Bitcoin: A Chinese History

Editor’s note: By some estimates, approximately 90% of all bitcoins are on Chinese exchanges. Though bitcoin mining and trading remain something of a niche interest, bitcoin has accrued a following in China that is unmatched anywhere else. Guo Hongcai, one of China’s leading bitcoin entrepreneurs and evangelists, recently spoke at a PingWest event to recount bitcoin’s brief, but eventful, rise to prominence in China. The following is a transcript of his talk, edited for brevity and clarity.

At first, everyone was a bitcoin miner, because everyone used their own computers.

Graphics cards were better for mining, and so we went from household computers to focusing on GPUs. One computer was no longer enough. Some discovered that, if they were lucky they might be able to mine 50 bitcoins in a day, and so they would buy ten computers, maybe buying out a netbar’s whole stock of used machines. Computers bought out of netbars were somewhat better, because they would have independent graphics cards on account of their being used so much for gaming. There was a boom in computing power, and that pushed things into the next stage, where so many people were making so many bitcoins, and people felt like bitcoin had some support behind it.

The next stage after that came quickly, when two companies, Nangua Zhang and ASICMiner, announced they wanted to make machines specifically designed for mining bitcoins. They started with 130nm chips, and then 110nm ones, and they owned the market.

At the end of 2014 I decided to start mining bitcoins, and so I moved to Baotou in Inner Mongolia and set up a cloud computing project.

Simply put, it was hosting. Some people make the machines, some people buy the machines, and some people don’t have any place to put the machines so they leave them with me. If you put them in an IDC room it would be very expensive, 3 yuan per kilowatt hour, but with us it was only 0.8 yuan, so it was cheaper. (That sounds expensive now, but it wasn’t at the time). So we hosted machines for mining bitcoins and made our first money that way.

The first generation mining machines were made by ASICMiner and Nangua Zhang, the next generation was those made by Dragon Mine, and third were those from “Ant.”

When Ant was making its 55nm processors, bitcoin happened to be up, and Nangua Zhang and ASICMiner were competing to develop 40nm chips and bypass 55nm chips. But as a result, Ant won easily with 55nm chips. That model they called S1, and it was Ant’s best mining device and made them a lot of money. But they also had some machines they couldn’t sell, and so they put them up for joint mining use.

Our mining operation accounted for almost 20% of the bitcoin computing power in the world at the time. The equipment manufacturers were all busy with producing their machines, not mining, so it was the only large scale operation.

Dragon Mine also had some machines they wanted hosted, and so they used an empty factory in Dongguan city to assemble their first mining operation. But the electricity cost was too high, 1.2 yuan, and they couldn’t go on, so they moved to Inner Mongolia. Later, I worked with Ant and found funding to support their development, and we moved all of Ant’s remaining production capacity to Inner Mongolia.

In this process I realized that what was behind the whole industry was electricity costs. If you can find lower electricity costs, your profits will be higher.

Our electricity costs at the time were a little more than 0.3 yuan, but that was still expensive. As 2015 rolled around, bitcoin plunged from 8000 to 1500 yuan and entered a “hard winter.” A lot of businesses died out. We realized that our clients wouldn’t be able to offset the electricity costs at that price, so we dropped the electricity fee from 0.8 yuan to 0.65, then to 0.55, 0.45, 0.4…

When we couldn’t go any lower, we started looking for a new place to build an operation, and that was Sichuan.

If you start from Ya’an city in Sichuan and drive towards Tibet you’ll see one hydropower station after another. I discovered that the hydropower resources were already so abundant that they had excess capacity. The west of the country has developed to this point where, in the summer, they can’t use all the power capacity they have. The water reserves exceed the safety limits of the dams, so the power company just discharges it all.

We wanted to buy electricity from them, but they said they couldn’t sell to us, because national regulations prohibited private sales like that. So I changed my approach and said: I’m not buying, I’m recycling. I’m recycling the wasted power reserves. Every year so much water is discharged without producing any power. Add it up, and you’ll find that every year each power station is throwing away hundreds of millions of yuan in electricity. It’s a huge waste. You discard part of it, I’ve got a solution to help you store some of it by changing hydropower into a new kind of power—bitcoin power. And so we created this idea of an energy currency.

Our conclusion was, 3000 tons of water can generate one bitcoin, at a cost of 0.1 yuan per kilowatt hour. So this was a new profit model. Of course, later this figure rose to 10,000 tons, then 20,000, because it’s tied to bitcoin’s value.

I couldn’t do this on my own, so I shared the idea with everyone in a closed WeChat group for bitcoin miners.

The hydropower bosses knew they were wasting a lot of power, just throwing it away, but this bitcoin “battery” idea could help them to use the power more effectively. And there was this efficient packaging solution here of putting the miners where the power stations were, making it all very easy. It took just ten days to install it all and get it working. It was like putting a battery into the station, converting the power into bitcoin.

Now, more than 75% of the global processing power for bitcoin is located in China, and 40% of China’s mining capacity is right there on that line of power stations, with miners large and small located in 100 different stations. Bitcoin’s price held steady at 1500 yuan for a long time, running along with hydropower.

And so that’s the story of how China’s bitcoin mining rose from a WeChat group.