China tries to tighten, bitcoin miners have hundreds of thousands of ways to dig underground

Since Beijing began tightening its controls on mining at the beginning of the year, miners like Ben – who use fake names for security – have been finding ways to avoid detection. of the authorities.

Inside a virtual currency mine in China

Currently, Ben is distributing his mining equipment in various regions to ensure that no facility consumes electricity too high and raises suspicion. In addition, Ben also finds ways to pull electricity from small power supplies and not connect to the large power grid, including dams, or to hide activity on the network environment.

Ben told CNBC he was used to hiding activity, but about the past six months things have gotten a lot more complicated.

“We never know how much the government will strengthen control of virtual currencies,” Ben said.

And Ben is not in the minority.

Although Beijing has issued successive bans on mining since May and then similar statements in September and November, multiple sources told CNBC that China continues to account for as much as 20% of the mining pool. cryptocurrency miners around the world.

Although this level is much lower than the peak of about 65-75%, this number is still much higher than the official estimate.

Data from Chinese cybersecurity firm Qihoo 360 shows that underground mining operations continue to do “well” in the country. In a November report, the team estimated that there are an average of 109,000 active crypto mining IPs in China on a daily basis. Most of these addresses, it was reported, were from Guangdong, Jiangsu, Zhejiang, and Shandong provinces.

However, this squeeze seems to be different for the following main reasons.

First, China is experiencing a shortage of energy, which is an important resource for bitcoin mining. The country is currently facing the worst power shortage in more than a decade, leading to cuts in electricity consumption.

Beijing also made clear its position that cryptocurrency mining will affect its goals on climate change, which includes the goal of carbon neutrality by 2060. In November, a Chinese government spokesman. Quoc Meng Wei has criticized bitcoin mining, considering it has a very serious impact on the environment, and demands stronger measures.

In addition, the upcoming competition from the digital yuan is also an important factor. China is currently testing its own digital currency, which could allow authorities to more effectively monitor cash flows.

In the provinces of Zhejiang, Jiangxi, Hebei and Inner Mongolia, the government has taken a variety of measures, including requiring local authorities to monitor IPs conducting underground cryptocurrency mining, controlling and arresting keep related objects.

The tricks of the bitcoin “miners”

When China started cracking down on cryptocurrency mining in May, most of it immediately ceased, as miners waited for things to calm down.

Among these, the largest “players” with large resources and relationships abroad have promptly moved their operations to many countries such as Kazakhstan, the United States, or countries with low electricity costs.

Others leave equipment in warehouses in Asia and move to other regions, ordering new equipment instead.

Small-scale cryptocurrency miners are stuck in the country due to many factors, from the Covid-19 pandemic, supply chain difficulties or US-China trade tensions.

In addition, the sale of virtual currency mining equipment is also ineffective when a large number of used devices pour into the market, causing the price to plummet.

In addition, mid-sized miners are “almost 100% severely affected” in this year’s crackdown by the government, one expert said. They were not able to sell the equipment to recover the assets, or resume operations, due to the high power consumption that would make it vulnerable.

But small-scale cryptocurrency miners like Ben are easier to breathe, the division of operations makes it difficult for authorities to trace. “Mining is no longer a large-scale activity“, said one bitcoin miner.

Ben has been involved in cryptocurrency mining since 2015 and currently has 1,000 virtual currency miners using electricity from the electricity grid and another 5,000 from hydroelectricity. For hundreds of machines using the power grid, Ben said that he has distributed them all over the country to avoid the eyes of the authorities.

“They’re everywhere and it’s hard to find“, says Ben about a number of miners that are connected to the industrial power line to operate whenever there is a notification of excess power to use.

In addition, electricity from hydropower plants that are not connected to the power grid is also cheaper, especially in the rainy season, when heavy rainfall makes hydroelectric power more abundant.

Beijing’s virtual currency ban has led many miners to move to Sichuan and Kunming, where thousands of hydroelectric power plants are located. Compared with coal power plants in the northern region of Xinjiang and Inner Mongolia, which were once the hubs of the cryptocurrency mining network, the power from hydroelectric dams is more difficult to control and identify.

“There are many cryptocurrency miners connected to the electricity grid from thousands of dams in Sichuan“, said Kevin Zhang of cryptocurrency company Foundry, who helped move $400 million worth of mining equipment from China to North America.

But a big problem with China’s underground cryptocurrency miners is that when the rainy season is over, the power supply will drop sharply. In previous years, they would often move to Xinjiang or Inner Mongolia to get electricity from coal power plants, but these areas are now closed to cryptocurrency miners.

“It is predicted that China’s market share of virtual currency will decrease to only 5% when the energy from the dams dries up. Many cryptocurrency miners will have to withdraw and move equipment abroad“, said Zhang.

With Ben, he is weighing his options. But until Ben can reach an agreement with the partner in the US, Ben will continue the current way. “Virtual currency miners are money printing machines,” said Zhang, as the machines will immediately turn into dollars after selling the virtual currency. In countries with tight capital controls, this is seen as a possible insurance option.

“This is the reason why many miners still haven’t sold their equipment, because for them this is the way to access foreign capital… once the equipment is back up and running again.,” said Zhang.