China Reconsiders Its Central Role in Bitcoin Mining

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Bitcoin enthusiasts appreciate the cryptocurrency as being out of the reach of any government. Yet up to three-quarters of global supply was produced in just one country, China, where an attempt by the government to curb production is now causing global Bitcoin turmoil.

The amount of electricity needed to power large numbers of computers used to make new bitcoins is in conflict with China’s recent climate goals. The government, which manages its local currency with a clenched fist, also generally frowns on cryptocurrencies. Legal bitcoin exchange has not been allowed in China for years, even though the country’s entrepreneurs emerged as the dominant source of its production.

Few governments have adopted Bitcoin, but the aftermath of Beijing’s threats showed how its influence on production left the cryptocurrency vulnerable.

The 24/7 number crunching required to create or “mine” Bitcoin relies on plentiful supplies of cheap electricity and equipment, some of the same elements that China used to become the world’s manufacturing hub.

In their hunger for market share, China’s bitcoin miners took advantage of an underregulated and overbuilt power generation sector. In the mountainous provinces of Sichuan and Yunnan, they set up mining operations alongside hydropower producers, where turbines turn snowmelt and seasonal downpours into electricity. When the rivers slowed each winter, miners packed their computers and headed north to coal-rich Xinjiang and Inner Mongolia.

Chinese bitcoin manufacturing operations aren’t as filthy as real mines, but one advisor notes that they don’t resemble the ultra-hygienic space environments of science fiction either: “In the movies, they’re cleaner and presentable.”


Photo:

Paul Ratje / The Washington Post / Getty Images

Mining operations in China, sometimes tens of thousands of computers wired together to solve complex arithmetic puzzles, use electricity. The Bitcoin industry alone is well on its way to becoming one of the top 10 electricity consumers in China alongside sectors such as steel and cement production, according to a peer-reviewed paper published in April by the UK’s Nature Communications. That would make China’s bitcoin producers greater energy consumers than the entire nation of Italy.

This cravings has brought Bitcoin mining into conflict with Beijing’s political priorities. President Xi Jinping is determined to make China the climate champion and has set ambitious goals to reduce coal consumption. Beijing is also on the verge of introducing a national digital currency, controlled by the central bank, designed to counter cryptocurrencies.

Chinese Bitcoin production is reminiscent of the country’s influence in other high-tech areas, from the production of rare earth minerals to video surveillance equipment – with one key difference: Beijing’s distrust of cryptocurrencies.

On May 21, China’s government promised to “crack down on Bitcoin mining and trading behavior,” a statement widely interpreted as a warning that the days of the multi-billion dollar cryptocurrency supply chain are numbered.

In response, power producers are pushing miners off the grid and Chinese traders are unloading computers that are supposed to make Bitcoin at huge discounts on the used market.

Mixed production

None of this means the world will run out of bitcoins. Instead, mining is likely to slow down in China and accelerate elsewhere. Miners in other nations had already curtailed China’s manufacturing dominance for the past 18 months or so, according to figures from the University of Cambridge, which estimated the U.S. share rose over the past year to around 7%.

But even given some industry expectations that the U.S. share could soar to maybe 40% in the next few years, the Bitcoin community had believed that China would keep nearly half of the mining.

“In China, people always thought that the government would crack down,” said Nishant Sharma, founding partner of the Beijing consulting firm BlocksBridge Consulting Ltd.

Even so, he said, “I see so much panic.”

Concerns over disruption from the upheaval in China have weighed on Bitcoin price, along with news last month that Elon Musk’s automaker Tesla Inc.

hadn’t accepted it as payment, also for environmental reasons.

Early entrants

The history of Bitcoin in China owes much to an earthquake that struck southwestern Sichuan Province in 2013. Among the millions of donations that subsequently flowed to charities, some stood out: gifts from Bitcoin to a foundation run by the Chinese action star Jet Li.

The resulting craze for Bitcoin intrigued Jiang Zhuoer, a Shanghai phone company employee who bought two computers that winter and started mining at home. His setup quickly generated $ 500 to $ 700 a month and also warmed up his apartment, he recalled in an interview.

Also in that year, a team of technology enthusiasts in Beijing began to develop computers specifically for the development of new bitcoins. Their company, Bitmain Technologies Ltd., used parameters published by an unidentified architect of Bitcoin, which one of them translated into Chinese.

Chinese companies like Bitmain have carved out a lucrative niche for themselves selling specialized Bitcoin mining computers.


Photo:

Artyom Geodakyan / TASS / Getty Images

Chinese regulators – chastised by a pattern of financial frenzy and the inevitable bankruptcy – telegraphed their fear. The state-controlled government news agency, Xinhua, called Bitcoin “nothing more than privately made money circulating on the Internet”.

Eight months after the Jet-Li donations, regulators torpedoed any notion that the trending asset was welcome in the Chinese financial system. Under the leadership of the People’s Bank of China, Beijing banned the country’s banks from handling cryptocurrency.

Beijing tightened the screws again in 2017 by banning various uses for cryptocurrencies, including online trading.

However, the Chinese authorities have not set specific guidelines for issuing Bitcoin, so the enthusiasts are continuing to mine.

Inspired by devious profit calculations instead of technical knowledge, small-town real estate tycoons and factory owners reconstructed cheap warehouses as data farms, bought electronics from Shenzhen and stacked computer servers next to loud cooling on crude racks rack fans.

“They’re cleaner and presentable in the movies,” said BlocksBridge’s Mr. Sharma. “In China they are not that clean and the wire jungle is worse.”

Since more and more difficult mathematical problems are solved in cryptocurrency mining, each new unit of the crypto requires more computing time – and energy – than the one previously mined. That means the earliest and most aggressive producers had a huge advantage.

Bitcoin was manna for power plant owners, often regional governments in headstrong places, who had expanded their generating capacity based on flimsy forecasts of industrial demand.

Income-hungry electricity producers applied for large data centers, such as the Aer III hydropower plant in Sichuan on the Tibetan plateau, which in 2019 housed 1,750 Bitcoin mining machines on its premises. Miners sometimes stole electricity, including one convicted of diverting power lines to take $ 125,000 worth of electricity in half a year to power its 400+ Bitcoin machines. He was sentenced to 11 ½ years in prison by a court in northern Liaoning Province in 2019.

Some of China’s biggest winners have focused on taking care of miners – a model that Levi Strauss followed in the mid-19th century,

who got rich outfitters in the California gold rush.

Bitmain, for example, has become the world’s leading manufacturer of mining computers by developing microchips that are optimized to process the equations that create the cryptocurrency. Shanghai wealth tracking service Hurun Report has crowned three of Bitmain’s top shareholders billionaires, including 42-year-old Zhan Ketuan with an estimated net worth of over $ 15 billion.

The telephone company worker turned miner Mr. Jiang is now CEO of the megaminer BTC.Top, a pool of 400,000 machines. The 36-year-old says Beijing’s latest guidelines could herald a return to smaller data centers and decentralized manufacturing, and he’s considering exporting some equipment to North America or Central Asia.

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Industry advocates in the West say mining is losing its cowboy image and that momentum is shifting towards countries with more predictable regulatory systems, particularly the US. The Internal Revenue Service has set cryptocurrency guidelines, American banks offer custody services for Bitcoin, and utility companies are luring miners to natural gas-fired power plants in New York state and solar parks in Texas.

Beijing’s crackdown should improve the currency’s long-term prospects by reducing the market’s “fear, uncertainty and doubt that China will mine all of Bitcoin,” said Sue Ennis, director of corporate development at Toronto-based cryptocurrency company Hut 8 Mining Corp. “Everyone who is not in China sees this as an opportunity to win a bigger piece of the pie,” she said, noting that her company is adding additional capacity to accommodate any miners who want to leave China.

In one of Bitmain’s largest overseas assignments to date, Las Vegas-based Marathon Digital Holdings Inc.

ordered 70,000 machines to be installed on bitcoin farms in Hardin, Mont. and Big Spring, Texas.

So far, the mantra of Bitcoin mining has been: “What does production cost in China and what is the risk?” says Marathon CEO Fred Thiel. Now that the crackdown is on, the risk has become obvious, he says.

—Liyan Qi and Elaine Yu contributed to this article.

Write to James T. Areddy at james.areddy@wsj.com

Corrections & reinforcements
Levi Strauss got rich outfitters in the California gold rush in the middle of the 19th century. In an earlier version of this article, the period was incorrectly referred to as the 1880s. (Corrected June 5th)

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