Bitcoin Mining Leaves China: A Sudden Mass Exodus

Author: Duan Xu, Cheng Manqi

Editor: Cheng Manqi

Source: LatePost

Baskets of hairy crabs, freshly pulled from the water, are loaded onto planes in Maryland, USA, bound for Shenzhen, China. In the U.S., they are considered an "invasive species," but in China, they are a highly sought-after delicacy.

Upon arrival in Shenzhen, they are quickly unloaded, placed in refrigerated containers, and transported to high-end restaurants. The water stains and fishy smell from the cabin have yet to dissipate when hundreds of well-packaged Bitcoin mining machines are loaded onto another flight. In stark contrast to the hairy crabs, these mining machines have become obsolete in China, yet they are the most coveted production tools for cryptocurrency miners in the U.S.

This is one scene from the "Great Migration of Bitcoin Hash Power."

On May 21 of this year, as the State Council's financial meeting signaled a crackdown on "Bitcoin mining and trading activities," local governments across China began shutting down mining operations and banning mining altogether, prompting many to seek opportunities abroad.

This mass migration is both urgent and costly.

Some miners, eager to expedite the transport of their machines, have opted for the expensive air freight instead of the more common and cheaper sea freight typically used for electronic products.

A mining machine dealer, who goes by the alias Luke, told LatePost that the quote for the specialized air freight service he uses is as high as 60 yuan per kilogram, sometimes even reaching 120 yuan, which is double the current average air freight rate and about twenty times the average sea freight rate. For example, the shipping cost for a bare Bitmain "Antminer S19," which weighs 14 kilograms, is nearly 800 yuan.

Mining machine image: exhaust fans, circuit boards, and exposed wires; those unfamiliar often confuse mining machines with computer cases.

Luke believes this price is "extremely outrageous," but to meet the urgent demands of his clients, he air-freighted thousands of Bitcoin mining machines to North and South America between July and August.

The urgent demand for overseas migration is driven by excessive profits.

The production cost of one Bitcoin, calculated at an electricity price of 0.4 yuan, now stabilizes around $10,000. Since December of last year, the price of Bitcoin has not dropped below $20,000, with an average price exceeding $30,000 over the past six months.

The changes in Chinese policy have also provided an unexpected boon to miners in other parts of the world.

This is because Bitcoin mining essentially involves machines "competing to solve problems." The first participant to provide the correct answer and have it verified by others receives a corresponding amount of Bitcoin as an automatic reward from the network [1]. Miners with more machines and greater total hash power have a higher probability of answering correctly first. The difficulty of answering is related to the total hash power of the network: the more mining machines there are, the harder it is to solve problems, leading to higher costs in hash power and electricity—these are the primary costs of mining.

Since China began cracking down on Bitcoin mining in May 2021, as much as 50% of the hash power has exited the mining network. This means that the same number of Bitcoins are still produced daily, but the miners sharing them have been halved.

One miner stated that as long as the mining machines are operational, they are "real money printers."

This expectation of profit is also attracting a large number of new overseas players to join the mining industry.

Among Luke's clients is a factory owner from Maryland, USA. Upon seeing China's mining ban, he immediately recognized it as an opportunity to mine domestically and purchased hundreds of the latest model mining machines from Bitmain in one go.

"This is a once-in-a-decade industry upheaval." Another Chinese individual, who previously engaged in cross-border e-commerce in Southeast Asia, has recently entered the mining industry. Due to high electricity costs in Southeast Asia, he is planning to explore opportunities in Pakistan.

Everyone is racing against time. The sooner they land, the more excess profits they can earn before the hash power recovers, helping them secure a better position in the new global mining landscape.

This ongoing great migration of Bitcoin mining or the new reshuffling of global hash power distribution showcases the uniqueness of the cryptocurrency industry compared to traditional business activities: due to its high degree of globalization and decentralization, the entire network is difficult to completely halt, and this ebb and flow may also bring new opportunities.

A hash power service provider commented on the current situation: "National policies have created a blue ocean."

Hash Power Reshuffle

After the end of May, Luke began engaging in the new business of mining machine distribution, summarizing his venture in four words: inexplicable.

Although he is in the blockchain industry, he had little prior contact with the mining community. In his impression, Bitcoin miners were mostly wealthy "local bosses," and mining was a "foolish business."

This impression is not entirely biased. At the end of 2012, a dropout PhD student from China, Zhang Nange, who later became the founder of Canaan Creative, the first publicly traded mining machine company globally, was the first to develop a professional mining machine based on ASIC (Application-Specific Integrated Circuit), marking the entry of Bitcoin mining into the "hot weapon" era of hash power competition.

Since then, China has produced leading mining machine manufacturers such as Bitmain, Canaan Creative, and Bit Micro (Shenma Mining Machine), which currently hold over 90% of the market share.

With upstream supply chain advantages and abundant electricity resources in regions like Xinjiang, Inner Mongolia, and Yunnan-Guizhou-Sichuan, China became the global Bitcoin mining center in the following years, forming an industry ecosystem of "mining machine manufacturers, miners, mining farms, and mining pools."

In this ecosystem, mining machine companies, mining farms, and mining pools all profit from miners; miners earn the price difference between Bitcoin and mining costs.

Excluding mining farm owners and pool owners who also mine, the narrow definition of miners indeed represents the group with the lowest entry barrier in the industry. This explains the large and mixed population of miners, the so-called "local bosses" in Luke's impression.

A mining pool salesperson stated that the mining bosses he encounters come from various backgrounds, including "factory owners, hydropower station operators, electronic product sellers, and internet café owners." In reality, due to the developed mining industry chain in China, the absolute investment required to become a miner is not high; one can start mining by spending several thousand to tens of thousands of yuan to purchase a mining machine and having a budget for long-term electricity costs. There are no statistical data on the exact number of Bitcoin miners in China, but some industry insiders estimate that before the ban, the number of miners in China may have exceeded 100,000.

Thus, when several friends with overseas backgrounds approached Luke at the end of May, hoping he could find channels to purchase mining machines through domestic connections, Luke did not take it particularly seriously. By sending a 99 yuan red envelope to an intermediary, he quickly contacted a sales representative from Bitmain.

However, after discussing in detail, Luke discovered that the overseas Chinese clients behind his friends had significant appetites. They were from Suriname, a small country in South America that most Chinese people are not familiar with, yet it has the largest and oldest Chinese community in South America and even had a Chinese president in the 1980s.

According to Luke, with the endorsement of the intermediary, he gained the trust of the Chinese clients in South America and received over a million dollars in June, commissioning him to purchase more than 100 mining machines and complete inspection, customs clearance, and transportation services. After receiving the first batch of goods in July, the client from Suriname decided to add tens of thousands of mining machines in batches and build a large Bitcoin mining farm locally.

At the current wholesale price of over 20,000 yuan per machine for large clients, if this transaction is completed, its total value could exceed hundreds of millions of yuan.

In this way, Luke turned 99 yuan into a multi-hundred-million business.

Those who had earlier established overseas mining services have felt a significant increase in demand within the four months since the ban.

Li Wei (alias), who previously mined Bitcoin in Shanxi, abandoned his business in China in 2018 due to compliance risks, believing "mining cannot last long in China," and moved to Canada.

In the past few years, Li Wei's business in Canada developed slowly, establishing only two mining farms with a few thousand slots. However, after May, the vacant slots in his original mining farm were fully booked. In July, he also raised funds from four or five Chinese shareholders to plan for the construction of a new mining farm that can accommodate up to 15,000 S19 mining machines.

Zhou Yu, who previously worked on public relations for the Russian mining farm BitRiver, recently received several inquiries from miners asking if there were still slots available in Siberia.

In 2019, BitRiver extensively sought partners in China, but the following year, it faced the pandemic, and cautious Chinese miners who wanted to visit the site could not go abroad, causing most cooperation intentions to fall through. Now, the news from Russia is: it's full, all full, and all the machines are from Chinese miners.

Some countries had previously aimed to attract Chinese mining farms. Kazakhstan, frequently mentioned by several interviewees as a popular destination for overseas migration, established a special zone called the Astana International Financial Center in 2015. According to local policies, "data centers" established here are exempt from any taxes except for a 1% "usage fee" on annual revenue.

Several miners with connections to Kazakhstan stated that in the past three months, the slots there have been fully occupied, with many newcomers coming from China.

From the Gobi Desert in Central Asia to the deserts of the American Midwest, and to the snowy plains of Canada and Siberia, as Chinese miners search the world for mining destinations, a new distribution of global hash power is quietly taking shape.

Although there is currently no comprehensive data available to present the latest distribution of hash power by region, public data shows that Bitcoin's total network hash power dropped to a low point in mid-July and has since rebounded rapidly. With no large-scale mining conditions remaining in China, a significant portion of the new hash power may be distributed overseas. Multiple interviewees stated that North America and Central Asia are popular destinations for mining machines, and their share in global hash power distribution may increase in the future.

Image: Changes in Bitcoin's total network hash power from April to September; after hitting a low point in mid-July, Bitcoin's hash power began to slowly recover. Source: OKLink

The situation of the mining community is also becoming increasingly polarized.

Some are reluctantly exiting the market; they lack overseas experience and trustworthy contacts abroad, or they entered the market early and have made enough money and do not wish to continue the hassle. Others are seizing this opportunity to increase their investments or accelerate their transfers, hoping to capture a larger share in the new landscape.

For example, among the Chinese clients of the Russian mining farm BitRiver, there is the Chinese gaming company The9, which has already ventured into the mining farm business. In June, The9 successively acquired Canadian cryptocurrency mining farms Montcrypto and Skychain, signed a hosting agreement with Russia's BitRiver, and announced plans to collaborate with Kazakhstani company LGHSTR Ltd. to build a cryptocurrency mining farm with a total capacity of 200,000 loads (load refers to the specifications of the mining farm; one load means the maximum power consumption of the farm can reach 10,000 kilowatt-hours per hour).

If fully utilized for S19 and other large Bitcoin mining machines, 200,000 loads could accommodate about 70,000 machines.

In the same month, Bit Mining (formerly 500.com) announced that it had successfully transported its first batch of 320 mining machines to Kazakhstan, with another 2,600 machines scheduled to arrive by the end of the month. In mid-July, another U.S.-listed company, Bit Digital (formerly Kenuo Financial), announced that it was transferring 14,500 Bitcoin mining machines from China to the U.S.

In addition to transportation, purchasing additional mining machines is another way to increase investment. According to incomplete statistics, since July, four overseas mining companies, including Hive Blockchain from Canada, the U.S., and Australia, have cumulatively purchased 31,000 Bitcoin mining machines.

There are also some miners without overseas experience who do not want to exit the market; they rely on their courage to keep fighting.

Among the most unexpected miners we heard about during interviews is a village in southern China, where the entire village previously pooled funds to buy 100,000 mining machines for mining in Xinjiang. After the ban, an elder from the clan widely contacted various overseas service providers and ultimately signed a contract with one of them.

According to those serving them, this elder was very cautious when inquiring about the overseas process, asking about logistics, customs clearance, transportation processes, and the arrangement of mining machines upon arrival. On the other hand, being in a region with a tradition of going overseas, this village also has a strong determination to migrate: by mid-September, a cargo ship carrying their first batch of 1,000 mining machines is set to depart from China to North America. If this trip goes smoothly, they plan to transport all 100,000 mining machines abroad.

Difficulty Upgrade

The key players helping mining machines go abroad are a group of professional service providers who now have three major tasks: building the mining farms, transporting the mining machines, and ensuring the machines are operational upon arrival. While this is not a new job in the mining industry, the involvement of cross-border elements makes all processes more expensive and complicated.

In late June, a month after the crackdown on Bitcoin mining was announced in China, a major client communication meeting focused on overseas operations was held by Bitmain in Chengdu. They stated that they had secured a large amount of electricity resources overseas and encouraged their mining clients to join them in building mining farms abroad.

According to LatePost, Bitmain quoted 28 million yuan to build a mining farm with a capacity of 10,000 loads in North America. Previously, the cost of building a mining farm of the same capacity in China ranged from 1 to 3 million yuan.

A participant in this communication meeting stated that the high costs are justified because Bitmain is "going all out," selecting the best suppliers and the most expensive equipment.

For example, regarding the transformers essential for building a mining farm, a person preparing to build a farm in the U.S. indicated that the current direct purchase price for transformers in the U.S. is about 400,000 yuan per unit. Building a mining farm with a capacity of 10,000 loads requires four transformers, leading to an expenditure of 1.6 million yuan just for this item, while domestic manufacturers quote around 100,000 yuan.

While industry giants attempt to create benchmark overseas projects, new entrants believe they can offer more professional, faster, and reasonably priced options.

Bertex, a Chinese blockchain startup that received investment from Bitmain's former chairman Wu Jihan at the end of last year, launched its hash power overseas business in June. In August, Bertex partner Sun Ju, who previously worked for IT consulting firm Frost & Sullivan and later held positions related to import and export trade at a state-owned enterprise, flew to the U.S. to coordinate local mining farm construction; Bertex founder Ran Jianfeng remained in China to address miners' overseas needs and arrange the transportation of mining machines.

According to Sun Ju, building a mining farm is simple in terms of housing and land, but the challenges lie in electricity and transformers.

However, even the relatively simple task of building houses becomes complicated when the location is in the U.S. Sun Ju cited that, in addition to regular construction, the infrastructure for a mining farm includes fans, water curtains (a type of cooling device), electrical engineering, networking, and racks. These different construction phases require different qualifications and corresponding teams in the U.S., making it difficult to find an experienced foreman to "package everything" as is often done in China. This means that mining farm builders must find people themselves, coordinate timelines, and arrange the order of entry.

As for securing electricity, it requires even more skills, including knowledge: the most basic is understanding the U.S. electrical standards—an American miner told us that a local Chinese owner recently bought a factory to build a mining farm, only to find that the voltage was incompatible after bringing in Chinese mining machines and transformers; he overlooked that the industrial electricity standard in the U.S. is 277/480 volts, while in China it is 220/380 volts.

It also involves methods: how to obtain more convenient information in ways that Americans can accept—such as asking where to buy compliant transformers faster, rather than waiting in line for 14 months in a bureaucratic manner.

"This is not something that can be naturally accomplished just by being in the U.S. for many years; the key is having business experience in the U.S.," Sun Ju said.

In terms of transportation, Ran Jianfeng stated that Bertex can provide comprehensive services. To alleviate miners' concerns about transporting mining machines overseas, they even offer video monitoring services throughout the transportation process and are negotiating with an insurance company for compensation services specifically for mining machine transport accidents.

Bertex also claims to have legal channels to help miners avoid the 25% punitive tariffs on importing electronic products from China to the U.S., and even to facilitate the return of mining machines. Sun Ju explained that if one has experience in building multinational factories in the manufacturing industry, it is not difficult to discover the methods involved.

Ran Jianfeng noted that, in his experience, when attracting miners to go overseas, a single low electricity price is not enough to be the biggest competitive advantage; miners care about comprehensive services, including "overall process control, hardware safety, logistics services, equipment guarantees, and cycle management, etc."

Because going overseas has increased the difficulty of mining farm services, Sun Ju and Ran Jianfeng, who have backgrounds in consulting and import-export trade, believe that now is an opportunity for them to enter the market.

Since the first Bitcoin block was mined at the end of 2009, Bitcoin mining has evolved from a niche activity that geeks could dabble in during their spare time using readily available CPUs to a large-scale multinational business collaboration with clearly defined divisions of labor and detailed processes, involving numerous participants and giving rise to several publicly traded companies.

This evolutionary process may be a scenario that Satoshi Nakamoto, who completed the world's first Bitcoin mining on a server in Helsinki, Finland, 12 years ago, never envisioned.

Born from Globalization, Returning to Globalization

Expanding the observation scope, even without a policy shift, Bitcoin hash power has been gradually leaving China in recent years.

After peaking at over 75% in 2017, China's share of total network hash power has been slowly declining. According to data from the Cambridge Centre for Alternative Finance, by early 2021, China's hash power share had dropped to 65%, and by the end of April, during the dry season, it further decreased to 46%, nearly a 20% drop compared to the same period last year.

As a cornerstone of the highly globalized cryptocurrency industry, the rise and fall of Bitcoin mining in China reflect changes in international political and economic trends and global division of labor.

Before 2018, when market logic was the dominant factor in cross-border economic activities, China became the global production center for mining machines due to its complete and rapid supply chain, a position it has maintained to this day.

This is a story that has been repeated multiple times over the past decade in emerging hardware fields such as smartphones, drones, and robotic vacuum cleaners—relying on the supply chain advantages of the manufacturing industry and the engineer dividend, researchers in Beijing and workers on assembly lines in Shenzhen can work together to quickly scale up the production of a new device, achieving global leadership in terms of shipment volume with affordable prices and agile iteration capabilities.

In the coming period, as Chinese mining machines and farms go overseas, China's role as a global manufacturing center in the mining industry will further diversify: factories in Guangdong, Zhejiang, Shandong, and Jiangsu will have opportunities to produce transformers for overseas mining farms. In popular overseas destinations, the quotes from Chinese manufacturers are significantly lower than those from their counterparts in developed regions, while the quality is more reliable than in relatively underdeveloped areas.

Chinese container manufacturers have also begun receiving orders for services related to overseas mining. This is a current trend in the mining industry, where mining machines are directly stacked into modified containers for mining, saving time on constructing fixed buildings and allowing overseas mining machines to "land and mine" immediately, starting operations more quickly.

However, the mining activities that gathered in China due to advantages in mining machine supply and cheap electricity have also brought a series of problems: before the ban, China was the largest energy-consuming country for mining—according to data from the Cambridge Centre for Alternative Finance, in 2020, China consumed about 78.8 billion kilowatt-hours of electricity for Bitcoin mining, nearly equivalent to the annual electricity generation of Algeria, a North African oil-producing country with a population of 43 million.

Some observers believe that the Chinese government's crackdown on mining is due to its high energy consumption, disruption of normal power grid planning, and potential hindrance to achieving carbon peak goals.

On the other hand, since 2018, with changes in the international environment, the mining industry has been voluntarily leaving China, and even the mining machine production segment, which was once China's strongest, has shown tendencies to go overseas.

Leading mining machine manufacturer Bitmain opened a production line in Malaysia in 2018. A person close to Bitmain indicated that the company is considering expanding its capacity in Malaysia, as exporting mining machines directly from Malaysia to the U.S. can avoid the 25% punitive tariffs.

An overseas competitor of Chinese mining machine manufacturers, the Israeli mining company Spondoolies, which ceased operations in 2016, has recently shown signs of revival.

In August of this year, Canadian Bitcoin infrastructure company Blockstream acquired the intellectual property of Spondoolies and announced that it would launch Blockstream-branded mining machines in the third quarter of next year.

"I originally thought the mining machine war was long over, but I didn't expect it to come back again," one industry participant remarked.

Due to past globalized logic, China once became the world's mining center; however, under the new rules of global interaction that place more emphasis on geopolitical and regulatory factors, China's cryptocurrency mining industry is gradually losing its former status.

The uniqueness of cryptocurrency mining lies in its "tenacity" or "stubbornness." In this distributed network, once mining nodes spread to a certain extent and the network scale exceeds a certain lower limit, it is difficult for any single entity to press the stop button on the entire industry unless there is global coordination. Of course, a powerful government can at least drive an unwelcome enterprise out of its borders.

In a sense, the "de-Chinafication" of mining is a situation that both the Chinese government and the global cryptocurrency community are pleased to see.

The former can better maintain financial stability and achieve the long-term carbon peak environmental goals; the latter gets what they have always wanted: a more decentralized Bitcoin network.

At the request of the interviewees, names like "Luke," "Li Wei," and "Zhou Yu" are pseudonyms.

[1] Bitcoin mining rewards are halved every four years; after the third halving in May last year, the reward per block is 6.25 Bitcoins.