New Order in Mining: Where Do Small and Medium Miners Go as Leading Mining Companies Go Abroad?

This article is an original piece by Chain Catcher, authored by Richard Lee and edited by Gong Quanyu.

After experiencing the craziest six months, China's crypto mining industry entered a period of drastic turbulence from May to June. Under the crackdown by governments across the country, the vast majority of domestic mining farms were shut down, leading to huge losses for miners who had just entered at this year's peak. The sell-off by some miners under economic pressure also caused a significant correction in the crypto market.

Looking back, it is a fact that Bitcoin mining consumes a huge amount of energy, and the government's crackdown has become a foregone conclusion. Transitioning to clean energy should be a long-term strategy for the mining industry to seek sustainable development. Currently, how to deal with the idle mining machines and minimize losses is the most urgent issue for miners of all sizes.

Going overseas was previously the most hopeful option for miners, but after a period of exploration, this path has not been as smooth as imagined. Meanwhile, some small miners are still trying to find ways to stay.

1. Giants Going Overseas, Most Small and Medium Miners Still Observing

Xu Liang's nearly 20,000 Antminer S19 machines have been idle for at least half a month, but he is not in a hurry to go overseas.

Since various regions have successively introduced policies to shut down mining farms, going overseas has become the most discussed option in the domestic mining industry. Leading domestic mining companies have acted quickly, such as Bitmain announcing the establishment of a self-operated mining base in Kazakhstan, and 9F Group announcing the acquisition of the Canadian Bitcoin mining farm Montcrypto and investment in another mining company, Skychain. Bit Mining has also invested in establishing a mining farm in Kazakhstan and has gradually transferred thousands of mining machines, stating that the remaining machines will take "the next few quarters" to transport completely.

However, in practical terms, going overseas means facing many issues such as uncertain local policies, unstable local social environments, insufficient mining capacity, and high transportation costs. Recently, Kazakhstan issued a new law that will charge cryptocurrency miners an additional fee of about $0.0023 per kilowatt of electricity.

Perhaps due to this, for more small and medium-sized mining companies and miners, waiting and observing remains their main attitude.

Xu Liang's mining farms are located in Xinjiang and Sichuan, with loads of 250,000 kilowatts and 30,000 kilowatts, primarily using Bitcoin mining machines, along with a small number of Ethereum GPU mining machines. After the local government introduced policies and shut down his mining farms, Xu Liang also turned his attention overseas.

Regarding going overseas, Xu Liang values two points: first, there must be certain local space or government resources, and second, the electricity must be sufficiently stable. His team is currently focusing on candidate locations in New York, USA, and Canada, while Central Asian countries like Kazakhstan are not considered due to social security issues.

"Going overseas must be self-built; unless there is local load, it is impossible to resume operations immediately," Xu Liang said. Currently, building a new mining farm overseas requires at least three to six months, and it could take up to eight months. The cost of building a new mining farm is also around six to seven million.

"Why am I not in a hurry to go out now? I'm just watching how many people get hit in the first wave," said Xu Liang, noting that nearly 20,000 Antminer S19 machines are not an asset that can be easily risked for transfer. He plans to wait for feedback and lessons from the first batch of mining companies that go overseas before making specific choices and arrangements. Xu Liang and his team began investing in Bitcoin mining in 2019 and have already recouped their costs.

This mindset is not an isolated case. The cloud computing platform Yizhi Mining announced on June 22 that after its mining farm in Sichuan was shut down as per regulations, it would indefinitely suspend its mining machine hosting services in mainland China and focus on overseas cloud computing services as the next step. However, regarding specific overseas expansion, the announcement stated: "Yizhi Mining adopts a strategy of following industry-leading companies, waiting for domestic peers to stabilize their overseas mining operations, maintenance, and other issues before going overseas to avoid unnecessary losses."

2. Some Small and Medium Miners May Benefit

Due to the large number of mining machines ceasing operations domestically, the average daily hash rate of the Bitcoin network had dropped to 96.49 EH/s as of July 6, close to the level at the end of 2019. The long journey of large mining companies going overseas may likely extend this correction cycle of Bitcoin's hash rate. Meanwhile, some previously disadvantaged small miners are trying to seek more profits during this period.

An industry insider told Chain Catcher that many small miners have likely emerged in the domestic market, many of whom may have previously been small miners or participated in joint mining at large farms. "These miners didn't rise before because they had a significant cost gap compared to large farms," the insider said.

Affected by the low tide of the entire network's hash rate, Bitcoin's overall mining difficulty has been continuously adjusted downwards, with a 27.94% reduction on July 3 to 14.36T, marking the largest adjustment in history. As mining difficulty decreases, the earnings of online miners will increase, including those small miners who were previously relatively passive in terms of electricity costs.

He also added that due to the global chip shortage over the past year, there has not been much increase in hash rate, so even the Antminer S9 machines from six years ago still have a low proportion of electricity costs. This means that the mining machines currently on the market are basically "not sensitive to electricity costs," and even using a household electricity price of 0.6 yuan can still be profitable, while warehouse rent and noise reduction costs can almost be ignored compared to profits.

Zhuang, a mining machine dealer in Beijing, also told Chain Catcher that recently, due to soaring profits, the sales of mining machines "have indeed gone up." Models that were previously hard to find in the market, such as the Shennma M20 and M21, "have been increasing in price these days," rebounding from the low point after the Sichuan policy announcement on June 18.

For small Bitcoin miners staying in China, how long the trend of rising earnings during the hash rate correction period can be maintained remains unknown. The aforementioned industry insider analyzed that under China's latest regulatory policies, the future hash rate structure may become more complex.

On one hand, some small miners with advantages in electricity resources, such as those running mining machines with small hydropower stations or isolated grid electricity, may not necessarily be at a disadvantage compared to overseas; on the other hand, the construction of domestic mining farms is also relatively cheap. According to him, the construction cost of overseas mining farms, such as in the United States, is roughly four to five times that of domestic farms.

Therefore, the insider predicts that among small miners in the future, those with electricity costs below 0.5 yuan per kilowatt will still occupy a certain survival space in the expansion of overseas mining; small miners with electricity costs between 0.5 yuan and 1 yuan per kilowatt will at least hold an advantage in the recent year, but after a year when overseas mining develops, domestic small miners in this electricity cost gradient may still face the fate of being eliminated.

3. Ethereum Miners Affected, But Still in Demand

Although governments in various regions are mainly cracking down on the Bitcoin mining industry, many Ethereum miners have also been affected because a large number of Ethereum mining machines operate alongside Bitcoin mining machines in mining farms in places like Sichuan.

Liao Hao became a miner last November, operating hundreds of Ethereum mining machines in a state grid hydropower consumption park in Liangshan, Sichuan. In the first half of this year, as cryptocurrency prices soared, Liao Hao followed the trend and bought over a hundred Sapphire 588 new machines at prices exceeding 30,000 each. After the Sichuan Provincial Development and Reform Commission issued a notice to shut down operations on June 18, the price of the same model mining machines plummeted to below 13,000, shrinking by over 50%.

"The depreciation of mining machines is too severe; it's like working for nothing now." Liao Hao had just paid off a bank loan of 500,000 yuan in March and April, but now with the machines idle, cash flow has been interrupted. "If (the price of mining machines) drops again, it will really be a loss." However, in this large mining farm with over 100,000 machines, Liao Hao's situation is still relatively good.

"Think about how many are doing cloud computing here; some borrowed money to buy mining machines, and the burden is heavy. Many people have lost everything and don't even have time to cry," Liao Hao said. Additionally, small retail investors who just "rushed in" during April and May have also suffered serious losses. They bought mining machines at high prices of 30,000 to 40,000 each when prices peaked, only to face shutdowns within three months. In the park where Liao Hao is located, there are "hundreds of such people."

Currently, waiting and "decentralized" mining have become Liao Hao and his peers' coping strategies. They are both "watching the situation" to see if there will be any loosening in the implementation of subsequent policies, while also working to transfer idle graphics cards and mining machines to gamers or other small retail investors. Regardless of whether the implementation changes, Liao Hao knows that large mining farms in China no longer hold an advantage.

"Run as much as possible," even if the situation does not change at all, Liao Hao plans to find places to keep the mining machines running—his home, relatives' homes, and joint mining are all options being considered. "Either set up a solar power generation site and run one or two dozen mining machines."

Liao Hao has also turned his attention to a small hydropower station in his hometown village. The hydropower station is located in Heyuan, Guangdong, with a load of 500 kilowatts, and the private asking price is 3 million, which Liao Hao cannot afford alone. In addition, after the regulatory policies have been defined, Liao Hao is also worried about the opinions of people from his hometown: "Now everyone says mining is illegal. If those who are unaware think we are doing something illegal, it would be disastrous for our reputation."

"Our identity as miners has gone from holding our heads high to now being downcast," Liao Hao joked self-deprecatingly.

Taking Liao Hao's experiences and strategies as an example, the trend of further decentralization of Ethereum and small cryptocurrency mining in China may be occurring. Min, a mining machine dealer in Chengdu, told Chain Catcher that since the State Council's Financial Committee expressed the need to crack down on cryptocurrency mining in May, the prices of mining machines have been declining, but sales have not been affected at all, as Ethereum and small cryptocurrency mining machines are still in demand in the market.

"With such low prices, mining machines are selling well," said Min. According to him, many small investors who could not afford mining machines when prices were high can now buy them quickly when the opportunity arises. For example, the Antminer L3+ for mining Litecoin, which sold for eight to nine thousand at its peak, can now be bought for two thousand.

According to Min, compared to Bitcoin mining machines, Ethereum and Litecoin mining machines consume less electricity and produce less noise, so ordinary households can "easily accommodate two or three machines." In contrast, Bitcoin mining machines consume a lot of energy, making it difficult for households to bear the load and prone to power outages; their recent sales targets have mostly been overseas mining farms.

Compared to the long overseas cycle for Bitcoin mining machines and the difficult recovery of hash rate in the future, the choices of Ethereum miners to stay have resulted in a relatively small decline in Ethereum network hash rate, with a shorter recovery period. According to Etherscan data, after Ethereum's average daily hash rate dropped to a three-month low of 477,535 GH/S on June 26, it has shown a rebound trend in recent days.

Currently, this most turbulent period in the history of cryptocurrency mining in China has basically come to an end, and there are no signs of easing in the related regulations, leaving miners with a lucky attitude with little hope. As the difficulty of Bitcoin mining increases in the future, the time window left for miners who are still observing will not exceed six months, and by then, a new Bitcoin hash rate structure will have basically formed.