The rain has come. The machines are humming. This should be the best time of the year for China’s bitcoin miners. The monsoon season, generally from June to October, brings excessive rain and thus cheap hydro electricity.
But this year is different, proving to be harder than ever for China's bitcoin miners and mining farm operators who are estimated to dominate 65% of the global multi-billion dollar bitcoin mining industry.
Since last summer, many mining farm operators rushed to build new facilities in China’s southwestern region in anticipation of a dramatic price rise with bitcoin’s halving.
But mining difficulty has now almost doubled compared to the monsoon season last year, while block rewards have halved, meaning it is more difficult to mine, with less rewards. Bitcoin miners that have entered the market since last year have to wait much longer to see a return on their investment in mining hardware and facilities.
Thomas Heller, global business director of mining pool F2Pool, summarized the situation in a recent blog post: “We’re halfway through 2020 and the mining industry has already faced several enormous challenges.”
“Miners had to battle off the macroeconomic black swan of March, pass through the smoke of the halving and a pandemic, and now they’re gearing up for the rest of the year’s competitive battlefield,” he wrote.
Harder than ever
Many miners expected bitcoin’s price to rise sharply after the halving, said Kevin Pan, CEO and co-founder of the China-based PoolIn, one of the two biggest bitcoin mining pools in the world (along with F2Pool).
“In reality, not only there was not much price momentum driven by halving, there came the mega sell-off on March 12, which caused a large scale of forced liquidation and loss,” he said.
For two months after halving, bitcoin’s price largely remained static around $9,000. Although it jumped above $10,000 last week and is now changing hands over $11,000, it is still at a similar price level seen at this time last year.
In contrast, the network’s mining difficulty rose to an all-time-level within two months after halving. It’s now almost twice as difficult to mine bitcoin compared to last July, while block rewards have halved.
Without a significant price breakout, bitcoin miner’s daily revenue has dropped by 70% compared to last year, said Pan, although the recent bitcoin price jump has helped improving the situation.
Indeed, Bitinfochart’s data shows bitcoin’s daily mining revenue was around $0.33 per one terahashes second (TH/s) of computing power in July 2019. It has since then declined to now around $0.1 per TH/s.
Meanwhile, a surge in interest and investment in bitcoin mining since last year have led to a surplus of newly constructed mining facilities in China.
In April, the oversupply issue had already shifted the hosting business from a seller’s market to a buyer’s market, with mining farms generally offering a 20% electricity discount compared to last year.
Pan estimates that during this rainy season, 20% to 30% of mining facility capacity in Sichuan and Yunnan provinces still remains unused.
To be clear, bitcoin miners and mining farms can still make a profit. But they have to endure a much longer period than expected to break even on their investments.
A payback period of six months to a year used to be common for bitcoin miners in China, but if bitcoin maintains its current prices around $11,000, that could be extended to as long as two years.
“In the eyes of many old Chinese miners, the electricity price right now is not only lower than the similar situation of the halving and hydro season in 2016, but also even lower than the electricity prices during the 2015 bear market,” said Heller of F2Pool.
Lower electricity may be appealing to miners, but it also means mining farm operators are facing an “unprecedented investment challenge” as the business shifted to a buyer’s market, Heller said.
Despite this year’s tough market environment, some are still bullish over the long term and are rolling out products to attract investors. Jiang Zhuo'er, CEO and founder of mining pool BTC.Top who also runs his own mining farms, recently launched joint-mining contracts dubbed B.top.
It essentially sells mining equipment by TH/s and farm electricity at cost to retailers who want to participate in mining. The company will not charge customers hosting and management fees until the mining profits they receive break even on their investment.
HashAge and Heng Jia, two long-running bitcoin mining farm operators with over a dozen facilities in Sichuan, also announced a partnership with Chinese crypto lending startup Babel last Friday.
Flex Yang, CEO and co-founder of Babel, said the firm is allocating up to $50 million in USDT as a loan for those who choose to host their miners at HashAge and Heng Jia’s facilities.
In contrast to previous crypto loans that require borrowers to pledge bitcoin as collateral, this new partnership accepts debtors’ miners hosted at HashAge and Heng Jia as collateral.
This effort is also one of the industry’s first in terms of treating specialized mining equipment, known as ASIC miners, as a tradable asset in crypto-based debt financing.
Luxor, a U.S.-based mining pool, rolled out a bitcoin hashrate price index earlier last month in an effort to provide better transparency into the traditionally opaque market of how much bitcoin mining equipment is changing hands.
But rain cuts both ways for the mining industry. Flooding in China is among the worst in decades, and has affected over 50 million residents, with nearly four million people displaced and over 150 dead or missing.
The good news is it could have been much worse. Pan said the flood has so far mainly affected the middle and lower reaches of the Yangtze river.
Since most mining farms in Sichuan and Yunnan are located along the upper reaches in the mountain area, which are some 1,200 km, or 800 miles, away from the middle reaches, there are fewer instances where facilities are directly flooded due to the rainfall.
But Pan said there have been more regular instances of mining farms’ hydropower plants temporarily cutting off electricity generation because the increasing water reserve levels would otherwise cause pressure on the dam.
The places that are suffering the most severe damage so far are provinces in Central China including Jiangxi, Hubei, Hunan and Anhui provinces, as illustrated in this multimedia article from the South China Morning Post.
Johnson Xu, chief analyst at Beijing-based research startup TokenInsight, said mining farm operators nowadays are more experienced in choosing the right location for construction, after witnessing events in previous years where facilities were destroyed by floods and mudslides.
“Chinese mining farms have already conducted thorough due diligence to pick the locations where potential flooding risk is minimal,” so the floods haven't caused a major impact on the mining community, said Xu.
Tug of war
Another reason why there are too many bitcoin mining farms is the push by local governments in Sichuan for establishing the so-called “Demonstration Zone for Utilizing Excessive Hydropower Electricity” since late last year.
Mining farms and hydropower plants that choose to be based in these industrial parks can typically enjoy a stable operational environment with a steady and cheap power supply. In return, they give a portion of their profits to local governments as well as China’s State Grid, the state-owned utility monopoly.
In previous years, many mining farms in Sichuan and Yunnan have been using what’s called “direct-supply” electricity. That means power plants sell electricity directly to mining farm operators without having to share the profits with other parties.
As local governments have stepped up efforts to rectify the “direct-supply” model adopted by many power plants, this has created a sort of tug of war among local governments, hydropower plants as well as the State Grid, Pan said.
Some bitcoin mining farm operators using “direct-supply” electricity wish to sell their facilities at a low valuation given tough market conditions. This tug-of-war will continue to be a risk factor for potential investors in those mining farms.
“Overall, the latest regulatory policies in China tend to have a negative impact on those unregulated smaller mining farms, but positive towards firms who meet the local regulatory requirements,” Xu added.
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