The challenge (and opportunity) for the bitcoin mining industry as a crackdown in China looms

Bitcoin miners in China are bracing for impact after China’s State Council — the central government cabinet — published notes from a May 21 meeting in which it was mentioned that cracking down on bitcoin trading and mining activities will be one of the priorities in maintaining the country’s financial stability.  

Never before has there been a clearer signal that China’s government might change its stance toward bitcoin mining, an industry that has become concentrated in the country due to its cheap power sources. 

The uncertainty that has followed from these comments has created a new challenge for local miners — and an opportunity for overseas mining facilities.

Moving out?

Apparently, a significant number of miners are now exploring opportunities for relocation. That could accelerate the recent trend of bitcoin hash power moving away from China, which has historically dominated the mining industry. 

Edward Evenson, head of business development at Slushpool, said in a Twitter thread last week that since the crackdown comment was published, he has received an increasing volume of inquiries from Chinese miners who intend to relocate their equipment.

“I’ve had 300 to 400 megawatts of mining machines contact me to help them distribute their machines across North America and some parts of the EU. Some have also begun shipping machines to Kazakhstan,” he said.

Didar Bekbauov, co-founder of Kazakhstan-based mining farm Hive Mining, said on social media that since May 21 he has received requests from Chinese miners asking for 20 to 50 megawatts of capacity.

Igor Runets, founder and CEO of Russia-headquartered BitRiver, said that following the State Council’s comment he saw a surge in inbound inquiries from China-based miners who want to relocate their equipment to BitRiver’s mining colocation farm in the central Asia region.

It’s hard to know exactly how many Chinese miners are considering moving their equipment overseas. But some industry insiders say what is clear is that the current vacant energy capacity overseas is not sufficient to absorb all the potential hosting demands from Chinese miners.

“Currently there isn’t enough,” Evenson told The Block during a recent interview. “Luckily [overseas] hosting facilities have been planning significant expansions since last year and will have greatly expanded their hosting capacity by Q4 2021 and Q1 2022.” 

“It will be a year-long process to get it all done. But new megawatts of capacity will come online through the year to absorb new shipments,” he added.

“The overall vacant capacity for mining equipment is already in short supply compared to the global demand,” Runets said. “If the Chinese government were to make a serious effort to end mining in China, it would further squeeze the supply, resulting in steepening of prices for hosting services.”

Meanwhile, several big bitcoin mining firms have announced plans in recent months to expand their power capacity via either joint ventures or acquisitions.

For instance, London Stock Exchange-listed Argo Blockchain said in March that it acquired 320 acres of land in West Texas in the U.S., which the mining firm now intends to transform into a 200-megawatt mining farm. 

Nasdaq-listed Riot Blockchain announced on May 26 that it has completed its acquisition of Whinstone US and immediately plans to scale up the mining and hosting capacity to 750 megawatts.

New York Stock Exchange-listed BIT Mining, which recently rebranded from 500.com, said on May 24 that it is jointly investing in a 100-megawatt mining facility in Kazakhstan with a local partner.

Evenson noted that Chinese miners who end up relocating their equipment to North American may need to adapt to a different hosting mechanism. “Hosting providers in North America generally want capital investment (for expansion), joint ventures to secure power, or charge a rather hefty profit share (15 to 25%) on top of a base USD per kWh rate,” he said on Twitter. 

This would be different from the fixed hosting and management fee that Chinese mining farms usually charge bitcoin miners in Xinjiang and Sichuan.

The carbon concern

Bloomberg reported last month that the impetus for the State Council’s comment was the conclusion that the spike in electricity consumption from bitcoin mining farms “was a key factor behind rising demand for coal in certain parts of China.” The report cited an anonymous source who was familiar with the State Council's discussion.

Indeed, thus far any regulatory pressure that China’s miners have felt has been confined to bitcoin mining regions where the energy is mostly based on fossil fuels, such as Inner Mongolia and Xinjiang. 

The Inner Mongolia government has already issued measures designed to drive bitcoin mining operations out of the province. The state-owned banks in the province's capital city of Urumqi have even started a month-long promotional campaign called “Anti-counterfeit and Stay away from virtual currency.”

It remains to be seen how the situation will play out in Xinjiang, where policy-related discussions are still ongoing.

On the other hand, the regions where hydroelectric power is dominant, most prominently Sichuan and Yunnan, are facing a sort of dilemma: the choice between political correctness and local economic interest.

On June 2, the energy regulator in Sichuan hosted a seminar with representatives from local power plants and industry players to gauge the potential impact that closing bitcoin mining farms would have on the local hydroelectricity economy.

For years, the Sichuan government has been dealing with the problem of generating excess hydroelectricity during the summer rainy season. To prevent it from going to waste, the local government has tried in recent years is setting up dedicated state-sanctioned industrial parks to attract energy-intensive industries, like bitcoin mining farms, that can help consume the extra hydroelectricity. 

One representative who attended the seminar on Wednesday told The Block that the meeting was more about hearing out the industry, and it did not determine any specific next steps.

Even if bitcoin miners can operate in Sichuan through the summer, though, the rainy season will end in October. That’s when miners usually migrate north to Inner Mongolia and Xinjiang. What if policymakers make it much more difficult, if not entirely impossible, for them to migrate to these provinces?

“We hope that if the Chinese government were to make such a move, mining equipment from China migrates to mining facilities that are powered by renewable energy instead of fossil fuel-powered sites,” Runets said.

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