In the same month during a Sichuan Decision-Making Consulting Committee meeting, Jiang Yang, former vice-president at the China Securities Regulatory Commission, was recorded speaking favorably of cryptocurrency mining firms in the province(7).
“Sichuan should study further about how the province’s cheap hydropower resources can attract digital currency-related businesses.” — Jiang Yang
But will bitcoin mining still be concentrated only in Sichuan and Yunnan? The other two provinces that also account for some percentage of mining in China are in Xinjiang and Inner Mongolia where coal and thermal power are the main sources of energy. China already has several UHV transmission-line projects underway, which will help deliver energy from rural regions to cities in the east, which could diversify other areas of China in bitcoin mining(10).
There is already a lot of buzz and hype around North America being the place to be for bitcoin mining in 2020. Hut8 and BitFarms have already started to make moves in Canada. Down south in Rockdale, Texas, which is about an hour’s drive northeast of Austin and boasting a Google 4.3 star rated Chinese Buffet, is about to become home to some of the largest bitcoin mining farms thanks to Bitmain and Northern Bitcoin AG(11). Ironically, this small town used to be an aluminum producing hub back in the 50s, but production has shut down the past decade. The town’s motto goes “Great Things Happen Here”, if bitcoin prices push up further, there could be more truth to this motto in hopes of spurring life back up in this now desolate town.
When talking with western miners in this space for the past few weeks, many have called out what many have been worrying about, which is the centralization of bitcoin mining being only restricted to China. Yes, many agree that bitcoin mining should be more decentralized and yes, more and more VC money has been flowing into this space, but it is going to take a lot to take away hash power dominance from China. And there has even been rumored a hash war going on between the East and West on social media.
As older generation mining machines are starting to get rotated out for newer efficient ones such as the WhatsMiner M30s and Antminer’s S17+ series, farms and pools in Sichuan still have the advantage of getting these new rigs shipped and set up in a faster manner. That location proximity will never go away (and trust me, things in China move fast). Considering Bitmain is the market leader of ASIC machines, by them building a farm in Rockdale makes you wonder if an ASIC manufacturing plant in the US would also be in the works giving miners based there faster set up times.
To circle back to the mining farm in Sichuan mentioned in the beginning that I went to visit, a few things stood out to me as I had conversations with the young man working at the farm. For a country that still has not experienced a “comfort zone”, the Chinese are diligent, hardworking, they move fast, and have a high tolerance to a lot of conditions. The dorm room, if I could give it a word, was basically fitted with a shagged twin sized bed, a desk with unrepaired mining machine parts scattered, and a pile of cigarette butts piling up in the corner of the room. Conditions that I think most people cannot handle. And the only form of entertainment is his computer. Considering that this young worker had a wife and child back in Anhui province, about a 3 hour flight away from our location, I asked him with grave curiosity, “how long do you think you would want to work here for?”, he responds, “until this farm ever closes down”. A mindset many Chinese miners had instilled during the California Gold Rush, including the miners in Africa today, as they barely had chances to go back home and see family. And as long as this attitude amongst the Chinese miners persists, that water source will continue flowing for them.
Have a Happy Chinese New Year of the Rat and let’s see who wins this hash rat race in 2020.
Sources
1. https://qz.com/1072907/why-china-is-so-hot-on-bitcoin/
2. https://www.pbs.org/wgbh/americanexperience/features/goldrush-chinese-immigrants/
4. http://raregoldnuggets.com/?p=5657
6. https://www.mining.com/feature-chinas-scramble-for-africa/
7. https://beincrypto.com/more-chinese-bitcoin-miners-flock-to-sichuan-as-demand-soars/
8. https://www.buybitcoinworldwide.com/mining/china/
10. https://blog.bitmex.com/mining-incentives-part-2-why-is-china-dominant-in-bitcoin-mining/
