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In China, Bitcoin Mining Moguls Are Scrambling To Survive

Mr Gao tells me, “Just because something is not illegal in China, doesn’t make it legal.” He takes a slight pause, a short breath, before leaning emphasis on the final word. Mr Gao is a bitcoin miner, with a few thousand mining rigs of his own, and facilities that he leases out to others. At present he has the capacity for 110,000 new machines, in sites spread throughout China’s sprawling western provinces, Sichuan and Yunnan, and also in the north, in Xinjiang and Mongolia. In other words, despite the precipitous fall in bitcoin’s price over the last 18 months, Mr Gao has been planning to expand.

China has 70 per cent of the world’s crypto-mining capacity, and over 70 per cent of that capacity is nestled in the mountains of Sichuan, where abundant hydroelectric power makes the price per kilowatt some of the cheapest anywhere in the world. But the very existence of this crypto gold rush is under threat. Mining bosses in China are making their millions in a legal grey area – and a new directive issued last week by the The National Development and Reform Commission (NDRC) hints that cryptocurrency mining may soon be outlawed altogether. For those at the top of China's crypto economy – including the mining moguls I spoke to – this is a clarion call to mine as much money as they can before it is too late.

Miners secure the network for a cryptocurrency, maintaining its infrastructure – its blockchain – by solving a series of complex computational problems necessary to string together transactions in clusters, or “blocks”, which constitute the “chain”. This is what makes cryptocurrencies comparatively decentralised and also theoretically impossible to hack. For their algorithmic chiseling, miners are rewarded with cryptocurrency coins.

In order to keep the rate of coins entering the market steady, the mining process has been designed to grow more difficult and electricity-consuming as the overall computational capacity devoted to mining increases. Therefore, already a few years after Bitcoin’s launch in 2009, mining operations started moving out of bedrooms and desktop computers running small processing units, to giant warehouse facilities with tens of thousands of machines, elaborate cooling units to stop them overheating, teams of engineers working around the clock to make sure none of the mining rigs go offline, and management teams working on logistics and smoothing the relationships with local power suppliers.

The tumultuous price of bitcoin – which hit $20,000 in December of 2017 before plummeting to $3,399 in February 2019 and since then stabilising around $4,000-$5,000 – doesn’t overly affect miners’ business; as long as the price per-bitcoin doesn’t fall beneath their costs, and they believe that the general trend is for bitcoin to increase in value in the long run (and not drop to zero as some speculate), their income remains steady.

Globally, according to research by JPMorgan Chase, “the production-weighted cash cost to create one bitcoin averaged around $4,060 globally in the fourth quarter” of 2018, meaning that as bitcoin’s price hovered around the $4,000 mark in recent months it looked as if bitcoin might fall to a point where it became financially unfeasible to continue to mine for it. Except, that is, in China, where the abundance of cheap power enables miners to keep the cost-per-coin at roughly $2,400.

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“The reason that there is so much mining here in China is simple,” Jingyang Zhang, one of China’s first investors in bitcoin, told me. “You have easy access to machines, you have cheap labour to maintain them and build the mining facilities, and crucially you have excess power here, which needs to be sold off for something, so it might as well be used for mining.” While people who trade bitcoins spend their days glued to the screens of their devices, checking cryptocurrency prices on various exchanges, miners are more interested in the price per kilowatt of electricity, and where they can find a stable and continuous supply that won’t be cut off by the local government.

“Mining is what made me believe in bitcoin,” says Mr Gao, leaning back in his chair in the antiseptic air-space of the VIP section of a glistening mall in Chengdu, Sichuan’s provincial capital. “Once you see the costs; the machines, the cooling facilities, all the labour…you realise that bitcoin isn’t an intangible thing. It must have some kind of inherent value – otherwise what is all of this for?” he says, waving his phone in the air with a picture of the mine he was just showing me: a giant series of warehouses nestled between some mountains in Sichuan.

An employee checks mining equipment at a mine near Kongyuxiang, Sichuan, China

Paul Ratje/For The Washington Post via Getty Images

Even before last week’s bombshell, the legal status of bitcoin in China was murky. In 2016 and 2017 there was intense speculation in bitcoin and associated cryptocurrencies, an explosion in initial coin offerings (ICOs) and new exchanges created. Many of these were fraudulent, including, it turned out, the very first ICO in China, in 2012. In that instance, a shadowy figure who called himself “grilled cat” online launched “butterfly mining rigs”, his own proprietary mining hardware, before disappearing without a trace with everyone’s money when he realised his machines weren’t able to compete in a rapidly evolving market.

The Chinese government, fretting about the rate of crypto-induced bankruptcies, quickly stepped in and initiated sweeping reforms. These banned ICOs and forced exchanges offline by making it illegal for legal tender (i.e. yuan) to be converted to cryptocurrencies or vice versa, thus rendering exchanges essentially useless. Most shuttered their operations; a few moved off the mainland, though they are still subject to Chinese law if they are caught taking money from Chinese citizens. These citizens would have to use a VPN, which is itself illegal, to access such exchanges.

These regulatory changes have seen the rate of bitcoin traded in Chinese yuan go from 90 per cent of the global total in 2017, to just one per cent today, according to statistics from the US library of Congress. Curiously it isn’t illegal to own bitcoin or trade it in China. However, you cannot use Chinese yuan to buy bitcoin, or exchange bitcoin for yuan. Considering the already very limited uptake in the practical uses for cryptocurrency, that means that bitcoin in China can only ever be used as a store for value – an ethereal value stored only in its crypto form.

There is, however, a not insignificant volume of over-the-counter (OTC) trades which do not go through an exchange, happening via payment apps WeChat and Alipay, where users send money to someone who then sends them the corresponding amount of the desired cryptocurrency. But this requires significant trust from both parties and is an invitation to commit a fraud with no viable legal recourse.

From a regulation standpoint, cryptocurrencies present a headache for a government that places extremely strict controls on its citizens’ ability to move money out of the country. “Money in China is like a lobster trap,” says Dr. G.M. Bell, a researcher based in Shanghai who has studied how wealthy Chinese move their money. “It’s easy to get money into the country, but very difficult to get it out again – that’s how the government wants it.” Decentralised cryptocurrencies pose an existential threat to the government’s control over its citizens purse strings, which is why Beijing has come down hard on exchanges. However, seeing that Bitcoin and, more importantly, the underlying blockchain may have potential for the future, the government is wary to ban it outright. The ICO law hedges by stating that “blockchain technology must service the real economy”.

Considering the lack of legal exchanges and the inherent risks of OTC trades, mining is the safest way to generate cryptocurrencies in China. That the coins are birthed out of wedlock into a legal shrug can make crypto-mining seem inherently political, though there is a clear difference between Chinese miners and their crypto-anarchist counterparts in the US and elsewhere. When I posed the question of politics to the founder of ChouGe mines (ChouGe literally translates as “ugly brother” in Chinese), he waved it off. “Of course I’m not an anarchist. I’m not even a liberal. I’m a nationalist and I think this could help build the nation,” he said, parroting a phrase popular in Xi-era political discourse. “I just think it gives people a new choice of asset class.”

With exchanges and ICOs already shuttered completely, and no legal way to convert cryptocurrencies into Chinese yuan, mining is the last remaining pillar propping up this intangible edifice. Were the government committed to destroying crypto in China for good, or at least for all but the extremely dedicated and willing to risk legal sanction, ban mining is all they would need to do. The NDRC’s new directive, issued on April 9, suggests this is a growing possibility. The document hints that mining itself might be outlawed altogether as part of a package of 450 different economic activities deemed suspect for “wasting resources, polluting the environment, being unsafe, or not adhering to law”. The miners I spoke to hardly seemed surprised at the news and didn’t seem overly deterred either. One noted that it is still in the public consultation phase, until May 7, and that even if it does pass into law, the process might not be immediate and the inspections would be fairly lax at first. Another had already been exploring options overseas and this merely pushed him to redouble his efforts.

Until now, mining has served a purpose unique to China: crypto-mining was seen in some circles as being an efficient way of mopping up some of the excess power generated and wasted in areas of the country where supply far outstrips demand.

The HaoBTC mine, photographed in 2016, is located in a remote mountain region on the edge of the Tibetan Plateau near Kongyuxiang, Sichuan, China. Its strategic location, next to a hydraulic power generator, ensures a reliable supply of cheap electricity