After Ethiopia became a new "sanctuary" for Chinese miners, who holds the upper hand in terms of benefits and risks?

Original Title: "The Great Migration of Chinese Bitcoin Mines to Ethiopia"
Original Author: Gong Fenni, from the WeChat public account Investment Ethiopia

01 Notice on Rectifying "Mining" Activities

China's Bitcoin mining volume once accounted for two-thirds of the global total.

From September 2019 to April 2020, the total network hash rate of Chinese miners reached over 71%. Abundant and cheap electricity and hardware made China a favored destination for cryptocurrency companies.

Initially, Bitcoin mining was mainly concentrated in regions such as Sichuan Province, Inner Mongolia Autonomous Region, Xinjiang Uygur Autonomous Region, and Yunnan Province, all of which benefited from rich and low-cost electricity resources.

On April 14, 2021, the price of Bitcoin reached a historic high of about $64,870. However, just over a month later, the price of this most popular digital currency plummeted to $34,259.

The sharp drop in Bitcoin's price in a short period was significantly related to the Chinese government's rectification measures against virtual currency "mining" activities. An important reason behind the plunge in Bitcoin's price was China's comprehensive crackdown on the cryptocurrency industry due to concerns over financial risks and excessive energy consumption. The process of Bitcoin "mining" consumes a lot of energy, as the application-specific integrated circuits (ASICs) used for mining Bitcoin require substantial energy.

In May 2021, China announced at a State Council meeting that the government planned to "crack down on Bitcoin mining and trading activities." Subsequently, local governments quickly took action, revoking licenses for companies involved in cryptocurrency mining, cutting off power supply to mining facilities, and even giving some companies only seven days to shut down their operations. By the end of June, 90% of China's Bitcoin mining centers had gone offline.

In September 2021, the National Development and Reform Commission and other departments issued a notice on rectifying virtual currency "mining" activities, categorizing virtual currency "mining" as an industry to be eliminated and strictly prohibiting such activities under the guise of data centers.

Afterwards, Bitcoin mining companies with nowhere to go began searching globally for suitable locations for their machines. Chinese Bitcoin mining companies quickly shifted their operations to countries such as the United States, Canada, and Kazakhstan.

02 Channing Mine in Texas

Chinese investors flocked to the United States to invest, building or operating cryptocurrency mines with hundreds of millions of dollars. Texas was the first state to open its doors to cryptocurrency businesses. The state's governor hopes Texas will become a new global Bitcoin mining hub. BIT Mining, headquartered in Shenzhen, China, also invested $26 million in a 57-megawatt facility in the state.

According to The New York Times, Bitcoin mines owned or operated by Chinese individuals have been found in at least 12 states in the U.S., including Arkansas, Ohio, Oklahoma, Tennessee, Texas, and Wyoming, consuming energy equivalent to that of 1.5 million households.

However, starting in 2022, several Bitcoin mines operated by Chinese individuals were exposed in the media, raising concerns from the U.S. government about their impact on the energy system and national security.

In 2022, when a company with Chinese background began cryptocurrency mining in Cheyenne, Wyoming, a team from Microsoft assessing national security threats raised alarms.

This mine is located near a Microsoft data center that supports the Pentagon and is only 1.6 kilometers away from an Air Force base that controls intercontinental ballistic missiles armed with nuclear weapons.

In a report submitted to the Committee on Foreign Investment in the United States in August 2022, the Microsoft team wrote that this location could allow Chinese individuals to "conduct comprehensive intelligence-gathering operations," highlighting the committee's role in monitoring threats from foreign investors.

Microsoft's warning did not go unnoticed. It is said that the U.S. government began tracking activities in Wyoming thereafter.

Subsequently, the case of 23-year-old "rich second generation" student Yu Jerry from New York University further brought attention to Chinese companies establishing cryptocurrency mines in the U.S.

According to The New York Times, Yu Jerry owns a little-known cryptocurrency mine worth $6 million in a small town in Texas, but the mine was sued by a contractor for unpaid bills, leading to the unexpected exposure of Yu Jerry's identity and the means of his multinational wealth transfer.

Yu Jerry lives a typical "rich second generation" lifestyle in the U.S. His shared apartment in Manhattan was purchased for $8 million. He then bought the majority stake in the Channing cryptocurrency mine in Texas for $6 million. All these transactions were conducted through cryptocurrency rather than banks, making the process not only anonymous but also circumventing overseas transfers to hide the source of funds.

Such highly confidential transactions allow Chinese investors to bypass the U.S. banking system, evade federal oversight, and circumvent various controls on capital outflow imposed by China.

The series of lawsuits filed by contractors due to unpaid bills led to the exposure of Yu Jerry's methods of multinational wealth transfer.

The Channing mine is built on a spacious plot of land with dozens of buildings housing 6,000 specialized computers that mine Bitcoin day and night, 24 hours a day. The investment records of Yu Jerry's mine can only be traced back to the cryptocurrency exchange Binance, with transactions completed overseas through Tether.

After these Chinese Bitcoin mines in the U.S. were exposed, their previously quiet days of printing money became increasingly difficult. Thus, another great migration of Chinese Bitcoin mines began to brew.

03 New "Sanctuary" for Bitcoin Miners

Finally, on the other side of the globe, Chinese Bitcoin miners found a new "sanctuary"—Ethiopia.

Cheap electricity and friendly relations with China have made this country in the "Horn of Africa" the preferred choice for Chinese Bitcoin miners.

Last spring, shipping containers began appearing near a substation connected to the Grand Ethiopian Renaissance Dam, the largest dam in Africa, which had recently been completed. Inside were powerful, energy-hungry computers.

This sign indicates that Chinese Bitcoin miners have arrived in the "Horn of Africa." Since the Chinese government expelled them from China in 2021, Chinese Bitcoin miners have been hopping from one country to another in search of cheap electricity and relaxed regulations.

Facing political and economic headwinds, Chinese Bitcoin miners are attracted by some of the lowest electricity costs in the world and increasingly friendly governments.

Although Ethiopia still prohibits cryptocurrency trading, the country has allowed Bitcoin mining since 2022.

Over the past decade, Ethiopia has strengthened its relationship with China, with several Chinese companies helping to build the $4.8 billion dam, from which miners plan to obtain electricity.

For all companies mining raw cryptocurrencies, Ethiopia has become a rare opportunity, but also a risky gamble.

Ethiopia's low electricity prices and the current government's astonishing welcome for Bitcoin mining naturally make the country an unexpected haven for cryptocurrency companies.

As the global Bitcoin mining industry faces increasing criticism for its energy-intensive practices, Ethiopia has become a surprising oasis, providing cryptocurrency companies with a rare breathing space to address growing concerns about climate change and power shortages. For Chinese companies that were once giants in the Bitcoin mining field, Ethiopia's warm embrace also offers an opportunity to regain dominance.

However, this bold move by Chinese companies is not without risks. Consider that nearly half of Ethiopia's population lacks access to electricity, and industrial electricity usage is far from full capacity, making Bitcoin mining ultimately a sensitive and delicate topic.

Nonetheless, the promise of substantial foreign exchange income is an enticing incentive for the Ethiopian government.

Mining service provider Luxor Technology has revealed Ethiopia's rapid rise as a global destination for Bitcoin mining equipment. The state-controlled power company has signed agreements to supply power to 21 Bitcoin mining companies, predominantly Chinese, highlighting the significant influence of foreign investment in Ethiopia's burgeoning mining sector.

The costs of Bitcoin mining mainly come from the investment in mining machines, logistics costs, hosting fees (including electricity), machine depreciation, and maintenance. Among these, hosting fees (including electricity) account for the highest proportion, reaching up to 45%.

Therefore, if Chinese Bitcoin mines pay for electricity in U.S. dollars, it would be a considerable income for the foreign exchange-strapped Ethiopian government. However, if the local government wants to take a larger share from the miners, it may not be an easy deal, as the investment records of Bitcoin mines can be completed overseas to avoid being conducted in Ethiopia.

At that point, will Ethiopia's tax authorities be powerless?

However, based on the historical investments of China in Ethiopia, it is predictable that the Ethiopian government will not be satisfied with just the dollar income from electricity. Who says they don't want to take a bigger slice of the huge profits from Bitcoin mines instead of just sipping a few cups of coffee?

Let's not forget, they are experts at killing the goose that lays the golden eggs!

Perhaps one day, miners will suddenly find themselves unwelcome and forced to leave in a hurry.