Most Bitcoin mining operations are in China. As of July 2017, it is estimated that almost 70 percent of all Bitcoin mining is located in China.
Cryptocurrency mining, like other forms of businesses, needs capital to start and runs at an operation cost. Briefly, the startup cost includes the building, facilities and mining equipment.
On the other hand, the operation cost primarily includes electricity consumption, Internet bandwidth, manpower, equipment wear and tear and facilities maintenance.
Cheap electricity and mining machines are the two most critical factors for why mining operations are now thriving in China.
Cheap coal and massive hydroelectric power
It is not surprising that China is leading the world in cryptocurrency mining as its electricity tariff is one of the lowest in the world. Electricity in China is mainly generated by coal, which accounted for 57 percent of the total production and secondly by hydroelectric power - 20 percent.
With China being the world’s third largest coal reserve and coal being the cheapest source of power among the fossil fuels, electricity production costs a lot less than other parts of the world.
However, coal power is not the main source of power that is fuelling cryptocurrency mining, hydroelectric power is.
The largest concentration of miners are located in Sichuan China, estimated to be about 30 percent of the total. In Sichuan, hydroelectric makes up 79.5 percent of the total electricity capacity while fossil fuel makes 19.5 percent and it runs only during dry seasons. In wet seasons, Sichuan energy production exceeds consumption.
As of today, electricity in Sichuan costs around $0.08 to $0.09/kWh for commercial and industrial consumption.
Running a mining plant
A reporter from National Business Daily visited a mining operation and reported:
“The mining operation owned by a company called TianJia WangLuo located inside BaJiaoQi hydroelectric power plant has over 5,800 mining machines totaling more than 40 petahashes of processing power. The mining yields around 27 coins daily. This plant uses 7,000 units of energy an hour, amounting to 168,000 units of energy (kWh) a day, as the national average cost of electricity is about RMB 0.40 ($0.06) a unit, the cost of electricity for the plant is around RMB 6,720 ($1,000) a day.”
The cost of setting up the mining operation is by no means small. According to the plant supervisor, Mr. Lei, the company spent more than RMB five mln ($750,000) to build the plant.
The costs of the mining equipment aren’t small either. Each mining machine costs around RMB 10,000 ($1,500). In total, the capital investment was more than RMB 60 mln ($9 mln).
“This huge investment isn’t borne solely by the company as that is impossible. In fact, some of these machines don’t belong to the company; we operate them on behalf of others. For example, you buy a few machines and give them to me, I operate them for you, and in return, I receive a fixed service charge. In this way, the capital cost can be reduced and so is the risk,” Mr. Lei explained to the reporters.
How much can be earned?
The reporter estimated that this operation has a revenue of over RMB two mln a year. However, the net profit should take into consideration factors such as market price fluctuation, future halving of a number of coins and the changing of difficulty in mining.
The coin that is mined will eventually be traded in the market and cashed at certain time. Thus, the market price will determine how much the net profit is.
Mr. Lei also explained that for his operation, they sell only enough coin to cover their expenses. The surplus is kept for future as this is the long term strategy for his company. He also mentioned that not all mining companies follow this practice.
“In 2013, electricity tariff was high at RMB 0.70 ($0.10) to RMB 0.80 ($0.12) per unit, but at the same time, Bitcoin price was also high, around RMB 8,000 ($1,196). Many mining operations survived the high electricity cost but in 2015, the price fell to RMB 900 ($135), many mining operations closed down. It was a very bad time for the business,” Mr. Lei recalled.
Mr. Lei further told the reporter that the profit usually depends on changing factors but if things were stable and stayed the way they are as of now and you buy a machine, it takes about eight to nine months of continuously running to get the return back.
As a matter of fact, any businesses that have a return on investment of less than a year is considered very good.
“Like ore miners, our jobs are tough, but the people who make big profits are definitely not the miners. In our field, the logic is as the same (as ore mining). The ones who earn the most are the machine sellers and ore traders,” said Mr Lei.
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