China is big on bitcoin mining. According to the latest report from Coinshare, China controls two thirds of Bitcoin’s overall hash rate, most of that power coming from Sichuan, home to China’s famous Panda.
But the real power actually resides in Beijing where China’s mining giant, Bitmain, is headquartered. Its co-founder, Jihan Wu, recently staged a coup and ousted his co-founder, Micree Zhand, to regain control of the company. So far, so good: The upheaval is generally seen as a good thing for the company, especially as it faces increasingly fierce competition from Whatsminer and Ebang.
Wu proposed three strategies to stimulate new interest from miners:
- Offering low down payments. Customers only need to put 20% down when they pre-order a large number of machines (say in the 5,000 unit range.) Since mining is an asset-intensive industry, such a discount would help alleviate cash flow problems for mining farms.
- Partnering with mining farms. Bitmain will lend its equipment to mining farms that have access to cheap electricity. It will also partly cover the cost of electricity. In return, Bitmain will get 75% of profits.
- Creating a “put option” on mining rigs, pegged to the price of BTC. If you buy at least 1,000 machines, the put options would yield a strike price of $5,000, expiring on March 27. If the bitcoin price is lower than $5,000 on that date, miners can sell their bitcoin at $5,000 to Bitmain.
The put option is particularly innovative, given that mining is cyclical and the use of financial instruments could significantly de-risk a bear market. More importantly, the put option will be facilitated by none other than Wu’s new gig, Matrixport, a blockchain bank headquartered in Singapore.
It’s pretty obvious that Bitmain is targeting small farms and new entrants through discounts and favorable payment terms. The bigger, more experienced mining companies don’t typically suffer from cash flow issues.
Likewise, the bigger mining farms have no incentive to enter the co-mining schema. Since the cost of electricity is the ultimate bottom line in mining, there’s little reason for any big farm that has access to cheap electricity to share 75% of its profits with Bitmain, in exchange for more machines.
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“Bitmain is just betting on mining pools,” one insider told me. He was referring to smaller, mining collectives who split their rewards based on the amount of power they contribute to the probability of mining a block. “These miners have less working capital and therefore will likely benefit from Bitmain’s new sales strategy.”
So will Wu’s strategy work?
Wu is betting on next year’s Bitcoin halvening, which, is a risky bet. The promise of “the halvening” has driven bitcoin’s upward momentum during the past decade, but it could also result in a market crash, given the uncertain volatility of the crypto market.
Still, Wu has been known as a risk-taker since his early days, when he bet his life savings on Bitcoin. That he’s doubling down now on Bitmain—and Bitcoin mooning yet again—should come as no surprise.
Top 3 other things that happened in China this week:
#1: Justin Sun - blocked again
On Dec 12th, Justin Sun, founder of Tron, and Yi He, co-founder of Binance woke up to blocked Weibo accounts. Both have subsequently registered new accounts. Sun under the name “Justin Sun teacher” and He under the name “ Yi He auntie.”
Then the government blocked Teacher Sun and Auntie He’s new Weibo accounts a day later.
This is the first time the Chinese government has blocked individual crypto tycoons. For example, though Sun gathered much notoriety during his failed lunch date with Buffet, his Weibo account had remained intact—until now. The latest attack could be the Government’s strike to silence crypto influencers whose points of view differ with its own—Tron and Binance have not stepped up to support China’s blockchain movement, compared to their peers such as Huobi and OKEx who actively seek partnership with government.
Tron is actively reaching out to Weibo and seeking reconciliation. But even if the account gets reactivated, we might see a more cautious, and far less entertaining, Sun.
#2. DCEP’s pilot launch might not be as grand as you think
China’s digital currency DCEP is set to debut in Shenzhen and Suzhou. According to Caijing, PBOC is scheduled to run small-scale experiments in Shenzhen, the growing tech hub near Hong Kong, and in Suzhou, the city close to Hangzhou where many blockchain technical talents reside.
Observers point out that the two experiments are well beyond pilot projects and more like “internal tests.” The two cities were chosen because of the central bank’s physical location in the cities.
Despite the lack of scale, the experiments provide more clarity around the digital currency and its structure. As predicted, the central bank will partner with commercial banks who create wallet-like products and directly interface with customers. No wonder there’s an increasing surge in bank’s interest in adopting blockchain: The ones that are able to innovate the fastest will get a bigger part of the DCEP pie.
#3: Blockchain-empowered city: too many and not powerful enough
The Chinese government is good at implementing top-down policy changes. Given Xi’s announcement, blockchain enthusiasm has trickled down to the municipal level. According to a Forbes China report, there are 10 cities and 11 districts that have implemented a variety of subsidies to stimulate blockchain development.
Data shows that most cities are on the east coast of China and exist are considered “economic development zones.” The policies tend to create favorable economic terms, such as tax cuts, subsidized working space, patent subsidies, and fund-raising subsidies to attract companies. For startups, these subsidies can be substantial. In the city of Changsha, for instance, each blockchain company can get up to $3 million worth of subsidy.
Obviously, among the hottest blockchain cities with the most crypto-registered companies and talent, such as Beijing and Shenzhen, these sorts of incentives don't exist. Talent naturally gravitates to big metropolitan areas.
So will these subsidies and incentives lure people to the second-tier cities? I'm dubious. Chinese take pride in settling in booming metropolises. Those who survive in big cities are considered successful, even though often at a higher cost.
Do you know?
Leek ( 韭菜 ) , as in the onion-like vegetable, is slang in China for an unsophisticated retail investor that loses his or her money—or “gets harvested”—in later rounds of investments, both in the stock and ICO markets.
Another lesser-known term is “miner leek” ( 韭菜矿工). These are small miners who join mining when price surges. Yet as a higher number of miners and machines result in higher hash rate and therefore more difficulty in mining bitcoin, these newbies fade away once the price goes down.
[ Da Bing is a weekly round-up of the most important crypto-related news that happened in China last week.]