IN THE HENGDUAN Sichuan Province mountains, puffy brown rivers, and trees heavy with ripe mangoes do not evoke digital wizardry. But until recently there were buildings here with shelf after shelf of specialized computers. They were often located near hydroelectric plants that supplied them with electricity from dams. It took a lot of strength. Their machines were used for “mining,” a process by which transactions in Bitcoin and other digital currencies are validated by solving cryptographic puzzles. In return, they received newly minted coins. The buildings could be recognized by their huge cooling systems: usually a wall on one side covered with huge fans to draw in air.
But fans all over Sichuan have stopped whirring. In May, a government committee tasked with promoting financial stability promised to stop bitcoin mining. Within a few weeks, the authorities ordered the closure of local projects in four major mining regions – Inner Mongolia, Sichuan, Xinjiang and Yunnan. Inner Mongolia residents were asked to call a hotline to report anyone violating the ban. In parts of Sichuan, miners were ordered to clean up computers overnight and demolish buildings they were housed in. For most of them, the utility companies pulled the plug.
The crackdown has global implications. Bitcoin’s “hash rate,” a measure of the computing power used by the world’s mining machines, has fallen by half in the past few weeks. Its “difficulty rate”, which rises and falls as computers join or leave the mine, fell to an all-time low last week. According to the Cambridge Bitcoin Electricity Consumption Index, about 65% of the bitcoins earned through mining were in China. However, analysts believe that 90% of mining has now ceased. Chinese miners sell their computers at half price.
China’s mining boom began in 2017 after a spike in Bitcoin price caught the attention of local entrepreneurs. The country already made most of the machines that mine Bitcoin around the world, as well as the bespoke chips they run on. It also had the capacity to produce more electricity than it needed. In 2018 this surplus was 70 terawatt hours (TWh), which corresponds to the total energy production in Switzerland. Instead of wasting the surplus, plants sold it to mining operations. The seasons would determine where these farms operate. After the soaking summer rain in Sichuan ended, if prices rose there, miners would run their machines somewhere near a cheaper source, usually coal-fired power plants thousands of kilometers away in Xinjiang and Inner Mongolia. (Energy from solar and wind power is not reliable enough to run the mining industry without interruption.)
In 2017, China banned cryptocurrency trading for fear of losing financial control. But local governments still welcomed the miners: they were a source of taxes and other dues. In June, a state zone was to be opened in Ya’an, a city in Sichuan, in time for the start of the rainy season. It provided cheap electricity for mining and other digital activities. “It was a win-win situation,” says Kirk Su, a miner who planned to place some of his machines in the zone. “China was a leader in mining in every way: cheap electricity, cheap labor, quick and easy access to equipment,” he says.
Then came the crackdown. It was partly aimed at the cryptocurrency traders. The mining industry itself has little to do with the volatile trading business. But the miners couldn’t function without converting their new bitcoins into yuan. To do this, they used exchanges that had been relocated abroad after the trading ban, but were still aimed at Chinese users. The government may have decided that “mining had to be abandoned” in order to free China from crypto transactions, says Bobby Lee, who co-founded China’s first cryptocurrency exchange (it had to shut down in 2017). Today he runs Ballet, an app that allows users to manage their digital currency.
Another goal could have been to reduce emissions. The Cambridge numbers suggest that Chinese miners are around 83. consumedTWh of electricity per year, similar to total electricity consumption in Belgium. (Still, China could have chosen to ban mining only in its coal-producing north, Lee says.) Officials may also have been concerned about collusion between local governments and mining companies, some of which had received subsidies for innovative big data firms.
The central government said it was “determined to prevent risks at the individual level from being transferred to broader society”. This could in part have been an indication of the activity of some mines that had Ponzi-like systems in place and promised great returns for investors. Other scammers have disguised themselves as cryptocurrency traders. Over 100 people were arrested last year for performing two such operations, PlusToken and WoToken.
To avoid crackdown, great miners have sent their machines overseas. Mr. Su, who also runs a logistics company for the transportation of mining equipment, has chartered Boeing 747s to quickly dispose of the used ones. Most go to Russia and Kazakhstan, which together account for about 13% of the world’s bitcoin mining. But there are only a few data centers abroad with space for many new machines, including in America, the second largest miner. It costs five to ten times what it does in China to build a farm there, Su says. That’s too much for most Chinese miners. More than half of their computers will stand still for the time being, he says.
Some smaller miners are still finding ways to work. One says he’s lucky enough to have teamed up with a private hydropower plant that doesn’t forego the extra revenue (it risks paying a fine off-grid or booting off the grid). When he met your correspondent, he struck a deal to buy a 5 million yuan ($ 770,000) farm from a fellow miner, powered by an off-grid facility. If his machines work there for 15 days, he will have earned his investment in Bitcoin again.
In an abandoned school in southern Sichuan, Mr. Su has stored 10,000 machines from some of his closed farms. He says that for every day they spend there, unplugged and piled to the ceiling, they lose 1 million yuan in potential profit. ■
This article appeared in the China section of the print edition under the heading “There was gold in the hills”