New regulations slowed down and shrunk the market for Bitcoin, but they did not make mining, owning, buying, or selling cryptocurrencies illegal. In fact, Chinese law specifically protects virtual private property, and that includes virtual money. (Back in 2003, Chinese courts accepted and protected virtual objects – including swords! – as the property of their owners.)
In addition, the government has encouraged and motivated Chinese companies to develop the blockchain technology that forms the basis of Bitcoin. The government is also using blockchain in its digital yuan experiments, and various local governments have encouraged bitcoin mining to attract investment and create jobs.
People in the crypto industry like Gieno Miao, the former miner and crypto entrepreneur, remain optimistic. The recent price hikes in Bitcoin – it’s up to $ 54,500 when this piece was released versus the roughly $ 10,000 it took to buy a coin on September 9, 2020 – has created a new mania for cryptocurrencies and Raised all industries that serve them attracting institutional funds from large public companies as well as smaller venture capitalists.
A new boom despite a gloomy legal status
However, the legal status of the entire crypto industry remains unclear. China-based crypto exchanges and ICOs are clearly banned, but many other parts of the industry, including mining, are subject to incentives and mis-incentives from local and central government organizations.
SupChina failed to reach the Chinese Securities Commission for comments on the legal status of cryptocurrencies and the government’s stance on mining in China. According to Reuters, the recent price spike in Bitcoin has put regulators on alert over financial risks and capital outflows. ”
How will China’s crypto industry react to the government re-control? Will the miners of Bitcoin and other cryptocurrencies in China be able to stay in business?
Who is mining crypto in China?
There are more than 100,000 miners in China, according to Sohu News (in Chinese). Most miners today are large corporations, either owning entire factories filled with mining computers or buying machines and then subcontracting them to factories to house and maintain. There are few domestic and small commercial miners.
Machines in the factories are usually connected to mining pools, which allow miners to share their computing resources to make mining more efficient. Four of the five largest pools are Chinese: F2Pool, Poolin, AntPool, and Huobi Pool. Together, these four mining pools have contributed just over 50% of the world’s bitcoin processing power over the past 12 months.
Until recently, most of China’s mines and pools were controlled by what Gieno Miao described as “Bitcoin community veterans who have been in business for many years”. As of late 2018, mining began to attract capital from more traditional financial players, including Chinese state-owned enterprises (SOEs), according to Miao. However, many dropped out of the market after March 2020 when COVID-19 became a pandemic and bitcoin prices fell.
Miao blamed these mistakes for outsiders who stormed into the mining industry with no understanding of Bitcoin or long-term plans for their investments. Even so, in China, as around the world, cryptocurrencies and blockchain are marching towards respectability, and established financial players are entering the game.
But mining still requires a lot of the hustle and bustle.
Miners must be ready to do business
The computers you need to mine crypto mining rigs have powerful and expensive technologies, usually graphics processors (GPUs) or application specific integrated circuits (ASICs). Big players need hundreds of these mining machines, which are in such demand that customers have to join waiting lists to be eligible to purchase.
Major mining equipment manufacturers in China include Bitmain, Canaan Creative, Ebang, and WhatsMiner. Bitmain says it has “shipped billions of ASICs, which is 75% of the global market.” Canaan Creative was listed on the Nasdaq in 2019 and had net sales of $ 204.3 million in fiscal 2019. Canaan Creative had a 22% market share of all ASIC mining equipment at the end of 2019. Ebang debuted on the Nasdaq in June 2020 and had sales of $ 109.1 million in 2019, according to SEC filings.
According to Miao, China has almost monopolized the manufacture of mining equipment, but is relying on ASIC chips from companies like Taiwan Semiconductor Manufacturing Company (TSMC) and Samsung.
The demand is so high right now that there are waiting times of around half a year, but many Chinese Bitcoin veterans know how to use their social connections, sometimes encouraged with additional fees, to jump in the queues. Miao said some miners paid up to 80% above advertised prices to get their machines sooner, and GPU prices rose from around 4,000 yuan ($ 600) to as much as 12,000 yuan ($ 1,850) in the weeks leading up to last Spring Festival USD) month. (In the US, GPU products currently retail for $ 271-2,379.)
Bitcoin mining machines in Sichuan province in 2016. Photo provided to SupChina by a source asking not to be named.
Electricity bills are another major challenge facing miners.
A high-performance machine consumes 3.5 kilowatt hours of electricity in an hour and more than 2,000 kilowatt hours in a month, according to Sohu News (in Chinese). Dong Wu, manager of a company that mines Bitcoin, Ethereum and Filecoin, told SupChina that electricity is its biggest expense. Miao gave some numbers, saying that some factories are paying tens of millions of dollars a month for juice. But the cost is well worth it: a large factory can mine around 200 bitcoins a day – at more than $ 50,000 per coin on March 9th, that’s around $ 10 million. Not bad for a day at work.
One final hurdle for Chinese crypto miners to overcome: When the government put Chinese cryptocurrency exchanges out of business, it became difficult to legally buy or sell virtual money using yuan. Chinese crypto holders must do some of their business overseas if they want to exchange their coins for yuan via OTC (over-the-counter) markets outside of China. These include Huobi and Binance – both founded in China but now with legal bases in the US and other countries, and companies with no China affiliation like Coinbase. It is not clear how Chinese law could affect such transactions in the future.
The Chinese government clearly wants to maintain tight control over all aspects of cryptocurrencies, from energy consumption to potential risk to the financial system. However, crypto veteran Gieno Miao insisted that the government is still generally positive, mentioning three places that offer support: Yunnan and Sichuan provinces and Hangzhou city. Hangzhou doesn’t have its own mining industry, Miao said, but the Hangzhou government gave Canaan Creative money and land. Chinese journalist Colin Wu, who writes at WuBlockchain (in Chinese), told SupChina that the government neither supports nor suppresses the crypto mining industry at the national level, but some county and city governments support them in creating jobs and local ones Can make the economy grow.
How Much Money Do Chinese Crypto Miners Make?
There is very little publicly available information about the finances of Chinese mining companies. An industry insider said people were making 500 million yuan ($ 77.3 million) a year from an initial investment of 20 million yuan ($ 3.1 million) in a Bitcoin and Ethereum factory in late 2019 earned. State-run Xinhua News Agency in 2018 reported (in Chinese) that miners made up to 70 million yuan ($ 10.8 million) in two months of operation.
It is unclear how representative these numbers are. But there is enough money in China’s crypto ecosystem to feed a network of advisors who can appear to make $ 10,000-15,000 a month by sharing information Miao says they get from “eating with insiders.”
There’s also enough confidence in the future of crypto in China to keep hopeful miners in business. Miao expects the price of Bitcoin to rise to $ 200,000 or $ 300,000 over the long term – with temporary declines. Dong Wu is betting at $ 500,000 or more.
As with almost every other product on earth, as long as there is demand, Chinese manufacturers will respond more intensely. Chinese crypto mining is here to stay.
Glossary:
Bitcoin bǐtè bì
Cryptocurrency jiāmì huòbì
Blockchain qūkuàiliàn
Bitcoin Mine bǐtè bì kuàng,
Bitcoin mining bǐtè bì wākuàng
Mining machine 矿 机 kuàng jī
Crypto community 币 圈 bì quān
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