The “mining” business, which earns 300 million a day, is going cold?

To a certain extent, compared to chasing the ups and downs in the secondary market, mining is a profitable business of “laying win”.

Editor’s note: This article is from the WeChat public number “deep combustion” (ID: shenrancaijing)

Author | Zhou Jifeng

Editor

“We’re ready to run, to go to the Middle East.” Wang Hao said to Shenrancaijing.

Wang Hao is the owner of a “mining farm” in Sichuan, and by “run,” he means move all of his bitcoin mining machines and equipment abroad.

On May 21, the State Council’s Financial Committee held its 51st meeting to clearly “crack down on bitcoin mining and trading, and resolutely prevent individual risks from being passed on to the social sector”.

The surging regulatory effort swept through the entire cryptocurrency community, and miners and farm owners, the top of the cryptocurrency industry chain, began to feel anxious and on pins and needles.

On May 26, Inner Mongolia Autonomous Region issued eight measures to combat and punish virtual currency mining, and began to strictly stop virtual currency mining.

The company is also a member of the National Energy Administration’s Sichuan Supervision Office, which issued a notice on May 27 about a research forum on virtual currency “mining”. The company is also a member of the Sichuan Energy Investment Group, which needs to report on the situation of virtual currency “mining” in their respective supply areas and related recommendations, and the impact analysis of shutting down virtual currency “mining” on the amount of abandoned hydropower in Sichuan this year.

The boots have not yet landed in Sichuan province, there are already many people panicked. A small mining farm owner told Deep Burn, “We don’t know what to do, now everything is stalled, waiting for the specific implementation of the policy.”

The past year, the virtual currency market ushered in a bull market, “mining” boom also broke out. The Sichuan, Inner Mongolia, Yunnan and other places are rich in energy and cheap, attracting a lot of “mining farms” to move in.

According to Crypto analytics and Glassnode, an on-chain market analysis firm, demand for bitcoin has risen sharply as institutional money continues to pour into the market. miners earned an average of about $50 million (about 300 million yuan) per day in March of this year, about four times as much as last year.

However, mining also requires a huge amount of energy, which not only does not help the local economy, but also creates a huge ecological burden.

According to Cambridge University research data, the annual electricity consumption of global bitcoin mining is about 121.36 terawatt hours, which is equivalent to meeting the energy needs of Cambridge University for 744 years.

Mining machine operators, including Huobi Mall and Leipit Mining Pool (BTC.TOP), have decided to suspend mining operations in China after the State Council’s Financial Commission stated it would crack down on bitcoin mining and trading practices. Many miners lamented that the good times didn’t last long before the “mining disaster” began.

Under the regulation, mining machines “go to sea overnight”
The so-called mining is actually the jargon of the cryptocurrency world. Why do we need to mine? Why do virtual currencies need to be mined? To explain these questions clearly, you need to go back to Satoshi Nakamoto, the inventor of Bitcoin.

For financial transactions, one of the most important aspects is actually bookkeeping. It’s equivalent to having to know how much I paid myself and how much money is left. But today’s bookkeeping systems are centralized, with banks taking care of keeping track of this stuff. Satoshi Nakamoto, on the other hand, has designed a decentralized transaction bookkeeping system that allows online payments to be initiated directly by one party and paid to another, without going through any financial institution in the middle.

To support and maintain this system, Satoshi Nakamoto designed incentives. It requires all bitcoin producers around the world to use their computers to download software to solve a very difficult mathematical problem using a specific algorithm, and whoever succeeds in solving the problem first gets the right to keep track of the block and is rewarded with bitcoins within that block.

Thus, this method of obtaining bitcoins is called “mining”, and the person who produces them is called a “miner”, and the computer that mines them is naturally called a “miner”.

The number of bitcoins is limited, and at the beginning, the virtual currency is easy to dig, but the later it gets, the harder it is to mine.

Originally, you could buy a mining machine at home and get some graphics cards to make a fortune, but now, it has become quite difficult for individuals to mine. In this mining game, bitcoin mining is now highly concentrated, with people starting to concentrate on buying giant mining machines and setting up large-scale mining farms in power-rich areas.

Chinese miners are among the most desperate in terms of mining computing power worldwide. A data released by Cambridge University’s Centre for Emerging Finance (CCAF) last year showed that Chinese miners accounted for 65.08% of the world’s total mining arithmetic. And because of the abundant and cheap power resources in Inner Mongolia, Sichuan and other provinces and cities, many “mining” field owners have arranged the location of their mines in these places.

But on the other hand, the harder the mine is to dig, the more power it consumes. The latest data from the University of Cambridge’s Bitcoin Power Consumption Index shows that bitcoin mining is estimated to consume 133.68 terawatt-hours of electricity per year (1 terawatt-hour is 1 billion kilowatt-hours of electricity). This figure already exceeds Sweden’s electricity consumption for a year, ranking it as the 27th highest electricity consumption of any country in the world.

According to Xinhua’s statistics, some “mining farms” consume millions of kilowatts of electricity a day; a “mining farm” in a western province can “eat” 45 million kilowatts of electricity a month; a “mining farm” in the southwest consumes as much electricity as three cities consume in a year.

Mining consumes a huge amount of electricity, which brings pressure on the local energy supply. For mining, whether it is a new product or backward capacity has been controversial. But by this year, the policy direction has become very clear, with Chinese regulators explicitly cracking down on bitcoin mining and trading practices.

The policy began to gradually tighten and the cryptocurrency community was on edge.

The move to restrict cryptocurrency trading and mining in some provinces and municipalities has exacerbated the cryptocurrency’s price decline. Bitcoin and other digital currencies, which have already fallen sharply from record highs this year, have recently been sold off again with a vengeance.

“From what we see now, it’s clear that there is definitely no way for high energy-consuming bitcoin miners to survive in the country, and perhaps only some of the smaller mining sites that are not connected to the national grid will survive.” After observing the recent policies, Wang Hao decided to move the miners overnight out to the Middle East.

Wang Hao’s prediction is that domestic energy conservation and carbon neutrality is the trend, so there will definitely be a wave of going to sea in the future. “Most of the places where people go to sea are also some resource-rich areas such as Central Asia and the Middle East. But foreign security issues, political issues are relatively large risks in going to sea, and going to sea also requires a particularly reliable relationship.”

Today, some large mining companies have begun to seek overseas mining. For example, Shenzhen-based mining company Bit Mining recently issued an announcement that it intends to invest more than $25 million to build a virtual coin mine in the United States with a wholly owned subsidiary of Bit Fawn, in addition to the proposed investment of more than $9 million to build a mine with a Kazakh company in the region.

And Lao Qin, who sells mining machines, is now at a loss for words. Earlier this year, he saw the good market for cryptocurrencies and engaged in a small mining farm in Sichuan with a few friends. “The address was chosen, and more than thirty policy approvals have been done. As a result, electricity is now limited and I don’t know what to do.”

The "mining" business, which earns 300 million a day, is going cold?

How crazy is the mining business?
Even with the high pressure mining policy in place, still can not stop the miners mining enthusiasm.

Everbright Securities points out that the mining industry is expected to add about $18 billion in revenue each year starting in 2020. The high profits are attracting countless people who are eager to get rich to join this gold rush.

In fact, the cryptocurrency market has seen a bull market since the end of last year to May this year. The high price of cryptocurrency has also made the mining business, which has been dormant for a long time, burst into flames again. This wave of mining is as frenzied as the gold rush of the 19th century, and for miners, it’s a bull market that’s hard to resist. Because it means that the price of coins is much higher than the cost of mining.

As long as the miner is on, he or she can make money lying down. A miner said to Deep Burn, “At present, mining monthly after electricity and mining machine costs, converted to an average of 18,000 yuan a month profit.”

Wang Hao also gave Deep Burn a calculation, the profit of mining = the production of bitcoin × coin price – mining machine costs – electricity – maintenance and labor costs – mine depreciation costs. “The current cost and cost of mining a bitcoin abroad is about $10,000. The price of bitcoin was once as high as $60,000 this year, and now despite falling back to about $37,000, there are still substantial profits.”

The mining boom has significantly boosted the market’s demand for mining machines. With that came an insane rise in mining machine prices. For example, Bitmain released its latest flagship model, the S19PRO, in February 2020, which went all the way up from an initial $15,000 per unit and reached $60,000 per unit some time ago.

Mining machines made by Chinese mining machine manufacturers such as Bitmain, Microbit and Jia Nan Technology are highly sought after. Orders from mining machine manufacturers are even lined up for a year from now. Mining machine maker Jia Nan Technology, for example, saw its revenue soar by 488% in the first quarter of this year.

The market rose, some intermediaries also earned a lot of money. In addition to mining, Lao Qin also sells mining machines. Some time ago, especially in May, dozens or even hundreds of customers came in every day to inquire about mining machines.

As bitcoin mining becomes more difficult, more and more people are aiming at other coins, such as ethereum, chia, litecoin, and so on.

The "mining" business, which earns 300 million a day, is going cold?

Since the Bitcoin algorithm is completely open source, after Satoshi Nakamoto pioneered the concept of decentralized cryptocurrency, other further refined and optimized virtual currency systems such as ethereum and litecoin have emerged. All of these virtual currencies are issued in a similar way to Bitcoin. Miners around the world can dedicate their computing power to “mining”, and in return, miners receive a percentage of the virtual currency generated by the newly generated blocks, as well as a percentage of the transaction fees.

The old Qin explained: “Now there are three forms of mining, one is bitcoin, need to have a chip, chip mining power consumption is relatively large. Ether is generally required to have a graphics card, energy consumption is relatively low, and there is a coin that requires a hard drive to mine, such as Chia coin, the power consumption of mining with a hard drive is relatively small. And some only need the hard disk, because the power consumption is not a lot, so it is very suitable for home to buy their own machine to dig.”

This also leads to, not only the mining machine, but also some other corresponding hardware prices have risen significantly.

For example, the current circulation of ethereum miners on the market, the mainstream is a graphics card miner, the core components are independent graphics cards with AMD and NVIDIA as the main source, a mining machine needs at least 6-8 graphics cards. The wave of mining, the mine boss crazy sweep, resulting in a card hard to find graphics cards, the price once doubled two or three times, not to mention that the second-hand graphics cards are even speculated out of the sky.

And unlike Bitcoin, which requires a graphics card to provide arithmetic power for mining, Chia coin requires ordinary users to use and expand their storage space to win rewards. That’s why hard drives become important. Large-capacity hard drives were also snapped up for a time, with prices skyrocketing across the web.

Who can really earn money?
In a way, mining is the new way to create wealth, and it’s even a more sound investment than coin speculation.

Take Bitcoin for example, when it first went on sale in 2009 the price was less than 1 cent, by March 2021 Bitcoin had surpassed the $60,000 mark, and although it has recently fallen back to almost $40,000, it has still skyrocketed thousands of times.

However, not many people are really getting rich. In the words of Qin, you actually “can’t get it”. The price of the cryptocurrency world is extremely volatile, and it is possible to gain dozens of times in just one month, and then fall back in a day or two. Few people can overcome their greed and not chase the ups and downs. Moreover, once leverage is added, if the loss exceeds the deposit, then it will be forced to sell all of it, and you will end up with no money back.

But mining is different, as long as the price of the coin does not fall so badly that it crashes through the cost, then mining is always profitable. And the mining time is long, a mining machine can always experience several rounds of bull market.

Old Qin gave Deep Burn a calculation. He is now mining chia coins, chia coins a mining machine is almost 450,000 yuan, a mining machine consumes five degrees of electricity per hour, a day is only 50 yuan. Even though the price of the currency has dropped recently, a mining machine can still mine about $522 worth of chia coins a day, which is equivalent to earning more than 3,000 yuan a day, making a quick return.

However, nowadays, the threshold of entry in the mining circle is getting higher and higher, and retail investors are getting worse and worse.

There are several factors that affect the profitability of mining: the cost of the equipment, the computing power of the equipment, the price of the coins and the cost of electricity. Relatively speaking, individuals mining today, especially for coins like bitcoin and ethereum, which require large amounts of electricity, actually bear higher risks.

Pixar, a long-time cryptocurrency industry observer, points out that firstly, it is because individuals can’t get very cheap electricity for mining, and secondly, they don’t have that much time and energy to repair and manage the mining machines, which leads to higher electricity and maintenance costs for individuals to spend, so the payback is slower.

“And the price of the cryptocurrency circle is very volatile, it is possible that you have not returned to the capital, the price of coins has fallen, this time to start the machine is a loss. But the mining field owners of the mining machine arithmetic power is higher, take the cost of electricity is also low, may be four or five months to return to the capital.”

In this circle, the mine field owners are the most profitable. At present, there are two models of making money in the mining field, one is to make money by mining themselves, one is to accept hosting. The equivalent of someone will be hosted mining machine to the mine, and the mine is responsible for providing arithmetic power and late machine maintenance.

The "mining" business, which earns 300 million a day, is going cold?

Lao Qin pointed out that if it is hosted, most of it is the electricity money earned. “In fact, the mine farm owners in Inner Mongolia and other places can get very cheap electricity prices, one degree of electricity may be about 10 cents, but the external may have to charge 20 to 30 cents. A mine according to the maximum supply of 10,000 degrees per hour to calculate, the equivalent of every hour to earn a thousand or so, so for the mine field owners, unless encounter extreme circumstances (such as March 12, 2020, bitcoin in just 20 hours plunged from $ 8,000 to $ 3,800, equivalent to the breakdown of the cost), open the mine is considered a dry matter. “

Of course, in addition to making some money, some mining farms will also withhold the crypto coins mined. “For example, the output of 10,000 yuan of coins, the mine may deduct a thirty to forty percent, secretly deducted down. After all, compared to the earnings from mining, simply earning electricity is also a bit less.” Wang Hao revealed.

Even hosting business, only buy one or two mining machine retailer is not popular, instead more and more mining farms are willing to host the mining machine of listed companies, industry giants. “I just don’t take pure retail investors now.” Wang Hao said to: “retail investors invest a million is only a dozen mining machines, management trouble, risk is also large.”

But the East does not shine in the West. Another type of mining – Defi mining – has become popular among retail investors again.

DeFi’s liquidity mining, which mainly happens on the blockchain of Ether, is the process of getting rewards by using DeFi products to deposit or lend specified cryptocurrency assets as required to provide liquidity to the pool of money. Similar to how we deposit money into a bank to get interest, except that Defi mining requires coins to be stored and coins to get interest.

Compared to traditional mining invested in miners, DeFi mining is extremely cheap. “Mining is too expensive, Defi is instead a new way out.” A 90-year-old who invested in dogcoin quickly turned his attention to Defi mining after realizing the cost of physical mining.

However, mining consumes huge amounts of electricity without producing much real value. Not only that, but as this bull market emerged, there was more and more chaos in the cryptocurrency world. For example, illegal speculative trading in bitcoin, or illegal token issuance and financing under the guise of “digital currency”, illegal pyramid scheme activities.

“The large amount of money flowing into the bitcoin trade will also weaken the support for the real economy and may cause financial risks.” An industry insider noted.

As Xinhua said in its article, if virtual currencies such as bitcoin are only bought and sold as virtual commodities, the general public has the freedom to participate in the transaction at their own risk. But if the virtual currency is packaged as a speculative speculation target, attracting investors to the trading platform, it is necessary to tighten the fence of the system and protect the interests of the people.

This round of regulation is equivalent to putting on the brakes and seat belts for the burgeoning cryptocurrency market.

*The title image and the accompanying image in the article are from Pexels. at the request of the interviewee, Wang Hao, Lao Qin and Pixar are pseudonyms in the article.

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