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New regulations slowed down and shrank 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 this includes virtual money. (As far back as 2003, Chinese courts have accepted and protected virtual items — including swords! — as property of their owners.)
Furthermore, the government has encouraged and incentivized Chinese companies to develop blockchain technology, which is the foundation of bitcoin. The government is also using blockchain in its experiments with digital yuan, and various local governments have encouraged bitcoin mining as a way to attract investment and create jobs.
People in the crypto industry like Gieno Miao, the former miner and crypto entrepreneur, remain bullish. The recent surges in Bitcoin price — it’s up to nearly $54,500 as this piece was published, up from the roughly $10,000 it took to buy a coin on September 9, 2020 — have caused a new mania for cryptocurrencies and all the industries that serve them that is drawing in institutional funds from large listed companies as well as smaller venture capitalists.
A new boom despite murky legal status
However, the legal status of the entire crypto industry remains unclear. China-based crypto exchanges and ICOs are clearly prohibited, but many other parts of the industry including mining are subject to incentives and disincentives by local and central government organizations alike.
SupChina failed to reach the Chinese Securities Regulatory Commission for comments on the legal status of cryptocurrencies and government attitudes to its mining in China, but Reuters says that bitcoin’s recent price surge has put “regulators on alert over financial risks and capital outflows as volatility spikes.”
So how will China’s crypto industry respond to renewed government scrutiny? Specifically, will the miners of bitcoin and other cryptocurrencies in China be able to stay in business?
Who mines crypto in China?
There are more than 100,000 miners in China, according to Sohu News (in Chinese). Most miners are now big players, either owning whole factories filled with mining computers, or buying machines and then contracting them out to factories to house and maintain. Home-based and small commercial miners are few.
Machines in the factories are usually connected to mining pools which allow miners to share their computational resources to make the mining more efficient. Four of the five biggest pools are Chinese: F2Pool, Poolin, AntPool, and Huobi Pool. Together, these four mining pools contributed just over 50% of the world’s bitcoin processing power in the last 12 months.
Until recently, most of the Chinese mines and the pools were controlled by people Gieno Miao described as “veterans of the Bitcoin community who have been in the business for many years.” But from the end of 2018, according to Miao, mining started attracting capital from more traditional financial players, including Chinese state-owned enterprises (SOEs). However, many dropped out of the market after March 2020, when COVID-19 became a pandemic and bitcoin prices tanked.
Miao blamed those failures on outsiders rushing into the mining industry without an understanding of bitcoin or long-term plans for their investments. Nonetheless, in China as across the world, cryptocurrencies and blockchain are marching to respectability, and established financial players are entering the game.
But mining still requires a lot of hustle.
Miners need to be willing to cut deals
The computers you need to mine crypto — mining rigs — have powerful and expensive technologies at their heart, usually graphics processing units (GPUs) or application-specific integrated circuits (ASICs). Big players need hundreds of these mining machines, which are in such demand that customers need to join wait lists to be eligible to purchase.
Major mining machine manufacturers in China include Bitmain, Canaan Creative, Ebang, and WhatsMiner. Bitmain says it “has shipped billions of ASICs, accounting for 75% of the global market.” Canaan Creative listed on Nasdaq in 2019, and earned net revenues of $204.3 million in fiscal year 2019, according to its SEC filing. Canaan Creative was reported to have 22% market share of all ASIC mining machines at the end of 2019. Ebang debuted on Nasdaq in June 2020, reporting $109.1 million revenues in 2019 according to its SEC filing.
China has nearly monopolized the manufacturing of mining machines, according to Miao, but it relies on ASIC chips from companies like Taiwan Semiconductor Manufacturing Company (TSMC) and Samsung.
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 incentivized with additional fees, to jump the queues. Miao says some miners have paid as much as 80% above the listed prices to get their machines earlier, and that prices for GPUs went from around 4,000 yuan ($600) to as much as 12,000 yuan ($1,850) in the weeks before Spring Festival last month. (In the U.S., GPU products are currently selling for $271 to $2,379.)
Electricity bills are another major challenge for miners.
A high-rate machine consumes 3.5 kilowatt-hours of electricity in one hour, and consumes more than 2,000 kilowatt-hours in a month, which is about the electricity consumption of an ordinary Chinese family for half a year, according to Sohu News (in Chinese). Dong Wu, a manager of a company that mines Bitcoin, Ethereum, and Filecoin, told SupChina that electricity is his biggest cost. Miao put some numbers on it, saying that some factories pay several millions of dollars a month for juice. But the cost is worth it: one big factory can mine about 200 bitcoins per day — at more than $50,000 a coin as of March 9, that’s about $10 million. Not bad for a day’s work.
A final hurdle that Chinese crypto miners have to surmount: When the government put Chinese cryptocurrency exchanges out of business, it became difficult to legally buy or sell virtual money with yuan. The closest way to a legal method of changing bitcoin and other cryptocurrencies into yuan seems to be the following:
- Change bitcoins to stablecoins such as USDC (which are tethered to fiat currencies) on the OTC (over-the-counter) markets operated outside of China. These include Huobi and Binance — both founded in China but now with legal bases in the U.S. and other countries, and companies without a China connection like Coinbase. These sites can then also convert the stablecoins into U.S. dollars.
- The U.S. dollars then have to be sent to a Chinese bank account, where they can be converted to yuan.
The Chinese government clearly wants to maintain tight control over all aspects of cryptocurrencies, from their energy use to their potential risk to the financial system. But crypto veteran Gieno Miao insisted that the government was still generally positive, mentioning three places that lend support: the provinces of Yunnan and Sichuan, and the city of Hangzhou. Hangzhou doesn’t have its own mining industries, Miao said, but the Hangzhou government has given money and land to Canaan Creative. Chinese journalist Colin Wu, who writes at WuBlockchain (in Chinese), told SupChina that the government neither supports nor suppresses the crypto mining industry at a national level, but some county and city governments support it if it can create jobs and grow the local economy.
How much money do Chinese crypto miners make?
There is very little publicly available information about the finances of Chinese mining companies. One industry insider talked of people making 500 million yuan ($77.3 million) a year from an initial investment of 20 million yuan ($3.1 million) in a factory to mine bitcoin and ethereum at the end of 2019. State-owned Xinhua News Agency in 2018 reported (in Chinese) that miners were earning as much as 70 million yuan ($10.8 million) from two months of operation.
It’s unclear how representative those numbers are. But there’s enough money floating around the crypto ecosystem in China to feed a network of consultants who can apparently make $10,000 to $15,000 per month by passing on information they get from “eating with insiders,” according to Miao.
There’s also enough confidence in the future of crypto in China to keep hopeful miners in business. Miao expects that the price of bitcoin to rise up to $200,000 or $300,000 in the long run — with temporary falls. Dong Wu is betting on $500,000 or more.
As with nearly every other product on earth, as long as there is demand, Chinese manufacturers will step up to meet it. Chinese crypto mining is here to stay.
Glossary:
Bitcoin 比特币 bǐtè bì
Cryptocurrency 加密货币 jiāmì huòbì
Blockchain 区块链 qūkuàiliàn
Bitcoin mine 比特币矿 bǐtè bì kuàng,
Bitcoin mining 比特币挖矿 bǐtè bì wākuàng
Mining machine 矿机 kuàng jī
Crypto community 币圈 bì quān
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