Bitcoin has moved east and grown incredibly
INSIDE a metal shed in the Tibetan highlands of western China, thousands of microprocessors flank narrow corridors, generating a hum and stifling waves of heat.
Outside the sky is blue, with a mountain peak looming at the top of a narrow wooded valley. A flock of goats ambles idly past a pile of discarded foam packaging. Inside, though, tranquillity is transformed into clamour.
Red, blue and green lights flash; cooling water trickles down the walls, and large ventilation fans thrum as they struggle to shift the hot air produced by all this computing power.
This is a bitcoin “mine”, the engine room of the world’s leading digital currency. The microprocessors here approve and record all the transactions that keep the bitcoin system running. They also compete to solve complex mathematical problems and are rewarded with bitcoins: that’s a way of putting fresh digital currency into circulation and incentivising more people to set up “mining” operations.
Bitcoin began as a utopian, libertarian dream, a decentralised currency outside the control of governments that gives its users the anonymity of cash and the instant, global power of e-mail. This was a system built not just for convenience but for those who can’t bring themselves to trust the global financial system.
Across Tibet, China is busy pulling mineral resources out of the ground; there is even a gold mine close by. But here in Kongyu, most of the mining is virtual. It is here because of extremely cheap hydropower and cheap wages – and perhaps because Chinese entrepreneurs have a knack for the business.
For a while, bitcoin was effectively kidnapped by drug dealers, becoming the anonymous payment backbone of the Silk Road, a black market that flourished on the Dark Net – until the FBI closed that market down in 2013.
Today it is an industry that is starting to come of age, but whose centre of gravity has shifted to China.
“When bitcoin was invented, the people dedicated to it were mostly crypto-punks and libertarians,” said Eric Mu, the chief marketing officer with HaoBTC, which operates the bitcoin “mine” in this township in China’s western Sichuan province. “Now they are more like bankers and lawyers who see opportunities in the industry.”
Today mines run by Chinese companies account for about 70% of the world’s bitcoin processing power, its factories produce the cheapest microprocessors to run these mines, and its exchanges account for about 70% of the world’s bitcoin trade.
Rich irony
Altogether there is around more than 15 million bitcoin in existence: each is worth $615 (R8 905) at current prices, with a market capitalisation of $9.2 billion.
For some, Chinese domination is a rich irony. For others, it is more a practical threat.
“Some people in the Western world were painting Chinese miners with too broad a brush,” said Emin Gün Sirer, a computer science professor at Cornell University in the US. “It’s not the case that all Chinese miners are part of the same enterprise or are colluding.”
But Sirer identifies one risk with the concentration of mining power here: if the Chinese government wanted, it could in theory crack down on miners and force them to block certain accounts. “They could stop the motion of funds,” he said, describing exactly the sort of government control bitcoin was supposed to guard against.
But in the mountains of Sichuan it is hard to see much evidence of a Chinese plot to bring bitcoin to heel.
The Chinese government has employed a fairly light touch. Although it banned Bitcoin is a virtual currency that enables direct payment over the internet between two individuals, skipping out the middle man such as a bank or credit card company.
Bitcoin transactions, with lower fees than traditional financial institutions, rely on cryptography to prevent double spending, counterfeiting or fraud. banks from taking part in bitcoin trading in 2013, it left ordinary people free to buy and trade the crypto-currency, and miners free to operate.
The industry is run by a disparate mix of investors and dreamers, manned by electricians and IT experts. There are people like Ryan Xu, a Chinese-born Australian who first became interested in libertarian economics while working as a reactor operator in a nuclear power plant. He now describes himself as “both a utopian and a venture capitalist”.
“We need to foresee the next five or 10 years,” he said. “All the governments are printing money and diluting people’s wealth. Is that justice or robbery? The financial system also keeps crashing every five or 10 years. I think that’s an illness in the monetary system.”
He says he is not sure bitcoin is the answer, but it is at least an experiment that might work. So why China? Running microprocessors sucks electricity. Competition is intense and profit margins are narrow: Xu has moved his mines around the world in search of the cheapest power, now to the mountains of Sichuan. His latest mine is still under construction, between a hydroelectric power plant and the concrete shell of a disused power transmission station, between Kongyu and the city of Kangding.
As China’s economy boomed, private companies set up hydroelectric plants in western Sichuan; then, as the economy slowed, they found themselves unable to sell to the national grid, elbowed out by more politically connected firms.
“It took a lot of money to build the plants, but it doesn’t cost that much to maintain them,” said HaoBTC’s Mu. “So it makes sense for them to sell the power to anyone willing to buy, even at a low rate.”
Maintenance staff are cheaper here than in the West. Mu says his company employs 10 people at three mines in the mountains, paying them around 6 000 yuan ($900) a month, a “decent salary” for this part of the world. HaoBTC runs one other mine in Sichuan and one further west, in Xinjiang, with more than 11 000 machines, earning more than 80 bitcoin a day – a daily income stream worth more than $745 000.
But it is not only Chinese entrepreneurs who have taken to bitcoin. A growing number of Chinese people have begun speculating and investing in bitcoin.
Bobby Lee, a former Silicon Valley engineer who founded China’s first bitcoin exchange, BTCC, attributes it partly to a natural instinct to buy and sell.
“If you look at Las Vegas or Macau or casinos worldwide, how come most of the clientele are of Asian descent, or Chinese specifically?” he asked. “It has to do with some cultural instinct.” – Washington Post