Geographies in Depth

Mining Bitcoin in the mountains of China

Bitcoin (virtual currency) coins are seen in an illustration picture taken at La Maison du Bitcoin in Paris July 11, 2014. French police dismantled an illegal Bitcoin exchange and seized 388 virtual currency units worth some 200,000 euros ($272,800) in the first such operation in Europe a public prosecutor said on Monday.   REUTERS/Benoit Tessier (FRANCE - Tags: BUSINESS) - RTR3Y7J6

Eric Mu, who runs a bitcoin mine in the mountains of Sichuan, explains his interest in the currency. Image: REUTERS/Benoit Tessier

Jeremy Goldkorn
Editor, SupChina
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The digital currency Bitcoin was invented in 2008 and began making headlines in 2013, attracting converts and speculators alike. Bitcoins are “mined” using powerful computers that solve mathematical formulae to generate pieces of computer code that represent financial value. The process of mining them profitably requires such immense computer power that “server farms” full of hundreds of machines, all accompanied by fans blowing nonstop to keep them cool, must be set up in warehouses.

Once created, Bitcoins are tradable in some markets, though many countries have banned or restricted the use of Bitcoins, and the People’s Bank of China (PBOC) banned commercial banks from dealing in the currency in 2014. Nevertheless, China has become one of the world’s leading markets for and producers of Bitcoin.

In 2013, the price of one Bitcoin exceeded $1,000. As irrational exuberance over the virtual currency subsided, the price fell to below $200, but in recent months, it has been on the rise again. It’s currently back up above $750.

We talked to Eric Mu, a Chinese entrepreneur who runs SinoHash, a Bitcoin mining facility in China, and says he became engrossed with the idea of a monetary system that could bypass the state. China provides a natural place for Bitcoin to take off, Mu believes, and he has staked out his plot in the virtual mining community while Chinese regulators have been content with a soft approach.

Jeremy: What is SinoHash, and what is your role?

Eric: SinoHash is a Bitcoin mining facility based in China. Like other mining facilities, it generates revenue in Bitcoin by running a large amount of dedicated computing equipment that consumes a large amount of electricity — one megawatt in our case. In the Bitcoin system, mining serves the function of securing the network against fraudulent transactions and miners are rewarded for contributing this utility.

SinoHash is also a miner hosting service — customers buy hardware equipment and ship them to our facility. We operate them and charge $0.045 for every kWh of electricity their machines consume. This service is not unique for people who are familiar with the space. There are facilities located in the United States, too. Our facility is located in Shimian, Ya’an Prefecture in Sichuan Province. The decision was made mainly due to the cool climate and cheap power supply.

Our cheap electricity is a main draw for clients. Also, most households don’t have the space or time required for the upkeep of a large number of mining rigs, which generate a great amount of heat and an unpleasant level of noise. But we have appealed to a small group of investors and it has been fairly lucrative over the past few years.

Jeremy: How did you get into the Bitcoin business?

Eric: I first learned about Bitcoin in 2013 and quickly grew engrossed with it. The idea of government-less currency resonated with me and I began to look for ways to get more involved. I tried a few jobs at Bitcoin startups and this eventually led to building my own Bitcoin mining facility and hosting service.

Jeremy: How would you describe the Chinese government’s attitude to and regulation of Bitcoin and other cryptocurrencies?

Eric: The Chinese government doesn’t have an explicitly formulated attitude as far as I know toward Bitcoin and the industry at large. There is evidence that it is concerned with a potential speculative bubble, which is often attributed to its ban of banks from directly handling Bitcoin-related business. Some government departments, the People’s Bank of China in particular, have recognized the innovativeness of the technology and dedicated resources to studying it, in an apparent bid to apply its underlying technology — blockchain — in building its own digital currency. When it comes to mining, there is little regulation and interference. Personally, I think that Bitcoin has outgrown the stage where a single government can profoundly affect its development, so I am not too concerned with the Chinese government’s attitude.

Jeremy: How many people do you estimate are trading Bitcoin and other cryptocurrencies in China?

Eric: Due to the nature of Bitcoin, there has been lack of reliable data in this regard. There is a small group of frequent day traders — my guess is a few tens of thousands. Meanwhile, there is a much larger population of people who occasionally buy and sell to fulfill a need. They often do this through face-to-face transactions or social payment tools, which is very hard to monitor. I, for example, often facilitate people to buy Bitcoins using WeChat payment. I have a friend, an American expat living in Beijing, who regularly buys Bitcoins worth tens of thousands in yuan every month through me, and he has done this consistently for at least eight months.

Jeremy: Why has Bitcoin become so popular in China?

Eric: China has all the right conditions for it to grow. Here are some of what I think are the most important factors: a large internet-savvy population, cheap and abundant hydropower, mature electrical manufacturing, capital control and a depreciating currency. Historically, the savings rate is much higher here and Bitcoin has proven to be a resilient store of value. But I wouldn’t advance the argument that Bitcoin is more popular in China than elsewhere. Some of the most well funded startups in the space are probably in the United States.

Jeremy: How much do you think one Bitcoin will be worth in one year’s time?

Eric: I think it has a good chance to exceed the USD1,000 mark once again. After that, the sky is the limit.

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Geographies in DepthFinancial and Monetary SystemsEmerging Technologies
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