CRACKDOWN

This could be the beginning of the end of China’s dominance in bitcoin mining

Obsession
Future of Finance
Obsession
Future of Finance

Having shut down the exchanges where cryptocurrencies like bitcoin are traded, the Chinese government is now going after the facilities where such currencies are “mined.” To do so, it’s hitting such operations where it hurts: electricity supply.

Fresh reports have emerged about a crackdown—though not an outright ban—on bitcoin mining operations in China. Bloomberg reported Wednesday (Jan. 3) that the nation’s central bank has outlined plans to curb the power supply to some bitcoin miners, citing unnamed sources. Reuters noted that the bank intends to tell local governments to regulate miners’ power usage to “gradually reduce the scale of their production.” Chinese business magazine Caixin, meanwhile, reported that (paywall) authorities will no longer offer mining companies preferential benefits such as discounted electricity and tax deductions.

The crackdown could well put an end to China’s dominance in bitcoin mining.

The country accounts for more than two-thirds of the world’s processing power devoted to bitcoin mining. It’s also home to some of the world’s leading creators of mining hardware, such as Beijing-based Bitmain. These hardware makers usually also operate large mining “pools”—groups of miners who agree to add up their resources to improve their odds of finding bitcoin.

Cheap electricity is a major advantage for bitcoin miners in China. Coal-abundant regions such as Xinjiang and Inner Mongolia have in recent years taken to crypto mining as a niche approach to transforming their less-developed economies.

Bitmain, a mining giant, has taken advantage of cheap coal-fired power in those two regions to build several of the world’s largest mining facilities. In Inner Mongolia’s Ordos city, local authorities offer the company a subsidized electricity rate of just 4 US cents per kilowatt hour. That’s 30% cheaper than what industrial firms in the area typically pay, and well below prices in the US and most European Union countries.

Miners get even cheaper rates by bargaining with hydropower stations—rather than local or national grids—in the mountainous Yunnan and Sichuan provinces. At one stage, Bitmain’s mining facility in Yunnan enjoyed a rate of less than 2 US cents per kWh, according to company executive Su Jiahai. Such practices are carried out in a legal grey area but make perfect business sense for both sides. In a 2015 column for CoinDesk, Chinese miner Eric Mu explained why a hydropower station in Sichuan agreed to power his company’s mining operations:

[The power station] couldn’t obtain the quota enabling them [to] sell power to [the] national grid, which prefers the state-owned power stations over those that are privately-owned. Also, the county-level grid could only consume a small percentage of the power the station generated.

When Wu Gang [Mu’s colleague] appeared on the scene with a wacky idea to mine bitcoin using hydropower, people were initially skeptical. However, once they overcame this initial bout of confusion, it was clear a win-win arrangement could be formed.

 Bitcoin mining in China is “mainly an opportunistic way of making some money out of the failures and inefficiencies of the power system.” Bitcoin mining in China is “mainly an opportunistic way of making some money out of the failures and inefficiencies of the power system,” said Lauri Myllyvirta, a Beijing-based campaigner with Greenpeace. The massive hydropower networks in Sichuan and Yunnan were built to transfer electricity to the rest of the country, noted Myllyvirta, but state-run grid operators too often fail to prioritize renewable energy over coal. In 2016, Yunnan wasted a staggering 32 billion kWh (link in Chinese) of hydropower, about equal to the total electricity consumption of Denmark the same year.

The crackdown on miners comes amid China’s efforts to reduce the country’s power glut and better transfer electricity to where it’s needed the most. As Bloomberg notes, the annual increase in China’s installed generating capacity has fallen to its slowest rate since 2010, and 15 of the 16 lines in its ultra-high-voltage transmission networkdesigned to send power from the oversupplied north and west to the east—will be completed this year.

As China continues to make better use of its power system, miners in the country may find their lives getting tougher, and feel the need to seek cheaper power in other parts of the world. In fact, some of them have already done so. A Beijing-based mining firm told Quartz in November that it is scouting for backup options in Sweden and Canada for the tens of thousands of mining machines it currently operates in Xinjiang, although the company has no specific timetable to move out. Bitmain for its part has set up a regional headquarters in Singapore.

Already, the Chinese government has effectively killed bitcoin trading in a country that once dominated the global market. Soon, bitcoin mining could be the next to fall.

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