Deep in rural China, bitcoin miners pack their bags

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IN THE HENGDUAN the mountains of Sichuan province, swollen brown rivers and trees laden with ripe mangoes do not evoke digital magic. Yet until recently there were buildings here with rack upon rack of specialized computers. They were often found near hydroelectric power stations that supplied them with electricity from dams. They needed a lot of power. Their machines have been used for “mining,” a process of validating transactions made in bitcoin and other digital currencies by solving crypto puzzles. In return, they received newly minted coins. The buildings were recognizable by their enormous cooling systems: usually a wall on one side covered with giant fans to suck in air.

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But across Sichuan, fans have stopped roaring. In May, a government committee tasked with promoting financial stability pledged to end bitcoin mining. Within weeks, authorities in four main mining regions – Inner Mongolia, Sichuan, Xinjiang and Yunnan – ordered local projects to shut down. Residents of Inner Mongolia have been asked to call a hotline to report anyone flouting the ban. In parts of Sichuan, miners have been ordered to empty computers and demolish buildings housing them overnight. Electricity providers have disconnected most of them.

The crackdown had a global impact. Bitcoin’s “hash rate”, a measure of the computing power used by the world’s mining machines, has halved in recent weeks. Its “difficulty rate,” which increases and decreases as computers join or leave the mining effort, fell to an all-time low last week. China accounted for around 65% of bitcoin earned through mining, according to the Cambridge Bitcoin Electricity Consumption Index. But analysts believe about 90% of its mining has now ceased. Chinese miners sell their computers at half their value.

China’s mining boom began in 2017, after a surge in the price of bitcoin caught the attention of local entrepreneurs. The country already made most of the machines that mine bitcoin around the world, as well as the custom chips they run on. He also had the ability to produce more energy than he needed. In 2018, this surplus amounted to 70 terawatt-hours (TWh), equivalent to the total energy production of Switzerland. Rather than let the surplus go to waste, factories sold it to mining farms. The seasons would determine where these farms were operated. After the heavy summer rains in Sichuan ended, when prices rose, miners would drive their machines to a cheaper source, usually coal-fired power plants thousands of miles away in Xinjiang and Inner Mongolia. (Solar and wind power is not reliable enough to power mining continuously.)

In 2017, China, fearing a loss of financial control, banned trading in cryptocurrencies. But local governments still welcomed minors: they were a source of taxes and other charges. In June, a state-run area in Ya’an, a town in Sichuan, was due to open in time for the start of the rainy season. It offered cheap energy for mining and other digital activities. “It was a win-win,” says Kirk Su, a miner who had planned to put some of his machines in the area. “China was a leader in mining in all aspects: cheap electricity, cheap labor, quick and easy access to equipment,” he says.

Then came the crackdown. Part of it was targeting cryptocurrency traders. The mining industry itself has little to do with the volatile activity of commerce. But miners couldn’t function without converting their new bitcoins to yuan. For this, they used exchanges that had moved overseas after the trade ban, but still targeted Chinese users. The government may have decided that in order to rid China of crypto transactions, “mining had to go,” says Bobby Lee, who co-founded China’s first cryptocurrency exchange (it was forced to shut down in 2017 ). He now runs Ballet, an app that allows users to manage their digital currency.

Another goal may have been to reduce emissions. Cambridge figures suggest Chinese miners used around 83TWh of electricity per year, equivalent to the total electricity consumption of Belgium. (Still, China could have chosen to ban mining only in its coal-spitting north, says Lee.) Officials could also be concerned about collusion between local governments and mining operations, some of which had received grants intended for innovative big data companies.

The central government has said it wants to “resolutely prevent the transmission of individual risks to society at large”. This may, in part, have been a reference to the activities of certain mines that had set up Ponzi-type projects, promising big returns on investment to investors. Other crooks have masqueraded as cryptocurrency traders. Last year, more than 100 people were arrested for carrying out two of these operations, PlusToken and WoToken.

To escape the repression, the big miners sent their machines abroad. Mr. Su, who also runs a logistics company that transports mining machinery, chartered Boeing 747s for the quick release of used ones. Most go to Russia and Kazakhstan, which together account for around 13% of the world’s bitcoin mining. But there are few overseas data centers with room for many new machines, including America’s second-largest miner. Building a farm there costs between five and ten times what it costs in China, says Su. This is too much for most Chinese miners. More than half of their computers will remain in place for now, he says.

Some smaller miners are still finding ways to function. One said he was lucky to have partnered with a private hydropower plant that is reluctant to forgo the extra revenue (it risks being fined or fired by the grid). Upon meeting with your correspondent, he made a deal to buy a farm from a fellow miner for 5 million yuan ($ 770,000), powered by an off-grid power plant. If his machines can operate there for 15 days, he will have recovered his investment in bitcoin.

At an abandoned school in southern Sichuan, Mr. Su stored 10,000 machines from some of his closed farms. For every day they spend there, unplugged and stacked to the ceiling, he says 1 million yuan of potential profit is lost.

This article appeared in the China section of the print edition under the headline “There Was Gold in the Hills”


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