major mining nation shuts it down
although beijing’s hostility has been building for months, the death sentence came in mid-june. Most of China’s output came from miners who split the year between the northern province of Xinjiang during the fall and winter months, and Sichuan and Yunnan in southern China during the spring and summer, hauling their equipment back and forth. and lap 2000 miles or more in tractor trailers. The annual migration was a search for cheap electricity: Miners worked with coal on sale in Xinjiang, then got an even better deal with excess hydropower fueled by thunderous monsoons in Sichuan and Yunnan.
On June 19, Sichuan and Yunnan provinces ordered all miners to leave. a few days later, the central government imposed what amounted to a nationwide ban by ordering Chinese banks to end all dealings with bitcoin producers.
In one week, more than nine out of 10 Chinese miners closed their farms and began looking for promising places to relocate, from Kazakhstan to Texas. since the peak on April 19, global computing power has roughly halved.
Surprisingly, the turmoil didn’t alter bitcoin’s price much, which has since hovered between $31,000 and $35,000. but the clash will cause two main changes. First, non-Chinese miner earnings are likely to double from already high levels. Timing depends on how quickly the displaced find new homes, and the estimated 4 million mining machines leaving China could take up to two years or more to resurface in new places.
secondly, the exodus from sichuan and yunnan, the places that are home to almost a small part of the world’s green cryptocurrency production, means that fossil fuels are now powering a much larger part of the world’s bitcoin production than before closing. Chinese miners are already shipping their equipment to parts of the world where production is most active, in particular, such as the US. uu. States like Texas and Tennessee, and a list of welcoming nations, including Kazakhstan, Russia, and Malaysia. These are all places where the majority of bitcoin, along with the vast majority of all electricity consumed by businesses and homes, is generated from coal and natural gas.
The great migration from China is just one of two main forces threatening to worsen bitcoin’s carbon footprint, which before the shutdown was estimated to be equal to that of Argentina. Due to the China earthquake, miners in the rest of the world are making a lot more money, so they are stashing away loads of cash and a yen to spend on towering shelves of the newest and most powerful ASIC computers. these lucky incumbents rely primarily on fossil fuels. they will likely burn much more coal and gas to fill the void left by the sudden closure of what was once the engine room of industry.
Of course, a strong trend towards renewable energy could take hold. hydropower in canada and even nuclear power in ohio offer promising opportunities. But for now, the best bet is that the big and imminent increases in production will come from the places that produce the most coins today. and they are powered primarily not by wind, solar, and hydropower, but by raw materials that shed carbon dioxide.
if bitcoin takes another moonshot from $32,000, the rush to install more computers, gobble up more electricity and pump out more co2 will only accelerate. “At $28,000 per coin, electricity use could rise 30% above China’s pre-lockdown level, and miners would still make a lot of money,” says Alex de Vries, an economist whose website digiconomist tracks electricity usage. bitcoin energy. “if it goes back to $65,000, miners would double their energy use before china went offline.”
It’s hard to find a better window into what’s to come than studying North America’s largest publicly traded “all-green” bitcoin producer, Bit Farms Canada. bitfarms works 100% with hydroelectric energy. In a single example, he illustrates the great rewards of minting bitcoins before the China typhoon; the even greater benefits brought about by the sudden uprooting of half of its competitors; and the difficulty of making renewable energy the dominant energy source for bitcoin manufacturing.
bitcoin automatic stabilizer
Before we get to the bit farms, let’s examine how the china blackout changes the way the bitcoin network distributes new coins and how that reset benefits miners working at full speed.
The bitcoin network is designed to distribute 6.25 coins every 10 minutes, or 900 a day. miners compete for prizes in a kind of giant guessing game or lottery based on running “hashes” or multi-digit codes generated by their asic rigs. the miner who matches the code assigned to the next batch of 6.25 bitcoins gets the full prize.
The winner not only receives the coins, but also the fees for transfers and purchases that the miner authenticates by signing the “block” containing those transactions. Those fees provide additional revenue that, on average, is about 10% of the bitcoin price. the fees are paid in bitcoin by the people and companies that carry out the transactions. so the total “block rewards” is 900 bitcoins per day, plus another 100 paid in fees, for a total of around 1000 coins.
The algorithms that govern the bitcoin network impose a kind of automatic stabilizer. the system adjusts the difficulty of winning prizes to the total capacity, or “hash rate”, on the network. Rising prices entice miners to buy more and more machines, driving up the total hash rate across the system. when that happens, the network demands proportionately more hashes, or computer-generated guesses, to earn the same number of bitcoins. if the hash rate doubles, the number of bitcoins awarded does not double: the system is designed to keep the number constant at 6.25 every 10 minutes. instead, the network raises the bar so that the average miner needs to generate twice as many hashes to get the same number of bitcoins.
The way the model is designed, the only way to earn more coins is to get more of the total computing power of the network; in other words, increase your share of the overall hash rate against the competition. But if the price of each bitcoin increases much faster than the increase in the hash rate, miners who don’t add any machines make much more money, even though their share of the total market decreases. And those that expand do even better, because the return on their investment in those new computer banks is extremely high.
This is precisely how the market has worked since the start of the pandemic. As the price increased 10-fold from March 2020 to April 2021, miners increased the overall hash rate, but mining profits increased much faster. to capitalize on the booming market, miners would normally have installed much more capacity than they actually added. in fact, orders for the newer asic machines have skyrocketed. but semiconductor shortages and supply chain disruptions caused long delays, keeping the overall hash rate much lower than if the machines had arrived. “The hash rate doubled last year. but if all the ordered machines had been installed, it would have gone up much more”, says de vries.
The result: miners who were solidly installed last March benefited in two ways. First, the price of their product skyrocketed. At $32,500 on July 8, bitcoin is still at many multiples of its value just before the pandemic struck. Second, the chip crunch effectively “protected” those entrenched players by giving them a much higher market share than if rivals had been free to add all the new capacity they wanted. the confluence of those warm currents seemed to make the last 18 months the golden age of mining. Now, the turmoil in China heralds even richer days ahead.
making it easier to earn new coins
Just before the big disconnect in China, total network capacity peaked at 191 exahash per second in mid-April. that’s a rate of 1 quintillion codes per second, or 1 followed by 18 zeroes. at the low point the week of June 27, the figure was cut in half to around 80 exahash. on July 15, it had stabilized in the 100 exhash range. In the space of two weeks, the total computational power of the bitcoin network dropped from the top by about half.
here’s an example illustrating how the exodus from china is leading to higher profits for rivals abroad. Before the capacity collapse, a ghost producer we’ll call a big miner generating 1.7 exhash would have had 1% of the market. that part would deliver 10 bitcoins of the 1,000 coins won in block prizes each day. the architecture of the network dictates that because the capacity has been reduced by 50%, the hash rate needed to secure a prize is also reduced by half.
but that adjustment doesn’t happen instantly. it usually takes about two weeks for the system to reset. this time, the drop was so severe that the adjustment took another week. Due to that built-in delay, the network made an interim change. During those three weeks, the protocol dropped to issuing the regular 6.25 bitcoin at longer intervals. Instead of every 10 minutes, launch times between mid-June and early July dropped to an average of 14 minutes, a 40% delay.
As a result, the closure of china, even in the intervening period, made mining much more profitable for players outside of that country. the network issued far fewer coins than usual, but the proportion of hashes generated by established miners increased faster than the slowdown in new coins. as we will see, miners like bitfarms are already having a feast. and the biggest gains are yet to come.
On July 3, the automatic stabilizer was activated, reducing the hash rate needed to capture new coins by 28%. a second adjustment will be made on July 17, with more to follow, until the computing power needed to earn a lot of bitcoin is cut in half. miners who used to own 1% of good computing power for 10 coins a day will soon be depositing 20 without adding new machines. the same amount of electronic guesswork will generate twice as many bitcoins. it’s only in the wild world of bitcoin that half of your competitors quit overnight, so you can’t change a thing and double your profits.
for bitfarms, a great business is now even better
bitfarms was thriving before the china shutdown, but now it’s about to become much more profitable. its before and after numbers are a case study in the origin of the industry and the additional riches to come.
Founded in 2017, BitFarms operates five plants, with a sixth underway, powered by electricity generated by Quebec’s raging rivers. the province, in fact, supplies more than 99% of all its energy for consumers and businesses through hydroelectricity. bitfarms went public in 2019 on the toronto stock exchange, earning a listing on the nasdaq in June. With a market cap of $600 million, it ranks in the top half-dozen of all publicly traded bitcoin miners. since the end of last year, its share price has increased sixfold, to $3.22 a share. As of January, bitfarms has been holding 95% of the bitcoins it collects in its treasury.
According to public disclosures from bitfarms, their “mining costs” per bitcoin earned in the first quarter of 2021, consisting of the cost of supplies, labor, and electricity, was $8,500. it benefits greatly from the ultra-low cost of hydroelectric power. last year it posted heady gross mining profits, excluding overhead, of 55%. but that was just a warm up for 2021.
In the first quarter, bitfarms mined 598 bitcoins to rack up $28 million in revenue. its production cost was only $6 million, which means its gross margins increased to 79%. Clearly, its low-cost structure made bit farms profitable at prices in 2020 that were much lower than today, and cryptocurrency’s huge run so far this year is causing a profit explosion.
Consider the staggering rise in daily earnings. as of March 2020, bitfarms was setting aside just $35,000 every 24 hours. by December the figure had advanced to $90,000, rising to $163,000 in January, $238,000 in February and $330,000 in March. that month, he was making 85 cents gross profit for every dollar of bitcoin he mined.
Of course, March and April marked the peak of bitcoin, as its price ranged from $50,000 to $64,000. but even though the value of bitcoin has halved, bitfarms is pocketing just as much profit as it did at the top, because it is hoarding around twice as many coins. their June “production update” does not reveal earnings, but does show the number of bitcoins earned per month. in June, bitfarms earned 265 bitcoins, a third more than in January, and at the current rate it will reach 415 in July.
As the production update explained, “On July 3, the bitcoin network experienced the largest difficulty drop in history due to recent macroeconomic developments in China. this has resulted in bit farms producing significantly larger amounts of bitcoin at a lower cost per bitcoin.” Founder and CEO Emiliano Grodzki noted that “BitFarms has nearly doubled its market share.” since the beginning of 2021, his earnings have doubled from seven to 14 coins per day.
Operating costs for bitfarms are almost entirely fixed, as electricity is by far the largest expense. so you are now minting twice as much product at the same cost. According to Fortune’s estimate, their spending per bitcoin suddenly dropped from $8,500 to around $4,500. “Our revenue for the same operating cost just doubled,” director of mining Ben Gagnon tells Fortune.
Today, bitfarms has 1.42 exhash of production installed. when the total of all mining was 191 exhash before the china shock, it controlled around 0.74% of the market.
but since the total network is now down to 90 exahash, the pool portion of bitfarms is spring-wound to 1.5%. with the next reset your daily bitcoin production should increase from 13 to 14 per day. At today’s prices, that’s good for daily earnings of up to $500,000, albeit half that in the generous month of March, when bitcoin itself was more valuable.
Chinese miners will return, but the challenge is huge
The length of the bounty depends on how quickly the Chinese miners find new homes. “they need to relocate energy equivalent to what is produced in all of belgium,” says de vries. bitfarms’ gagnon predicts that it will take the Chinese two and a half years to build new factories abroad. He points out that before the commotion, those miners’ biggest problem was getting new machines, mostly produced in their home country by Bitmain, the world’s largest supplier. “The industry was asking for 100,000 ASIC computers a month because prices and profits were so high,” says Gagnon. “Fifty-five to 70% of the customers were Chinese. now the problem of “scarcity” has completely changed, from machines to electricity. the new bottleneck is the search for scarce energy by Chinese miners.”
gagnon, who has worked extensively in china, explains how guiding a project from blueprint to hash is 10 times more arduous and time consuming in a place like texas than on home turf. in china, says gagnon, “miners will drive to a coal plant or hydroelectric dam. they’ll have a couple of drinks with the plant owners, then have dinner and do a handshake deal. the next day, they will arrive with their equipment.” electrical contractors and other workers will work 18 hours a day, seven days a week, erecting the plant that houses the computers. “They will sleep on the spot,” Gagnon says. “That doesn’t happen in the rest of the world.”
what took eight weeks in china will likely take immigrant bitcoin miners in canada eight months, says gagnon. and in the usa In the US or Europe, Chinese miners would need to obtain permits, negotiate deals with utility companies, and hire contractors who work at a much slower pace. “The infrastructure isn’t there, and the deals aren’t there,” Gagnon says. the displaced can import their computers, but not their electrical equipment. “They need to install switch panels, switches, transformers, and power distribution units (pdus),” he says. “That equipment has different certification standards in the United States. and Europe than in China. they cannot be reused like computers. all that equipment needs to be replaced.” the covid crisis has stretched supply lines for these items, causing delays. delays in getting those electrical essentials could greatly extend the timeline for overseas restarts.
Overall, Gagnon says, the challenge will be finding enough power. “china is the no. 1 producer of electricity in the world, much larger than the us. uu,” he says, noting that miners there benefited from the nation’s giant excess power generation. That surplus doesn’t exist in many places, says Gagnon. he adds that the challenge is not just relocating more than half of the world’s existing machines. the Chinese also need to find a place for the hundreds of thousands of computers they’ve already ordered that are piling up in storage.
bitcoin’s carbon footprint is likely to continue to grow
As the Chinese seek new havens, and miners continue to expand to benefit from still-strong prices, what is the likelihood of energy use shifting from fossil fuels to renewables? It’s important to understand that, believe it or not, China’s dominance has been waning in recent years. de vries calculates that in September 2019, the no. 2 economy accounted for 75% of the entire network. But many Chinese miners ventured abroad, perhaps fearing that Beijing and the provinces would eventually crack down. In less than two years, the US Participation increased from 4% to 17%, Iraq’s from 2% to 6% and Kazakhstan’s from 1% to 5%.
That trend reduced bitcoin’s ecological footprint before the knockout blow. That’s because the amounts extracted through hydropower in Sichuan and Yunnan fell along with China’s overall share of global computing power. as of april 2021, yunnan and sichuan accounted for only 29% of the bitcoin network, down from 44% in april 2020, according to a study by de vries. An estimate from the University of Cambridge placed green production worldwide at about a third of the total, meaning Sichuan and Yunnan were the main show. the role of nations that generate a large proportion of their energy through renewables is relatively minor. Canada contributes just 3% of the grid’s computing power, while Norway, Europe’s hydropower capital, provides a fraction of 1%.
so if bitcoin continues to be mined where it is mined now, its carbon footprint is likely to increase. that may not be the case. miners could flock to places that offer excess power provided by renewables. For example, the state of Washington enjoys a large surplus of hydroelectric power. still, miners would need to obtain separate permits from individual counties and the federal government to take advantage of the networks. it’s not entirely clear that the Chinese can get those regulatory approvals. another option is an overlooked source that doesn’t emit co2, but isn’t exactly considered “green”. mining specialist standard power has just signed a five-year contract in ohio to produce bitcoin using nuclear energy.
in canada, the chances of replicating what bitfarms have created are slim. The Quebec government has limited the amount of hydropower that can be used for bitcoin mining and has allocated more than half of that capacity to bitfarms. therefore, the potential for new competitors in quebec is severely limited. So far, wind and solar power have gained little traction. “Wind and solar power are a particularly bad combination for cryptocurrencies,” says de Vries. “Miners buy expensive machines that need to be replaced every 18 months with newer, faster machines. to be profitable, miners need to run those computers 24/7. they cannot be turned off waiting for the sun to shine or for the wind to blow.”
Right now, the only thing likely to stop the resurgence of Chinese reverse bitcoin mining is a collapse in its value. Although mining gets easier as the price goes down, if it goes down low enough, the cost of electricity and equipment will make the venture unprofitable. it is a scenario that believers who think that cryptocurrencies will change the world deem absurd. here is the puzzle for the fans. the only way to guarantee bitcoin’s carbon footprint is reduced, without government lockdowns, is for the price to go down. just ask elon musk. being green and embracing bitcoin at the same time is the toughest of tough acts.
A version of this article appears in the August/September 2021 issue of fortune with the headline “can bitcoin go green?”