IN THE HENGDUAN mountains of Sichuan province, swollen brown rivers and trees heavy with ripe mangoes do not evoke digital wizardry. Yet until recently, there were buildings here with rack upon rack of specialised computers. They were often near hydropower plants that supplied them with electricity from dams. They needed lots of power. Their machines were used for “mining”, a process that involves validating transactions conducted in bitcoin and other digital currencies by solving cryptographic puzzles. In return, they received newly minted coins. The buildings were recognisable by their huge cooling systems: usually a wall on one side covered in giant fans to draw in air.
Listen to this story
Your browser does not support the
But across Sichuan, the fans have stopped whirring. In May, a government committee tasked with promoting financial stability vowed to put a stop to bitcoin mining. Within weeks the authorities in four main mining regions—Inner Mongolia, Sichuan, Xinjiang and Yunnan—ordered the closure of local projects. Residents of Inner Mongolia were urged to call a hotline to report anyone flouting the ban. In parts of Sichuan, miners were ordered to clear out computers and demolish buildings housing them overnight. Power suppliers pulled the plug on most of them.
The clampdown has had a global impact. Bitcoin’s “hash rate”, a measure of the computational power being used by the world’s mining machines, has fallen by half in recent weeks. Its “difficulty rate”, which rises and falls as computers join or leave the mining effort, last week fell to an all-time low. China had accounted for about 65% of bitcoins earned through mining, according to the Cambridge Bitcoin Electricity Consumption Index. But analysts think about 90% of its mining has now ceased. Chinese miners are selling their computers at half their value.
China’s mining boom began in 2017, after a surge in the price of bitcoin caught the attention of local entrepreneurs. The country was already making most of the machines that mine bitcoin globally, as well as the tailor-made chips on which they run. It also had the capacity to produce more power than it needed. In 2018 this excess amounted to 70 terawatt-hours (TWh), equivalent to Switzerland’s total energy production. Rather than let the surplus go to waste, plants sold it to mining farms. The seasons would determine where those farms operated. After the end of Sichuan’s drenching summer rains, when prices there would rise, miners would drive their machines to somewhere near a cheaper source, usually coal-fired power plants thousands of kilometres away in Xinjiang and Inner Mongolia. (Energy from solar and wind power is not reliable enough to power non-stop mining.)
In 2017 China, fearing a loss of financial control, banned cryptocurrency trading. But local governments still welcomed the miners: they were a source of taxes and other levies. In June a state-run zone in Ya’an, a city in Sichuan, had been set to open in time for the start of the rainy season. It was offering cheap power for mining and other digital activities. “It was a win-win,” says Kirk Su, a miner who had been planning to put some of his machines in the zone. “China was leading in mining in all respects: cheap power, cheap labour, fast and easy access to kit,” he says.
Then came the clampdown. It was targeted in part at the cryptocurrency traders. The mining industry itself has little to do with the volatile business of trading. But miners could not function without converting their new bitcoins into yuan. For this they used exchanges that had moved offshore after the trading ban, but still targeted Chinese users. The government may have decided that to rid China of crypto transactions, “mining had to go”, says Bobby Lee, who co-founded China’s first cryptocurrency exchange (it was forced to shut in 2017). He now runs Ballet, an app that lets users manage their digital currency.
Another aim may have been to reduce emissions. The Cambridge numbers suggest that Chinese miners used around 83TWh of electricity a year, similar to Belgium’s total power consumption. (Still, China could have chosen to ban mining only in its coal-belching north, says Mr Lee.) Officials may also have worried about collusion between local governments and mining operations, some of which had been getting subsidies earmarked for innovative big-data firms.
The central government said it wanted to “resolutely prevent the transmission of individual-level risks to broader society”. That may, in part, have been a reference to the activities of some mines that had been setting up Ponzi-like schemes, promising big returns to investors. Other scammers have been masquerading as cryptocurrency traders. Last year over 100 people were arrested for running two such operations, PlusToken and WoToken.
To evade the clampdown, big miners have sent their machines overseas. Mr Su, who also runs a logistics business that transports mining machines, has been chartering Boeing 747s to get used ones out swiftly. Most are going to Russia and Kazakhstan, which together account for about 13% of the world’s bitcoin mining. But there are few data centres abroad with space for lots of new machines, including in America, the second-biggest miner. Building a farm there costs between five and ten times what it does in China, says Mr Su. That is too much for most Chinese miners. More than half of their computers will stay put for now, he says.
Some smaller miners are still finding ways to operate. One says he is lucky to have teamed up with a privately owned hydropower station that is loth to forgo the extra revenue (it risks being fined by the grid or booted off it). While meeting your correspondent, he struck a deal to buy a farm from a fellow miner for 5m yuan ($770,000), powered by a plant that is off the grid. If his machines can function there for 15 days, he will have earned his investment back in bitcoin.
In an abandoned school in southern Sichuan, Mr Su has stored 10,000 machines from some of his shuttered farms. For every day they spend there, unplugged and stacked to the ceiling, he says that 1m yuan in potential profit is lost. ■
This article appeared in the China section of the print edition under the headline “There was gold in them thar hills”