Takeaways from MinerSummit 2019

This post was originally published in the Adaptive Analysis newsletter. You can subscribe to the newsletter here.

Over ten years of successful operation and the Bitcoin network has arrived at a point where the vast majority of hash rate is deployed in China, and almost all of the mining hardware is also manufactured in China. It is estimated that 50% of the network hash rate is deployed in China and over 80% of this is believed to be in the Sichuan province.

I was in the capital of Sichuan, Chengdu, for MinerSummit 2019. The Summit gathered mining experts from all over the globe in fields both directly and indirectly related to mining. This included miners, mining pools, developers, hardware manufacturers, hardware resellers and brokers, energy experts, financial services specialists, among many others.

The Summit turned out to be something special with overwhelmingly positive from all in attendance. This post details some of the key advantages and downsides of mining in China that I learned from my time at MinerSummit.

Mining in China — 50 Shades of Guānxì

In the lead-up to MinerSummit, it became clear to me that there are a lot of advantages to mining in China.

China is where the majority of the ASIC hardware manufacturers are based — Bitmain, Canaan, and Ebang, the three largest Bitcoin ASIC designers, are all based in China. These manufacturers are estimated to represent over 96% of the Bitcoin ASIC sales market. Mining in China means being close to where the hardware is manufactured which means less friction when negotiating hardware deals and shorter delivery times. Shorter delivery times means more time with the hardware online which means shorter payback periods.

China has the most liquid secondary hardware market in the world -

Naturally a byproduct of the first point, China also has the most liquid secondary hardware market. Sourcing hardware on the secondary market and also offloading hardware is a much easier job in China than elsewhere.

Cheap electricity rates -

Electricity is widely recognized as the most significant operating cost for miners. There are some outlier cases where miners have access to free electricity but mostly, the electricity rate miners are paying determines whether their hardware is profitable, how vulnerable their operations are to price drops, and whether it is logical to continue mining or to shut down. Sichuan’s rainy season which takes place from roughly April to October each year leads to an abundance of energy being created by hydropower stations in the region. With the national grid infrastructure not yet developed enough to handle such capacity, much of this energy is sold in private deals with miners being an ideal candidate. Mining farms can negotiate extremely attractive rates for purchasing large quantities of this energy.

Tax benefits -

This is an ambiguous area which I admittedly know little about. Anecdotally, it appears some miners are paying no tax. There seems to be a big focus on leveraging local relationships with the municipal governments, supporting power providers, and providing employment. Every miners’ circumstance is likely unique in this regard but it does seem that some municipalities are open to fostering an extremely attractive business environment for miners. Politicians in Sichuan have recently discussed how they can remain attractive to miners.

Low labour rates -

Low labour rates is certainly not a new phenomenon when it comes to China. Staff onsite 24/7 means miners can maximise hardware uptime and at a lower cost than in most other places. One miner who has farms in both Canada and China told me that if his hardware breaks down in Canada on the weekend, it won’t be fixed until Monday morning. Whereas in China, the hardware will be fixed and brought back online quickly at any time.

Downsides? 🤔

The main downside for miners in China is the uncertain stance the Chinese government has towards the industry. The government has flirted with outright banning mining on several occasions. However, the difference between discussions at national government level and at the municipality level seems to be pivotal here. CoinShares succinctly described the situation in their May 2018 mining report.

“Chinese miners already operate in a legal grey area, with large differences in treatment between local jurisdictions, and concrete, large-scale coordinated action on the ground would likely be required to effectively uproot miners… there appears to exist significant differences between local and national treatments of the mining industry, with certain local governments seemingly much more inclined to view the industry positively due to its vigorous revenue generation on municipal levels.” CoinShares May 2018 Mining Report

Nonetheless, the national government’s shaky stance on the industry represents a real recognizable risk. From discussions at MinerSummit, many miners seem to be considering decreasing their exposure to China by moving at least part of their operations overseas. Jan Čapek, co-founder of Slush Pool, noted the following in an interview with MinerUpdate.

“After talking to some miners in China specifically, we’ve learned their considering relocating part of their operations overseas. They feel like they don’t have a political guarantee that the business here is going to be accepted by the government forever.”

Throughout 2019, we have seen many attractive areas arise. Iran, Canada, and Russia have all been making headlines during the year but I can assure you, there are many other high-potential areas that were discussed at MinerSummit. More on that at a later stage.

Since MinerSummit, I have been staying in China to learn more about the country which houses the dominant share of Bitcoin hash rate. I travelled to Xi’an after Chengdu and I am currently in Shanghai spending some time with Braiins BD director Edward Evenson learning all the secrets of the Slush Pool business 😏. MinerUpdate had the chance to interview the Slush Pool team the day following MinerSummit. The interview covered the latest technologies being developed by the team, key risks to the Bitcoin network, and proof-of-work versus proof-of-stake. It’s certainly worth a read — here’s part 1 and part 2 of the interview.

Beijing is next on my agenda and I will be meeting with many more miners while in the capital. Shenzhen is the final destination and I am planning on checking out some of the hardware factories while there. I will be keeping subscribers informed about any insights I learn from my travels. If you learned anything from this newsletter, you can support it by forwarding it to a friend or sharing on social media.

-John Lee

A big thanks and acknowledgements are due to Daniel and Mia, the visionaries of MinerSummit.

guānxì (关系), noun