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November 24, 2016

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In boondocks, computers ‘mine’ bitcoins

WHEN I first met 34-year-old Deng Jiliang at a Kangding factory 357 kilometers from the southwestern city of Chengdu last month, he was in the process of relocating about 9,000 computers to the Xinjiang Uygur Autonomous Region in northwestern China.

I was with my Japanese friend Makoto San, who had a strong interest in the fountainhead of that holy grail of virtual currency, the bitcoin.

His interest grew with each surge in bitcoin’s price, which jumped to a two-year high of about 4,300 yuan (US$624) in October and touched three-year high of 5,300 yuan last week.

I helped Makoto make contact with Wu Gang, founder of bitcoin mining and trading company HaoBTC. The company, founded in 2014, is headquartered in Beijing, but its main “farm” for “mining” bitcoins is located in the mountainous Kangding region on the Tibetan plateau in southwestern Sichuan Province.

Wu subsequently gave us an introduction to his partner Deng in Kangding, who would show us around the site.

After a five-hour flight from Shanghai and a three-hour drive to the factory, it was a bit surprising to find that the man in charge of one of world’s few large-scale producers of bitcoins was pulling up stakes and moving the factory elsewhere.

“Why?” I asked.

“We don’t have any other choice,” Deng replied. “We will soon run out of water to generate power in the dry season. So we have to move all these computers to place that have cheap electricity.”

Since 2013, when Chinese investors began large-scale trading of bitcoins, the cyber currency “mined” by supercomputers solving complicated mathematical algorithms has burst into the world’s consciousness.

Instead of the initial concept of bitcoin as a decentralized digital currency beyond the control of any single company or government, the “world without leaders” is now virtually controlled by three mainly group-run networks: software designers, hardware miners and trading exchanges.

In the first and last functions, the US and Japan take the lead. China dominates the second. It is now home to 70 percent of bitcoin “mining” due to the relatively cheap cost of electricity in areas served by hydroelectric systems, according to a report on Bloomberg News.

Miners in power

Looking around the Kangding site, I could see where Deng’s factory had an ideal location — a river canyon surrounded by mountains and a privately owned hydropower station with cables linked directly to the factory’s three warehouses.

Quite idyllic, if one can ignore the overpowering sense of isolation and the random wrecks of trucks that accidentally rolled into the canyon by dint of the twisting roads.

En route to Kangding, Makoto and I drove through 21 mountain tunnels and nearly got lost because the GPS was pointing us to the middle of nowhere.

“To be honest, the environment seems too crude and bold,” Makoto said. “It’s hard for me to link it with the birthplace of an avant-garde currency. But it is interesting to realize that my bitcoin holdings were generating from waterfalls in the Tibetan plateau.”

Musings aside, we could see that Deng’s concerns about cost and productivity underlay the reality of the bitcoin “mining” business in China.

Although the Kangding factory was China’s largest bitcoin “miner,” with capacity to produce about 900 bitcoins a month, Deng said the revenue hardly covered electricity costs of 24/7 operation at about 250,000 yuan a week, which can’t be paid in bitcoins.

Then, too, there is the initial factory investment of 50 million yuan to purchase the necessary computers and then update them as newer models offered faster speeds.

The Kangding factory, situated at an oxygen-challenge elevation up about 3,000 meters is a series of three warehouses crammed with shelves of computers with ultrafast speed of calculation and emitting heat and noise.

The site initially employed nine staff; six remain.

It was a surprise to us that most of Deng’s colleagues barely knew what bitcoin was before joining the mining team. Deng himself ran a restaurant in his hometown of Leshan, Sichuan, and Guo Yongzhi, the youngest staffer, was a salesman of herbal medicines back in Chengdu.

When Guo was introduced to us, Makoto and I didn’t even realize the man standing there with a cigarette in hand and a gloomy look on his face was actually 22 years old.

The technicians who work there sit in front of screens in a separate room outside of the warehouse, monitoring the mining conditions of computers, doing maintenance if anything goes wrong, and of course, reporting to Beijing headquarters on a routine basis.

“I’ve never seen so many computers at a time in my life,” I said to Deng, marveling at the way Guo and others could handle so many machines at once.

“We don’t take them to bed with us,” Deng said wryly. “If nothing goes wrong, we have no reasons to enter a warehouse full of radiation and heat.”

Hard days for miners

For the hardships, staff are paid about 6,000 yuan a month. While in the process of packing up gear for the relocation, some work overnight. The alternative is a steel bunk bed in a something resembling a school dormitory.

The nearby town of Kangding, population 130,000, offers little in the way of modern amenities or entertainment. When not working, the staff usually have their noses stuck into their personal computers or mobiles. Dinner almost every night is spicy Sichuan hotpot of some kind.

Deng said his current staff are itchy to leave the remote, lonely area for a bit of respite after 14-day shifts. Guo, a man of few words, is worried that his work will prevent him from finding a girl friend.

The course of bitcoin mining, like love, is never easy.

With the time required to “mine” a bitcoin doubling every four years due to the complex formula set forth by the currency’s mysterious creator, Satoshi Nakamoto, miners are hard pressed to produce the large volumes of yesteryear.

“This factory hasn’t make a profit since its establishment 17 months ago,” Deng said. “For us, retaining ‘mining’ and pooling it for appreciation seem to be the only way out.”

Thus, Deng and Wu are thinking about eventually transferring all of Kangding’s mining capacity to Xinjiang, where they can use stable thermal power at relatively lower costs. For now, they are prepared to shuttle the factory gear between Kangding and Xingjiang, based on electricity prices.

One of my friends who work in the US banking industry likens the bitcoin mining business model to shale gas production. With a quick decline in the efficiency of the gas wells, producers need to constantly expand to maintain revenue.

“It is very capital-intensive business,” Deng admitted. “It’s a key issue for us to control costs — in our case, the cost of electricity.”

At the end of our trip, Makoto was satisfied with the results. He got a close look at the workings of a significant player in the Chinese bitcoin industry.

He also came face-to-face with problems besetting the business. But despite the hurdles, Chinese bitcoin industry players seem intent on persevering, no matter how abstruse the business models they choose to follow. And with the Chinese government talking about developing its own official digital currency, the plot thickens.


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