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Technicians repair bitcoin mining machines at a mining facility operated by Bitmain 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 them wiped out as soon as possible.
In May, the government called for a harsh crackdown on bitcoin mining and trading, triggering what is dubbed in crypto circles “the great mining migration.” This exodus is underway now, and it could be a game-changer for Texas.
Mining is the energy-intensive process that both creates new coins and maintains a log of all existing digital token transactions.
Despite a lack of reserves that caused multi-day power outages last winter, Texas often has the lowest energy prices in the world, and its share of renewables is increasing over time. with 20% of its electricity coming from wind in 2019. It has a deregulated power grid that allows customers to choose between electricity providers, and most importantly, its political leaders are very pro-crypto dream conditions for a miner looking for a friendly welcome and cheap sources of energy.
“You are going to witness a dramatic change in the next few months,” said Brandon Arvanaghi, previously a security engineer at the crypto exchange Gemini. “We have governors like Greg Abbott in Texas promoting mining. It’s going to become a real industry in the United States, which is going to be amazing.”
China’s mining domination
Data for 2021 for the global distribution of mining power is not yet available, but earlier estimates showed that 65% to 75% of the world’s bitcoin mining occurred in China, mainly in four provinces. Chinese: Xinjiang, Inner Mongolia, Sichuan and Yunnan. Sichuan and Yunnan hydropower make them renewable energy hotspots, while Xinjiang and Inner Mongolia are home to many Chinese coal-fired power plants.
The withdrawal of minors has already started in Inner Mongolia. After failing to meet Beijing’s climate targets, the province’s leaders decided to give bitcoin miners two months to get rid of, explicitly attributing its energy shortages to crypto mines.
Castle Island Ventures founding partner Nic Carter said while it’s not entirely clear how China will handle the next steps, a gradual rollout is likely. “It looks like we are moving from policy statement to actual implementation in a relatively short timeframe,” he said.
How this exodus is measured is by looking at hashrate, an industry term used to describe the computing power of all miners in the bitcoin network.
“Given the drop in hashrate, it seems likely that facilities will be disabled across the country,” continued Carter, who also believes that likely 50-60% of Bitcoin’s total hashrate will eventually leave China.
While China’s announcement was not anchored in politics, that doesn’t stop miners like Alejandro De La Torre from cutting their losses and making an exit.
“We don’t want to face some kind of new ban coming to China every year,” said De La Torre, vice chairman of the Hong Kong-based Poolin mining pool. “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 features of Bitcoin is that it is completely location independent. Minors only need an internet connection, unlike other industries which need to be relatively close to their end users.
“The good thing about bitcoin which is underestimated by many opponents is that it is a portable market; you can bring it straight to the power source,” Steve explained. Barbour, founder of Upstream Data, a company that manufactures and provides portable mining solutions for oil and gas installations.
That said, the exodus will not be instantaneous, in part because it will take some time for miners to move their machines out of China or to liquidate their assets and settle elsewhere.
Or they will
Because large-scale miners compete in a low-margin industry, where their only variable cost is usually energy, there is an incentive to migrate to the cheapest energy sources in the world.
“Every western mining host I know has had their phones off the hook,” Carter said. “Chinese miners or minors domiciled in China are turning to Central Asia, Eastern Europe, the United States and Northern Europe.”
One likely destination is China’s immediate neighbor, Kazakhstan. The country’s coal mines provide a cheap and plentiful supply of energy. It also helps Kazakhstan to adopt a more lax attitude towards construction, which bodes well for miners who have to build physical facilities in a short period of time.
Didar Bekbauov runs Xive, a company that provides accommodation services to international minors. Xive also sells the specialized equipment needed for mining.
Bekbauov says he has stopped counting the number of Chinese miners who have called him to ask about resettlement options, ranging from operations with 15 platforms to thousands.
“A miner told us that only government power plants have restricted mining and that private plants will continue to serve miners,” Bekbauov told CNBC.
“But most of the electricity is produced by government power plants, so the miners will have to move around. This makes them uncertain and desperate to find other locations,” he said.
It remains to be seen whether Kazakhstan is a destination or simply a stopover on a long migration to the west.
Arvanaghi is bullish on North America and believes hashrate there will increase over the next few months.
“Texas not only has the cheapest electricity in the United States, but 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 top miner in America.”
Wyoming also tends to be pro-bitcoin and could be another mining destination, according to Arvanaghi.
There are, however, some major limitations for the United States to become a global mining destination.
On the one hand, the time it takes to build the physical infrastructure needed to accommodate the minors is likely six to nine months, Carter told CNBC. “The United States probably cannot be as nimble as other countries in terms of relocating these stray miners,” he said.
The logistics of moving can also be difficult. There is a shortage of sea containers, thanks to tailwinds from the Covid pandemic.
But perhaps the biggest question is the reliability of the Texas power grid. A storm that devastated large swathes of the state in 2020 reignited a debate over whether Texas should protect its systems from winter weather, a potentially costly project that could affect taxes or other charges for those looking to tap into the state’s electricity grid. More recently, ERCOT, the organization that operates the Texas grid, called on consumers to conserve energy amid what officials have called an unusual number of “forced production cuts” and a heat wave to come. .
Respond to Musk’s review
Tesla CEO Elon Musk has criticized bitcoin mining, saying it is bad for the environment. This is not a new review.
For years, skeptics have slandered the world’s most popular digital token for polluting the planet, while supporters have touted the virtues of bitcoin and its role in accelerating the rise of renewable energy.
It is not clear whether the mining exodus from China will make or break the cause of bitcoin enthusiasts in the token carbon footprint debate. The dominant narrative, to date, has been that much of the world’s bitcoin is mined for a Chinese purpose.
“From a narrative standpoint, it’s definitely an improvement,” Carter said. “But China also has the most abundant stranded hydroelectric resources in the world.”
The country offers important energy vectors from wind, solar and especially hydroelectricity in the south. The Xinjiang grid, for example, is 35% supplied by wind and solar energy.
If all the miners eventually leave China, it will mean less mining powered by fossil fuels, but it also means that the share of the mining network powered by renewable energy will decrease. This is why the question of where these migrant miners end up could prove to be crucial for the future of bitcoin. “This is the biggest story of the year for bitcoin,” Carter said.
De La Torre says they are looking to expand their operations using green energy, a trend that has been brewing for years. He says hydropower plants are generally cheaper than fossil fuels in most parts of the world.
“Mining is price sensitive, so look for the cheapest energy and the cheapest energy tends to be renewable because if you burn fossil fuels … it has extraction costs, refining and transportation, ”explained Adam, CEO of Blockstream. Back.
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Each year, the investment bank Lazard publishes a breakdown of energy costs by source. Its 2020 report shows that many of the most common renewable energy sources are either equal to or cheaper than conventional energy sources like coal and gas. And the cost of renewable energy keeps dropping.
But there are limits to mining crypto solely on renewables.
Although solar and wind power are now the cheapest power sources in the world, both power supplies face limitations on a large scale, so the viability of miners turning exclusively to wind or solar power is of concern.
Next six months
At the moment, there isn’t much mining capacity in the world ready to absorb the Chinese miner diaspora. As they scramble to find a new home, we might see the hashrate disconnect and stay offline.
In practice, this would mean that all the remaining miners are more profitable for a while.
Greater geographic dispersion would balance the global balance of power and also reduce a sovereign nation’s ability to co-opt or control the network.
We could also see the emergence of special crypto-economic zones in the coming months.
“You will see jurisdictions take a very favorable position and create the equivalent of special zones to encourage minors to house locally,” Carter said. “We see it at the state level here. You will also see it at the country level, you might even see subsidized electricity for mining.”
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