Since 2018, there’s been talk about China losing its crypto mining lead to North America. The idea made headlines again in early 2020 after Barry Silbert, founder of $3 billion crypto investment fund Grayscale put a big bet on mining in the US.
China’s status as the world’s crypto mining leader has gone unchallenged for at least five years. The country is home to the biggest equipment manufacturers and accounts for almost 65% of the global bitcoin hashrate, a measure of computer power on the network, data compiled by researchers at the Cambridge Centre for Alternative Finance.
We’ve seen claims that Chinese miners are going to America to escape regulations, and that Americans are jumping into the industry themselves. We wanted to know if either checked out, so we made some calls.
Six China-based miners and industry insiders contacted by TechNode said they have no intention of moving their operations to North America, but industry watchers said there are signs that the industry is preparing for take off in North America.
Techwar, crypto mining edition
Can this traditionally Chinese wildcat industry flourish in North America?
Silbert’s US-based blockchain group DCG made a big bet that it can. In late August, DCG announced it has committed to invest $100 million through 2021 in a crypto mining investment company it founded in 2019, Foundry.
From its base in upstate New York, Foundry wants to challenge China’s crypto mining dominance. It plans to build its own mining operations and finance other companies to do the same across the US and Canada.
According to eToro Bitcoin, Foundry’s mission could have support from Washington. The centralization of the $215 billion bitcoin network (at the time of writing) has rung alarms in the US. Just yesterday, a Congress committee debated a bill to support US competitiveness in blockchain technology that could include crypto mining.
Mike Colyer, Foundry’s newly appointed CEO told TechNode that concerns around centralization are essentially about security, which are not specific to China. It’s not about “North America vs. China, or US vs. China, it’s about strengthening the decentralization and the security of the bitcoin network,” he said.
Transactions on bitcoin’s ledger are not verified by a single authority, but instead rely on consensus among the majority of the users. This makes the network vulnerable to what is known as a 51% attack, whereby the majority of the miners use their collective hashpower to take control of the network.
In an op-ed published in August, Ripple CEO Chris Larsen said that bitcoin miners’ concentration in China “means the Chinese government has the majority needed to wield control over those protocols and can effectively block or reverse transactions.”
But it’s an unlikely scenario. An attack is estimated to cost a little over $516,783 per hour. Despite professionalization and consolidation of the industry, China’s 65% is not a unit, but a wildcat industry of small miners that operate in a legal grey area.
Beijing vs. Uncle Sam
Chinese miners have had a rocky relationship with local authorities, to say the least. Just last week, the local government of Inner Mongolia announced it was halting electricity discounts for major cryptocurrency mines, including Bitmain and Ebang.
This news seems to support the idea that China-based miners are fed up with regulatory crackdowns and are moving out.
However, authorities in Sichuan have recently indicated that they want to legitimize and support the mining industry. New regulations will bring it under the direct supervision and taxation of the government, but only big, professionalized miners will survive the ripple effects of the new rules.
Despite these changes, Sichuan-based miners contacted by TechNode said they have no intention in moving their operations to North America. They said conditions for mining in China are still good.
Flex Yang, CEO of Babel Finance, a company which finances Chinese crypto mines, said he hasn’t seen any miners moving to North America, at least not yet.
“Chinese miners love China,” Alejandro de la Torre, VP at Poolin, one of the world’s biggest mining pools, told TechNode. He said that the rumored move to North America is “just a rumor.”
One miner contacted by TechNode said he was considering moving operations to North America but for foreign exchange purposes rather than concerns about regulation. His company is funded in US dollars instead of Chinese yuan.
He said the tides of regulation can be as unpredictable in the US as China, with the Internal Revenue Service, the federal tax agency, and local governments bringing instability.
Some states in the US have seen the value of bitcoin mining and are welcoming the new investments, Colyer said. “Georgia, North Carolina, and Texas are really excited to have folks,” he said.
The cost of power
Foundry isn’t betting on China-based miners crossing the pond. He says US institutional investors have realized the value of the industry and want in. In the last three years, many have built out infrastructure in the form of facilities waiting to be filled with mining rigs, Colyer said.
But for North America to develop its mining industry, it needs more than the good graces of regulators.
Mining needs a lot of cheap electricity to be a profitable business. The abundance of cheap electricity in parts of China, notably Sichuan, Xinjiang, and Inner Mongolia, has helped miners scale up their operations by keeping costs low.
At the peak of rain season, electricity produced by hydropower stations in Sichuan, a province on the foot of the Himalayas, prices can be as low as $0.01 per kilowatt hour. The mining provinces are also sparsely populated, which means a lot of electricity is untapped.
“North America has a few advantages that can make it as competitive for mining as China,” Ethan Vera, co-founder of North America-based mining operator Luxor and founder of Hash Rate Index, told TechNode.
Vera said that the idea that China has cheaper and better sources of electricity than the US is not entirely accurate.
“Canada and the US have very advanced electricity grid infrastructure that can be used for crypto mining at a lower cost,” he said, pointing to Texas where he said electricity can cost less than $0.02, the state has seen a lot of mining infrastructure build-outs.
Foundry sees opportunity in parts of the US with power grid conditions similar to Sichuan: Washington state, western New York, Texas, and the Tennessee Valley, are among the parts of North America that Colyer said have similar power grid conditions to Sichuan.
But other costs can stack up in the US. Labour costs are significantly higher in North America, the miner who is considering moving his operations there said. Yang said the overall cost of developing mining operations is higher in the US.
Rig makers crossing the pond
US-based miner Vera thinks Chinese mining rig manufacturers welcome investors’ interest in North America, even “prioritizing” orders from there. “They don’t want to be China-centric either,” Foundry CEO Colyer said.
“We plan to continue collaborating with Foundry as we focus on increasing our global market share,” Jordan Chen, COO of MicroBT, said in a press release announcing Foundry’s launch.
The bulk of the orders for mining rigs in 2020 are from North America, said several industry insiders, including Yang. It is likely that major manufacturers will be occupied with delivering orders to North America for the rest of the year, with little to no capacity to deliver new orders to China.
If true, this could suffer a major blow to China’s mining industry. Access to the newest machines is a make-it-or-break-it condition for an industry where small differences in equipment stack up to major competitive edges.
In July, Bitmain signed the biggest known deal for its newest mining rig with Washington state-based Core Scientific, which happens to be Colyer’s previous gig. The Beijing company will sell 17,595 S19 Antminers to Core Scientific over the next four months.
Just the ‘beginning’
We didn’t find evidence of an exodus of Chinese miners, but North American investors are putting their weight, and wallets, behind the local crypto mining industry. Their investments have yet to mark a visible mark on hashrates, and it is too early to tell how different costs will stack up in the cash flow-intensive industry.
Foundry, backed by the deep pockets of Silbert’s DCG, will try to boost the North American industry.
Politics might make this an opportune time for Foundry’s mission to bring mining to North America, as US lawmakers are talking about national competitiveness in blockchain and cryptocurrencies.
Vera predicts that the tide is just “beginning.” “While 2020 hasn’t seen any large change yet due to the rainy season in Sichuan, tariffs and manufacturer delays, 2021 is poised to see a significant change,” he said.
Correction: An earlier version of the article incorrectly stated that DCG has already invested $100 million in Foundry and that Flex Yang is the co-founder of Babel Finance.