China Has Triggered a Bitcoin Mining Exodus | WIRED

Gian M. Volpicelli

Business

06.06.2021 09:00 AM

China Has Triggered a Bitcoin Mining Exodus

The promise of a crackdown is sending the country's crypterati scrambling for the exit.

Photograph: Lars Hagberg/Getty Images

The man shooting the video wears a face mask, rimless glasses, and a white hard hat. He is traipsing near the entrance of a warehouse full to the brim with stacks of internet-connected machines sitting idle in half-darkness. As the man turns the camera around to showcase the machines, he says in Mandarin, “This is the stock for you. It hasn’t even started mining bitcoin.” The video, a sales pitch received via text by a cryptocurrency entrepreneur based in Switzerland, is just one of many similar messages that have been flowing out of China over the past two weeks.

China has long been the world’s epicenter of bitcoin mining, an energy-guzzling process to secure the cryptocurrency network and mint new bitcoins via specialized machines known as “mining rigs.” According to the University of Cambridge's Centre for Alternative Finance, over 65 percent of miners working on the bitcoin blockchain were based in China as of April 2021. But Chinese miners are now on tenterhooks following a top government official’s announcement, in a speech on May 21, that Beijing would start to “crackdown on bitcoin mining and trading behavior.”

Some miners reacted by scrambling to get rid of their rigs. According to Robert Van Kirk, managing director of US-based mining equipment marketplace Kaboomracks, Chinese miners are frantically “fire-selling” their equipment. Even if the crackdown announcement was not immediately translated into regulation, Van Kirk says, it appears that some miners have been put off by the hostility. “People mining there have realized that it may now be a riskier proposition to operate in China than they had anticipated,” he says. “They may be leaving, regardless of whatever determination is made.” As a consequence, Van Kirk says, used mining rigs are now being sold at a steep discount, in some cases as much as 40 percent lower than the usual price. This is higher than figures from a Reuters report this week, featuring an interview with Chinese mining machine manufacturer Canaan, which says that prices have fallen by 20 to 30 percent from early May.

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Some of those selling their rigs, Van Kirk says, are likely entrepreneurs whose hosting contracts— which allow them to rent space for their machines in a large Chinese mining facility to take advantage of cheap energy and optimized infrastructure—were nearing their expiration dates. Because of amid the current uncertainty, these people might have resolved to sell their rigs rather than renewing their hosting deals.

Other miners are planning to take their business elsewhere, although it is hard to gauge how many miners are in the process of fleeing China. Right now, bitcoin’s hashrate—a rough proxy for the number of mining rigs connected to the network—is about 1.5 percent lower than it was on May 21, which suggests a large-scale exodus has not happened yet. (And even that decrease could be explained by unrelated reasons.) But in the long run, a shift in bitcoin mining’s geographic distribution might nevertheless be underway.

A source familiar with China’s bitcoin mining industry, speaking anonymously out of security concerns, describes panicked miners transporting their machines to neighboring Kazakhstan “overnight.” Those who could not afford a quick move, the source says, are planning to wind down their large mining farms and continue their mining in a more decentralized, inconspicuous fashion.

Didar Bekbauov is the founder of Kazakhstan-based Xive, a company that helps miners find space and convenient energy contracts in China. Bekbaouv says that, in the past fortnight, he has been receiving daily enquiries from representatives of Chinese miners looking to relocate to Kazakhstan. “These people are waiting for some clarification from the Chinese government, and they are looking for a plan B in case the government restricts or somehow bans mining altogether,” Bekbaouv says. Kazakhstan already accounts for over 6 percent of the world’s mining, and is endowed with cheap coal-produced energy and a relatively cold climate (which is great for miners who do not want to spend a fortune on cooling systems for their mining rigs). Another advantage is that it borders China, and especially the Xinjiang region, where over a third of China’s mining takes place. Kazakhstan might certainly increase its global share of mining—Bekbaouv estimates that it could maybe double its capacity—but it is possible that it will simply be used as a stopover destination for miners looking to rehome their precious rigs elsewhere. And that elsewhere, some say, is likely to be North America.

Alex Brammer, vice president of business development at US cryptocurrency company Luxor Tech, recounts being bombarded by calls coming from Chinese miners within hours of the May 21 speech. “We were fielding calls from very large miners trying to find collocation space power throughout North America,” he says. “We were having calls and the questions being asked were, 'Can you house 20,000 machines in 14 days?' for example. The tone in the industry was just very frantic.”

“Anecdotally, I would say that many, many [miners] will be leaving China, within the next 30 to 60 or 90 days,” Brammer adds.

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Non-Chinese entrepreneurs might be the first to up sticks, Kaboomracks’ Van Kirk says. “We have clients that are hosted in China, but are Western, who are wanting to find capacity outside of China,” he says. “They're looking for something in the United States or Canada.”

It is not only North America to be sought after as a prospective destination. Parts of northern Europe and Latin America are also being considered; in general, Brammer says, some Chinese individuals want to move their business to a place “that is politically stable, that has strong property rights, that has some type of an existing and somewhat stable regulatory framework.” But the US, which is already the world’s second country for bitcoin mining, might prove to be particularly attractive.

That is not to say that a move will be simple. Logistically, Brammer says, it is quite a nightmare to move tens of thousands of machines from China to the US, especially amid a global pandemic that has triggered a shortage in shipping containers, and a latent trade war that will require any company seeking to move goods from China to the US to pay a 25 percent tariff. Even once the mining machines are unloaded from the private cargo planes or container ships, setting up a new mining operation in North America is going to take some time. “Some of these [Chinese miners] are coming in and they're saying, ‘We'd like to buy 500 megawatts of capacity,’ and you've got these North American power generation facilities and mining farms that go ‘We just don't have that,’” says Brammer. He estimates the timeframe for building a large mining farm from scratch at around 12 to 24 months.

Edward Evenson, director of business development at bitcoin mining company Braiins, is more sanguine. He says that most larger miners will just be shipping new machines from manufacturers based out of China, and that they will have the resources to pull that off relatively quickly. “Smaller miners may not have the resources or connections, so they will probably have to sell off their machines,” Evenson says. “But the larger operations will simply move their machines to more stable environments for mining.”

The big question, however, is whether the panicked calls will lead to a true exodus. As a matter of fact, right now most Chinese miners are waiting for the government’s next move. “Chinese miners, who have higher risk tolerance than Western miners in our observation, are largely taking a wait and see approach,” says Ian Wittkopp, vice president of Beijing-based venture capital firm Sino Global Capital. “Most Chinese miners have experienced similar cycles of news in the past. The cost of migrating to a new location can be high, we expect most miners to wait for more regulatory clarity before relocating.”

This is not the first time China has been waving its fist at bitcoin; but that harsh posturing has never really sunk the country’s thriving bitcoin industry. “Whenever the price of bitcoin shoots up, and there's a lot of speculative mania around it, the government makes one of these announcements,” Evenson says. “They've done it essentially every year or about every other year since 2013.”

But this time it may be different. First of all, the seniority of the official who made the announcement, China’s vice premier Liu He, may mean that this time the government plans more decisive action. On top of that, the regional government of Inner Mongolia—a bitcoin mining hub— has proposed a ban, while energy officials in Sichuan, another key mining region, have been holding consultations on the matter. According to Shuyao Kong, a director at blockchain firm Consensys, Beijing might simply want to target miners in regions such as Xinjiang and Inner Mongolia, which power their rigs mostly with coal, as part of China’s push for sustainability. Kong says this might trigger “the estrangement of China and the crypto industry”, tired of dealing with the vagaries of the government’s posturing and equivocating.

Another key difference from the past, Evenson says, is that the level of investment Chinese miners have poured into their operations means they have much more to lose. “No one, when they've invested this much capital into a project, wants to keep dealing with the uncertainty. So if you can, you want to secure a stable environment to run your machines,” he says. While he expects China to remain a bitcoin mining powerhouse, Evenson expects up to a quarter of its miners to relocate within two years.

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What such a shift will mean for bitcoin is hard to tell at this stage. One immediate consequence is that the bitcoin networks will become more geographically decentralized, which will assuage the fears of many cryptocurrency believers worried about the excessive concentration of miners in a single authoritarian country.

Another unexpected upshot might have to do with bitcoin’s environmental impact. The cryptocurrency has been heavily criticized recently for consuming as much energy as the Netherlands. While the University of Cambridge estimates that 39 percent of mining is powered by renewable energy, many – including former bitcoin champion and Tesla Technoking Elon Musk—think that mining’s carbon footprint is still too high.

A shift from China to North America, where the question of bitcoin’s environmental impact has become a top priority (Musk himself has been in talks with American miners to increase its sustainability), in parallel with China’s own crackdown on mining in coal-powered regions might paradoxically end up making mining greener.

This story originally appeared on WIRED UK.