Inside a metal shed in the Tibetan highlands of western China, thousands of microprocessors flank narrow corridors, generating a constant hum and stifling waves of heat.
Outside, the sky is clear and blue, with a mountain peak looming at the top of a narrow wooded valley. A flock of goats ambles idly past a pile of discarded foam packaging. Inside, though, tranquility is transformed into clamor. Red, blue and green lights constantly flash; cooling water trickles down the walls, and large ventilation fans thrum as they struggle to shift the hot air produced by all this concentrated computing power.
This is a bitcoin “mine,” the engine room of the world’s leading digital currency. The microprocessors here approve and record all the transactions that keep the bitcoin system running. They also compete to solve complex mathematical problems and are rewarded with bitcoins: That’s a way of putting fresh digital currency into circulation and incentivizing more people to set up “mining” operations.
Bitcoin began as a utopian, libertarian dream, a decentralized currency outside the control of governments, a system that gives its users the anonymity of cash and the instant, global power of email. This was a system built not just for convenience but also for those who can’t bring themselves to trust the global financial system, created by a programmer whose identity remains a mystery.
Across Tibet, China is busy pulling mineral resources out of the ground; there is even a gold mine close by. But here in Kongyu, most of the mining is virtual. It is here because of extremely cheap hydropower, cheap wages — and perhaps because Chinese entrepreneurs have a knack for the business.
For a while, bitcoin was effectively kidnapped by drug dealers, becoming the anonymous payment backbone of the Silk Road, a black market in illegal drugs that flourished on the dark Net — until the FBI closed that market down in 2013.
Today it is an industry that is starting to come of age, but whose center of gravity has shifted to China, and away from utopian dreamers toward venture capitalists.
“When bitcoin was invented, the people dedicated to it were mostly crypto-punks and libertarians,” said Eric Mu, the chief marketing officer with HaoBTC, which operates the bitcoin “mine” in this township in China’s western Sichuan province. “Now they are more like bankers and lawyers who see opportunities the industry. And as they join, the industry is changing.”
In this case, changing also means moving to China.
Today, mines run by Chinese companies account for around 70 percent of the world’s bitcoin processing power, its factories produce the cheapest microprocessors to run these mines, and its exchanges account for roughly 70 percent of the world’s bitcoin trade.
It is increasingly big business. Altogether there around more than 15 million bitcoin in existence: Each is worth $615 at current prices, with a market capitalization of $9.2 billion.
For some, Chinese domination of an industry once controlled by libertarian crypto-punks is a rich irony. For others, it is more practical threat: Chinese miners, some argued, have been standing in the way of reforms needed to speed up transaction speeds on bitcoin’s fast-expanding network of users.
But those concerns might be overblown.
“Some people in the Western world were painting Chinese miners with too broad a brush,” said Emin Gün Sirer, a computer science professor at Cornell University. “It’s not the case that all Chinese miners are part of the same enterprise or are colluding.”
But Sirer identifies one risk with the concentration of mining power here: If the Chinese government wanted, it could in theory crack down on miners and force them to block certain bitcoin accounts.
“They would not be able to usurp funds, but they could stop the motion of funds,” he said, describing exactly the sort of government control bitcoin was supposed to guard against.
These are concerns that have parallels with the way China is using its digital market power to reshape the Internet and influence the global debate about censorship and surveillance.
But here, in the mountains of Sichuan, it is hard to see much evidence of a Chinese plot to bring bitcoin to heel.
So far, the Chinese government has employed a fairly light touch. Although it banned banks from taking part in bitcoin trading in 2013, it left ordinary people free to buy and trade the crypto-currency, and miners free to operate.
The industry is run by a disparate mix of investors and dreamers, and manned by electricians and IT experts. There are people like Ryan Xu, an infectiously enthusiastic Chinese-born Australian who first became interested in libertarian economics while working as a reactor operator in a nuclear power plant. He now describes himself as “both a utopian and a venture capitalist.”
“We need to foresee the next five or 10 years,” he said in a wide-ranging conversation over dinner in the western city of Kanding. “All the governments are printing money and diluting people’s wealth. Is that justice or robbery? The financial system also keeps crashing every five or 10 years. I think that’s an illness in the monetary system and it needs a cure.”
He says he is not sure bitcoin is the answer, but it is at least an experiment that might work.
So why China?
Running microprocessors sucks electricity. Competition is intense and profit margins are narrow: Xu has moved his mines around the world in search of the cheapest power, from Iceland to Georgia, and then to Washington state, from the coal fields of China’s northern Inner Mongolia province and now to the mountains of Sichuan.
His latest mine is still under construction, between a hydroelectric power plant and the concrete shell of a disused power transmission station, between Kongyu and the city of Kanding.
As China’s economy boomed, private companies set up hydroelectric plants in western Sichuan; then, as the economy slowed, they found themselves unable to sell to the national grid, elbowed out of the market by more politically powerful state-owned firms.
“It took a lot of money to build the plants, but it doesn’t cost that much to maintain them,” said HaoBTC’s Mu. “So it makes sense for them to sell the power to anyone willing to buy, even at a low rate.”
Maintenance staff are cheaper here than in the West. Mu says his company employs 10 people at three mines in the mountains, paying them around 6,000 yuan ($900) a month, a “decent salary” for this part of the world. HaoBTC runs one other mine in Sichuan and one farther west in Xinjiang, with more than 11,000 machines, earning more than 80 bitcoin a day — a daily income stream worth more than $45,000.
But it is not only Chinese entrepreneurs who have taken to bitcoin. Deprived of good investment opportunities at home, and burned by a volatile stock market, a growing number of Chinese people have begun speculating and investing in bitcoin.
Bobby Lee, a former Silicon Valley engineer who founded China’s first bitcoin exchange, BTCC, attributes it partly to a natural instinct to buy and sell.
“If you look at Las Vegas or Macau or casinos worldwide, how come most of the clientele are of Asian descent, or Chinese specifically?” he asked. “It has to do with some cultural instinct. Chinese people like to gamble.”
Yet as bitcoin matures, it is also experiencing some significant growing pains.
On Aug. 2, the Bitfinex exchange in Hong Kong was forced to admit that hackers had stolen nearly 120,000 bitcoin worth $72 million from customers’ accounts. That news caused the bitcoin price to fall by more than 20 percent, and underlined the safety concerns that many ordinary people feel about owning digital money.
At the same time, the system is showing signs of overloading. Bitcoin’s current technology can only process around three digital transactions a second — minuscule compared to the roughly 24,000 transactions per second that Visa can manage.
Delays in processing transactions have grown, as have transaction fees, and the industry has become deeply divided about how to reform the system to solve the problem.
Jeff Garzik, a leading bitcoin developer based in Atlanta, argues that a technological fix is in the pipeline that will allow soon bitcoin to process tens of thousands of transactions a second.
“I think that with new technologies coming down the pipeline, it can scale up to everyone buying their coffee with bitcoin in the entire world,” he said. “It really can be the first really good substitute for physical in-your-hand cash.”
Like Sirer, he isn’t too worried about the current concentration of mining power in China, partly because the market is so dynamic and the dominant players change every year.
“It’s much easier to challenge the dominant players in this space because market entry is so easy,” he said. “If the Chinese miners suddenly power off their rigs, within 24 hours we’ll see the emergence of another competitor.”
Here in the mountains, miners while away while away their free time playing mah-jongg or poker, smoking cigarettes or surfing on their smartphones. Site manager Guo Hua used to run a small camera repair shop, and still likes fiddling around with machines. Marketing manager Mu, who spends only a few weeks of the year here, likes to translate books in his free time, or run to the nearest town to buy cigarettes for his colleagues. Sometimes he hikes into the mountains, toward a remote Tibetan village or a looming peak, a welcome change of change of pace from Beijing and its polluted air.
And all the time, the microprocessors keep on running.
Xu Yangjingjing contributed to this report.