China’s bitcoin miner exodus

Technicians perform repairs on Bitcoin mining machines at a Bitmain-operated mining facility in Ordos, Inner Mongolia, China on Friday August 11, 2017.

Qilai Shen | Bloomberg | Getty Images

China has long been home to more than half of the world’s bitcoin miners, but now Beijing wants to get them out of the way as soon as possible.

In May, the government called for tough crackdown on Bitcoin mining and trading, triggering what is known in crypto circles as “the great mining migration.” This exodus is underway now, and it could be a game changer for Texas.

Mining is the energy-intensive process in which new coins are created and all transactions of existing digital tokens are logged.

Despite the lack of reserves that caused days of blackouts last winter, Texas often has some of the lowest energy prices in the world, and its share of renewable energy is growing over time, with 20% of its electricity coming from wind power as of 2019, a deregulated power grid where the Customers can choose between electricity providers, and most importantly the political leaders are very crypto-friendly – dream conditions for a miner looking for a friendly welcome and cheap energy sources.

“You will see a dramatic shift in the next few months,” said Brandon Arvanaghi, previously a security engineer at Gemini crypto exchange. “We have governors like Greg Abbott in Texas promoting mining. It’s going to be a real industry in the United States, which is going to be incredible.”

China’s dominance in mining

Data for 2021 on the global distribution of mining power is not yet available, but previous estimates have shown that 65 to 75 percent of global bitcoin mining took place in China – mainly in four Chinese provinces: Xinjiang, Inner Mongolia, Sichuan and Yunnan. The hydropower of Sichuan and Yunnan make them meccas for renewable energy, while Xinjiang and Inner Mongolia are home to many of China’s coal-fired power plants.

Mining of miners has already started in Inner Mongolia. After failing to meet Beijing’s climate goals, the provincial leaders decided to give Bitcoin miners two months to evacuate and explicitly blamed crypto mines for their energy shortfalls.

Castle Island Ventures’ founding partner Nic Carter says that while it is not entirely clear how China will handle the next steps, phasing in is likely. “It seems like we are moving from policy statement to actual implementation in a relatively short amount of time,” he said.

The way this exodus is measured is hashrate, an industry term used to describe the computing power of all miners on the Bitcoin network.

“Given the drop in hash rate, it is likely that installations across the country will be shut down,” continued Carter, who also thinks that likely 50 to 60% of Bitcoin’s total hash rate will eventually leave China.

Though China’s announcement hasn’t been cemented in politics, it doesn’t stop miners like Alejandro De La Torre set about reducing their losses and making an exit.

“We don’t want to be faced with a new ban in China every year,” said De La Torre, vice president of Hong Kong-based mining pool Poolin. “So we’re trying to diversify our global mining hashrate, and that’s why we’re moving to the United States and Canada.”

One of the greatest things about Bitcoin is that it is completely location-independent. Miners only need an internet connection, unlike other industries that need to be relatively close to their end users.

“The cool thing about Bitcoin, which is underestimated by many naysayers, is that it’s a portable market; you can put it straight to the power source,” said Steve Barbour, founder of Upstream Data, a manufacturer and supplier portable mining solutions for oil and gas facilities.

The exodus will not happen immediately, however, in part because it will be some time before the miners move their machinery out of China or liquidate their assets and move elsewhere.

Where to go

As miners compete on a large scale in a low margin industry where their only variable cost is usually energy, they are encouraged to migrate to the cheapest energy sources in the world.

“Every western mining host I know had their phones ringing,” Carter said. “Chinese miners, or miners who were based in China, look to Central Asia, Eastern Europe, the United States, and Northern Europe.”

A likely target is China’s neighbor Kazakhstan. The country’s coal mines ensure a cheap and abundant energy supply. It also helps that Kazakhstan has a looser attitude towards construction, which bodes well for miners who need to build physical assets in a short amount of time.

Didar Bekbauov heads Xive, a company that provides hosting services to international miners. Xive also sells the special equipment needed for mining.

Bekbauov says he has stopped counting the number of Chinese miners who called him to inquire about relocation opportunities, which range from operations with 15 rigs to thousands.

“One miner told us that only state electricity companies have restricted mining and private ones will continue to serve miners,” Bekbauov told CNBC.

“But most of the electricity is generated by state power plants, so the miners have to move. That makes them unsafe and is desperately looking for other locations, ”he said.

Whether Kazakhstan is a destination or just a stopover on a longer hike west remains to be seen.

Arvanaghi is optimistic about North America and believes that the hash rate there will increase in the next few months.

“Texas not only has the cheapest electricity in the US, but also one of the cheapest in the world,” he said. “It’s also very easy to start a mining company … if you have $ 30 million, $ 40 million, you can be a leading miner in the United States.”

Wyoming has also turned into a pro-bitcoin trend and could be another mining destination, according to Arvanaghi.

However, there are some major constraints for the US to become a global mining destination.

For one, the lead time to build the actual physical infrastructure required to host miners is likely six to nine months, Carter told CNBC. “The US may not be as agile as other countries when it comes to onshoring these stray miners,” he said.

Moving logistics can also prove difficult. Thanks to the tailwind of the Covid pandemic, there is a shortage of shipping containers.

But perhaps the biggest question is the reliability of the Texas power grid. A storm that devastated large swaths of the state in 2020 sparked a debate over whether Texas should winterize its systems, a potentially costly project that could affect taxes or other fees for those looking to tap into the state’s power grid . Recently, ERCOT, the organization that runs the Texas grid, urged consumers to conserve energy while officials cited an unusual number of “forced power outages” and an impending heatwave.

Answer to the Musk review

Tesla CEO Elon Musk has beaten up Bitcoin mining, claiming it is bad for the environment. It’s not a new review.

For years, skeptics have slandered the world’s most popular digital token for polluting the planet, while supporters have extolled Bitcoin’s virtues and its role in accelerating the rise of renewable energy.

It is unclear whether the China mining exodus will speak for bitcoin enthusiasts in the token carbon footprint debate or not. The prevailing narrative to date has been that much of the world’s bitcoin is mined with a Chinese destination.

“From a narrative point of view, it’s definitely an improvement,” Carter said. “But China also has the world’s most stranded water resources.”

The country offers significant energy sources from wind, solar and, above all, hydropower in the south. Xinjiang’s power grid, for example, is 35% powered by wind and solar energy.

If all miners leave China it will mean less fossil fuel mining, but it will also mean the network’s share of renewable energy mining will decrease. Because of this, the question of where these migrant miners end up could prove critical to Bitcoin’s future. “It’s the biggest story of the year for Bitcoin,” Carter said.

De La Torre says they want to expand their operations with green energy, a trend that has been going on for years. He says that hydropower plants are generally cheaper than fossil fuels in most parts of the world.

“Mining is price sensitive so the lowest cost energy is sought, and the lowest cost energy is usually renewable because if you are burning fossil fuels … back.

Zoom In Icon Arrows pointing outwards

Every year the investment bank Lazard publishes a breakdown of energy costs by source. The 2020 report shows that many of the most popular renewable energy sources are either the same as or less expensive than conventional energy sources such as coal and gas. And the cost of renewable electricity continues to fall.

However, the operation of crypto mines using only renewable energy is restricted.

Although sun and wind are the world’s most affordable energy sources today, both power supplies are limited in scale, so there are concerns about the profitability of miners who rely solely on wind or solar power.

Next six months

There are currently not that many mining capacities around the world ready to accommodate the Chinese miners’ diaspora. As they struggled to find a new home, we could see Hashrate go offline – and stay offline.

In practice, this would mean that all remaining miners would be more profitable for a period of time.

Greater geographical dispersion would balance the global balance of power and would also limit the ability of a single sovereign nation to co-opt or control the network.

Special crypto economic zones may also emerge in the next few months.

“You will see jurisdictions taking a very positive stance, creating the equivalent of special zones to encourage miners to host locally,” Carter said. “We’re seeing it here at the state level. You will see it at the state level too, you might even see subsidized electricity for mining.”