Do You Know Where Your Bitcoins Are Coming From?

As the number of cryptocurrencies and tokens multiply—they now reach into the thousands—Bitcoin remains the best-known, time-tested and valuable. But where’s it coming from?

If you’ve purchased any Bitcoin in the past few months, chances are it was made in China–but, isn’t everything nowadays? This could be both problematic for the flourishing digital currency, and an opportunity for determined rival “miners” in the U.S. and across the world. 

Crypto mining is virtual, but requires pricey real-world inputs. In layman’s terms, miners compete to solve increasingly complex equations, or “blocks”, generated by the blockchain. The first to solve one earns the right to process and confirm fresh transactions, and win newly minted coins as payment. Being first comes at a cost as it requires a yuge amount of supercomputing power, which in turn requires vast amounts of electricity.

Chinese entrepreneurs infiltrated this environment in the early 2010s, while Americans remained skeptical on the sidelines. Miners have long taken advantage of the nearly-free hydropower near dams that the country built. Beijing-based Bitmain managed to corner the market on specialized chips and machinery the miners needed.

Bitriver, the largest data center in the former Soviet Union, was opened just a year ago, but has already won clients from all over the world, including the U.S., Japan and China. Most of them mine bitcoins. The company rents a building near the Bratsk aluminium plant. The world’s single largest aluminum smelter was built by the USSR in 1960s along with the nearby hydropower plant as energy is the largest cost in aluminium smelting.

“You have these little cities in backcountry China where hundreds of millions have been invested,” per Taras Kulyk, leader of blockchain business development at Core Scientific, which operates three competing mining sites in the U.S. Banks Are Warming Up to the Blockchain, CC: Ethereum

Yet Beijing authorities boarded up the exchanges in 2017, when a slew of fishy “initial coin offerings” boosted up Bitcoin’s price sevenfold. A 70% down swoop followed in 2018. That left Chinese miners with a two-thirds global market share, but no tried-and-true way to convert their Bitcoin into renminbi to pay non-virtual bills.

“They are reliant on over-the-counter brokers who are supposed to be banned but still operate,” says Simon Hawkins, a co-chair of law firm Latham & Watkins’ global blockchain and cryptocurrency task force. “The policy attitude is quite unclear.”

Deep in the countryside of inner-Mongolia lives giants – giant BTC mines that is. The Bitmain SanShangLiang industrial park mining complex is the largest mining facility in the world. This gargantuan mining operation consists of 25,000 machines that process $250K worth of BTC daily.

Cheap electricity is no longer the sole metric. Investors are also weighing regulatory risk and management quality, says Michel Rauchs, who follows crypto’s for the Cambridge Centre for Alternative Finance. “Better-capitalized firms are building out professionalized data centers,” he says. “China has lost some share, particularly to the U.S.”  

Robinhooder’s have started heaving their stimmy’s into early movers like Marathon Patent Group [$MARA], which mines in Montana and North Dakota. Its shares have shot up ninefold since November. Adversary Riot Blockchain [$RIOT], out of upstate New York, is up a mere seven times.

About 18.5 million of the 21 million bitcoins have already been created. As the remaining supply dwindles, so does the fraction of a coin earned by each successful “hash,” or solution. That will ultimately multiply miners’ break-even costs. That process will take decades, though, says Whit Gibbs, CEO of HASHR8, which enables retail investors to contract a bit of their own Bitcoin mining. Ad interim, miners are backing up the brinks truck thanks to Bitcoin’s recent run up.

For all that, China’s yuge head start in crypto mining will dissipate only gradually, while the next move of its regulatory hierarchy remains as murky as ever. Yet another element to consider before leaning into the Bitcoin hysteria. Bitcoin is Going Ballistic…Again

cc: Satoshi Nakamoto

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