Picture a remote village tucked at the end of a winding road. Towering overhead are the peaks of the world’s tallest and largest mountain range. It’s the perfect place for bitcoin miners to set up shop.

Mountains invite rain, and, in modern China, rain is just begging to be channeled through gargantuan dams into electricity generators. The Himalayas have made the southwestern province of Sichuan home to abundant dams and, during the rainy season, incredibly cheap electricity.

Normie tech entrepreneurs haven’t flocked to these inaccessible secluded villages to take advantage of it. But bitcoin miners have swarmed the area, consuming as much as 10% of Sichuan’s total electricity, by some accounts (in Chinese).

But this year could turn out to be just too wet. On June 17, Chinese media reported that a hydroelectric power station had been swept away by debris and that many local mines were destroyed in Ganzi prefecture in western Sichuan. Across China, this year’s floods have already killed more than 121 people and caused $3.6 billion in damages.

But these epic floods are the least of the miners’ worries.

Bottom line: Crypto mining is traditionally a wildcat industry, inhabiting a legal grey area and the remotest regions of China. As the industry professionalizes, local authorities are embracing it. The private sector is stepping up to offer financial products to bitcoin miners.

Three forces shape bitcoin mining in Sichuan: hydro power, regulations, and the markets. Both regulators and market favor big mines. As the industry consolidates, small mines face going out of business or selling out to mining tycoons.

The law of water

Bitcoin mining requires a lot of electricity, and keeping this cost low is essential for a sustainable mining business. During the rainy season, Sichuan’s massive hydroelectric power stations produce a lot of power, with local prices as low as $0.01 per kilowatt hour.

READ MORE: China accounts for 66% of the world’s bitcoin processing power: research

Heads above water: But miners reached by TechNode were not worried about the floods and said they had not been affected. It’s business as usual, they said. Every year the floods destroy some mines, but provide cheap power for the rest.

  • The global hash rate, a measure of mining activity, has been rising over the last month.

This year could still see disaster. Flooding is shaping up to be more severe than usual, local media report that dams are near breaking point.

  • Floods can also cause lesser disruptions. In 2019, landslides interrupted operations at hydroelectricity stations, disrupting the miners’ power supply.

The law of the land

Crypto is legal—unless you want to spend it: China has a love/hate relationship with crypto currencies. In late 2017, major homegrown crypto exchanges were kicked out of the country after a blanket ban on crypto trading and initial coin offerings were banned.

  • Mining itself is not illegal and never has been. But trading crypto currency for money can get you in trouble.
  • Even though their occupation itself might be done legally, things get a little tricky when miners want to spend their earnings.

READ MORE: Chinese court recognizes Bitcoin as virtual property, a first

Black market power trading is not: What is definitely illegal and has got many miners in trouble, is mines getting electricity without going through the grid.

  • This off-grid consumption happens a lot in Sichuan, where many mines are surreptitiously built right next to hydroelectric power plants.
  • The only legal way to access Sichuan’s cheap hydro-power is to go through the national electricity grid.
  • This is, of course, more expensive than plugging in directly to the hydroelectric plants, but still cheaper than electricity available in the rest of the country.

Moves to legalize (hesitantly): Local authorities in Sichuan have recognized the economic value of bitcoin mining, and are slowly bringing it into the mainstream, in return for tax and power grid compliance. But without clear permission from central authorities, the province has run hot and cold on mining.

  • In April, several prefectures in Sichuan announced plans for hydropower parks. These new areas will pick tech companies to settle them close to the hydropower stations and give them preferential electricity prices.
  • While mining was not mentioned directly in the relevant documents, they name blockchain as a key technology.
  • In May, Sichuan’s Finance Authority issued a statement to prefectures asking them to withdraw from mining.
  • But when winning enterprises for the hydro parks were announced the next month, they included multiple bitcoin mines, marking a breakthrough in state support for the industry.
  • In June, Sichuan’s grid operator said it expects the mining industry’s electricity consumption to double over the next year, as compliant bitcoin farms are brought under the wing of the hydroparks.

The law of the market

Big is beautiful: Sanctions on crypto mining look a lot like other newly-legal industries: while a few big players go corporate at hydroparks, others are left out in the Himalayan cold.

  • Scale plays a big part in the industry these days, and small players have a hard time competing with bigger, professionalized players.
  • Mining bitcoin is like playing the lottery to earn a living. If you are an individual with a single mining rig, you might make it big once in a while and make enough money to keep your business going. The more equipment you have, the higher your chances of hitting the jackpot.
  • Taking advantage of these economies of crypto-scale, big miners use their gains to buy more equipment, further increasing their edge.

Let go of the weak: While new regulations have yet to be fully formed and implemented, they will almost certainly favor a small group of big miners.

  • Access to legal, cheap hydroelectricity through the hydroparks will further lower costs for the professionalized mines.
  • Going mainstream has also meant paying more taxes—hard to bear on the razor-thin margins of small mines.
  • With off-grid electricity facing stiffer enforcement, the industry is only likely to consolidate further.

Sharks in the mountains: The last year has seen many small miners lose their equipment over debt.

  • In late 2019, many third-party loan brokers for miners popped up in China, fronting loans for miners who wanted to buy more equipment.
  • In March, in anticipation of a bull run on the heels of the bitcoin halving, many miners pawned their tokens for traditional currency to get new mining rigs.
  • Instead, the price of bitcoin dropped, forcing many to sell their collateral and pawn their rigs to second-hand markets to pay back their brokers.

The pitfalls of capital markets: Increasingly sophisticated players are making a host of new bitcoin-related financial products available to miners. They might use them to hedge—or to place even bigger bets.

  • Since late 2019, mining pools, cryptocurrency exchanges and even rig manufacturers have expanded offerings of financial products, traded in crypto markets.
  • These include loans, but also derivatives on various aspects of the bitcoin market; from coin prices to the network’s hash rate.
  • In theory, these could help small miners get the cash they need to make their operations viable, or de-risk their investments through derivatives.
  • Derivatives trading is a pretty sophisticated industry. And wildcat miners in Sichuan are not, on the whole, financially sophisticated people.
  • These contracts can be used carefully to limit risks—but it’s safe to expect that many traders will lose their shirts on ill-advised futures bets.

The price of bitcoin has surged since the March price drop off, and electricity prices in Sichuan remain low due to the overabundance of rain. Some small miners are still powering through. But as electricity prices rise in autumn—and whenever further regulation is rolled out—legal and financial pressures will mount on small miners.

Eliza Gkritsi

Eliza was TechNode's blockchain and fintech reporter until July 2021, when she moved to CoinDesk to cover crypto in Asia. Get in touch with her via email or Twitter.