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Euromoney, May 2018

Soviet military bunkers in Kazakhstan and portable houses in Siberia linked up to the plumbing: Bitcoin mining is moving in some interesting directions that will become even more diverse as China cracks down on its domestic industry.

In a furniture store outside Irkutsk in Eastern Siberia, an anarchist in jackboots and a Che Guevera hat is showing Euromoney a bitcoin mining rig hooked up to a bathroom boiler, and expressing a hope that it might one day be used to evaporate human waste.

That is not the strangest sentence you will read in this article, and certainly not the craziest idea – in fact a very good one. But it is illustrative of some of the stranger directions takenby the nascent, entrepreneurial industry of bitcoin mining.

Mining is the process by which new bitcoin is created, and through which transactions among existing bitcoin are recorded and verified on the public ledger known as the blockchain. Miners use microprocessors to solve complex mathematical problems, and the first to do so get to place the next block on the blockchain, for which they are rewarded with newly released bitcoin.

In theory, anyone can be a miner. All you need is the right kind of processor, called an ASIC (application-specific integrated circuit). If you have the most up to date equipment then you can make money from mining, provided the revenue you generate is greater than the cost of the energy you consume in the first place. Some consider it a far better model than investing in bitcoin itself.

Today, China dominates bitcoin mining, being responsible for as much as 70% of it worldwide. That’s partly because China also leads the world in manufacturing the most efficient and cost-effective ASICs, with three companies in particular dominating the field and Bitmain Technologies, Beijing-based producer of the AntMiner processors, pre-eminent.

But China at a state level has become increasingly suspicious of bitcoin, and last year began banning the many bitcoin exchanges that had sprung up in the country. Earlier this year, it moved on to bitcoin miners too. This has taken a rather unclear form – provincial governments were told to “guide miners toward an orderly exit from the business”, as one source put it, or “actively guide companies to exit the industry” – but the outcome does appear to be some bitcoin mining operations closing, a curb on new ones opening, and others moving their operations overseas.

This article is about where bitcoin mining is going next.


There is a simple equation at the heart of bitcoinmining. In order to yield more revenue than you burn in electricity costs, you don’t just need the best processor you can find, you also need the cheapest electricity.

On top of that, you also need to consider the heat that your bitcoin mining rig is giving off. These two dynamics will inform your choice of location: ideally a cold place with cheap electricity.

In China, this rapidly led bitcoin mining operations from the coal-rich states of Shaanxi and Inner Mongolia to those with plentiful hydro, principally Sichuan. Here, the Himalaya start their descent towards the lower and flatter land to China’s east, and the rivers feed numerous hydroelectric plants.

This is the heart of the modern bitcoin mining industry – or at least it was up until the start of this year.

Were you able to get near them, at many hydro plants you might find an innocuous blue-roofed building built right on the site of the power station itself, often with cables drawing power straight from the station rather than the national grid.

Within these humble buildings, often many miles from any form of public transportation, you would find two things: lines of microprocessors, cooled incessantly by dozens of fans; and basic dormitories where workers would stay for weeks at a time, working in the dark, getting through the boredom by reasoning that there is nothing to spend their wages on and that they are at least therefore saving money.

Since many of these hydro operators are themselves private sector enterprises, the deals on electricity have been negotiated directly between power station and bitcoin miner, and in cases where those plants have excess capacity that they can’t sell to the national grid, it has made a lot of sense to sell power at a low rate to an on-site mining operation. Generally the grid prefers state-owned power stations over private-sector operators, so there has been a lot of this capacity to sell. It has worked for both sides.

There are a number of companies, venture capitalists and entrepreneurs that have driven growth in these Chinese plants, some not even formally registered as businesses.

At the more formalized end have been companies like HaoBTC, which runs (or at least ran

) mines in both Sichuan and Xinjiang. Its former chief marketing officer, Eric Mu, gave the clearest picture of life inside these mines when he wrote an account for CoinDesk, including a recollection of a time an earthquake severed the only road connecting the power station in Tibetan Sichuan to the outside world and the workers had to eat potatoes for weeks until they were rescued.

Then there are entrepr

eneurs like Ryan Xu, a Chinese-born Australian who worked as a reactor operator in a nuclear power plant before setting

up bitcoin mines, including one in Kangding, Sichuan (others have apparently included Iceland, Georgia and Washington State, as well as Inner Mongolia).

But the status of these operations is now uncertain. Xu is understood to have run at least three such plants, but bitcoin.com reported earlier this year that they had all been shut down; Euromoney was unable to reach him for comment through companies he is known to be linked with. And HaoBTC’s web site in April carried only a message in Chinese saying that “due to the recent central government regulation”, they were not providing bitcoin transactions or client registration.

There is a lot of uncertainty about what’s happening now. “I have not heard of a case where anybody has been ordered to shut down their mine, or even had their miners confiscated,” says Leonhard Weese, president of the Hong Kong Bitcoin Association. He says, though, that many are moving their mines out of the country.

“I think the more relevant point is that Bitcoin mining in China may have reached a point where it is consuming all the electricity below 2 or 3 US cents per KWh,” he says. “They can’t grow anymore, and newly produced miners are deployed in Russia, Brazil, Canada, or anywhere with cheap electricity.”


The cold-plus-cheap electricity equa

tion yields its most remarkable outcome in a cave in Kazakhstan – a former Soviet military bunker, in fact, which now houses the bitcoin mining operations of Ice Rock Mining.

Steeped in dank Cold War tunnels near a village 100 kilometres outside of Almaty, it is perhaps the perfect place for a bitcoin mine. It has a constant temperature of around 12 degrees celsius, low enough to absorb the heat from the processors without any need for additional cooling.

It is owned outright by its CEO, Mailk Murzashev – how he comes to own a Soviet military facility in a cave is a question we never quite get to ask hi

m – and so there is no rent. And he says he has negotiated a long-term electricity supply of just US$0.03 per Kwh, on a par with the very best rates we have heard of in Sichuan hydro plants. This is apparently because the mine is located in what is technically an agricultural territory and is therefore subsidized. (How long this subsidy will remain in place when the authorities realize he’s not rearing sheep but mining bitcoin, is another question we don’t get to ask him.)

Ice Rock Mining plans to have 5,000 ASICs spread through seven tunnels in this facility, and has conducted an initial coin offering linked to it.

Euromoney’s communications with Ice Rock Mining start well and steadily go downhill from there. The company’s executives, including Murzashev, are at first enthusiastic and invite us to visit the cave in Kazakhstan. Then the invitation is retracted, apparently on security grounds, to be replaced instead with a telephone or skype interview.  Shortly after that Amir Ness, a former equity trader who has been handling the group’s PR, leaves; when Euromoney reaches him on the phone he says that he has become uncomfortable that the right KYC processes have not been established and don’t look like moving forward anytime soon.

“They’re not bad people, they’re doing everything they said they would do,” he says. “They’re just doing it in a way I don’t agree with, both in terms of the language on the web site and in having told me they were going to put KYC in place.” He insists, though, that the mining operation is legitimate.

He then goes into more detail in a half-hour interview on Youtube published on March 19. “There wasn’t a strong focus on compliance, and I was OK with that in the beginning. But as things got bigger and bigger I realized, no, we’ve got to have that in place,” he says.

He says things came to a head when he started speaking about the venture in the US, generating interest with investors there and bringing KYC and AML standards to the foreground. “I saw that it wasn’t changing: that’s part of the management style and I’m not going to be able to do anything about it.” He also expressed concern about apparent guarantees of returns on the website, which “put a number like 400% and come up with an answer that somehow seems to make sense that doesn’t.” He remains an investor in the project but no longer represents it.

Euromoney visits Almaty in March and makes a last attempt to contact Murzashev for an interview but in the end is unable to reach him, nor to verify anything the company claims to be doing.

And so, to find the timezone’s new cutting edge of bitcoin mining, we must head further north: to Siberia.


Kazakhstan might have the most thriller-movie location, but for characters there is only one place to be: Irkutsk, Siberia.

“We call it the crypto-capital of the Russian federation,” says Yuri Dromashko, who runs a bitcoin farm here having turned to the industry after running a book-keeping office for more than 15 years and, at various stages, property investments and a karaoke bar.

Irkutsk is another example of the perfect confluence of climate and energy availability: it has the cheapest electricity in Russia, much of it sourced from hydro from the dam between nearby Lake Baikal and the Angara river that links it to the city.

Residents, as opposed to commercial businesses, pay around one ruble per kilowatt hour – less than two US cents. And it is constantly fr

eezing: the average year-round temperature is zero Celsius and Baikal will still be frozen well into May.

Dromashko first heard about bitcoin over the radio in about 2011 and has regretted ever since that he didn’t jump right in. Instead he got started 18 months ago and now has two parts to his business: his own mining operation, using Chinese processors, and a farm which handles not just his own processors but those for other miners.

He’s far from alone. “My farm is not the biggest in Irkutsk, I should note,” he says. “Mining is really accessible to every circle of society here.” His farm consumes about 2 megawatts per hour, he says. “It’s a really profitable business. It’s amazing how fast it can bring money in.

“The situation for small scale businesses in the Russian federation is not so positive,” he says, speaking from experience. “It’s very hard to do business in Russia now, and very hard to gain rewards. But for

mining, people are very happy. They have huge revenues: you can gain back all the money you have invested in a mining firm within three months.”

The most memorable people we meet in the whole industry are the interesting combination of a Che-styled furniture magnate called Dmitry Tolmachev – the man from our opening paragraph – and a computer-minded businessman called Ilya Frolov.

The two knew one another at school in Irkutsk, but led different lives. Tolmachev, a self-styled anarchist but with a clear entrepreneurial zest, started out in business after the collapse of the Soviet Union, importing goods from Turkey, China and anywhere else he could find something the country needed. Then for 20 years he specialized in furniture production, still his main business: he has a multi-floor furniture showroom outside of Irkutsk reminiscent of any such store, except with Che iconography all over it and an art gallery next to the café where local artists can exhibit for free.

Frolov, meanwhile, worked for multinationals all over the world, from Coca-Cola to Caterpillar, the pump industry to Spanish olive oil. He spent three years in China working for Ikea before coming back to Irkutsk in 2013, where he set up a consultancy and really began to study bitcoin and blockchain technologies.

The two were brought together by a simple idea. Why not use the heat generated by bitcoin mining to warm homes? That way the heat emissions, considered a problem in most bitcoin mining, serve a purpose and further reduce costs. Why not rig the bitcoin rigs to a boiler – a crypto-boiler, Tolmachev calls it – so that in addition to gaining revenue from mining, the heating bill is taken care of?

Tolmachev shows Euromoney a number of demonstration homes. They are small – some so small as to be portable – but well-made, with room for bitcoin processors in areas such as bathroom cupboards, linked to a central heating system. “In our Siberian climate, we decided to use the heat for our houses, not to just waste it as a by-product,” he says.

In one modest 16 square metre room, the processor that heats it brings in about $350 of revenue per month when bitcoin’s price is around the $9,000 level (it was obviously a lot more when it was worth $20,000 per coin). “Normally you spend money when you have to heat your house,” he says. “In this case, you spend no money, but you gain money.” The set-up is linked to an app showing the progress of mining, revenue, electricity use and supply, strength of internet connection and so on.

Customers can buy a house with a processor, or just the house and put their own processor in it. Some house models he shows us cost as little as $5,000-$8000; these are portable homes, which sounds strange, but is actually quite commonplace in this part of Russia, where people will put a cabin on the back of a truck and transport it to the Baikal lakeside, one of the world’s most beautiful places.

The strong environmental agenda around Baikal, which is truly pristine, has led Tolmachev to some more far-sighted ideas for what one might do with bitcoin. Anyone who takes their house to Lake Baikal is going to produce waste; Tolmachev thinks mining heat could be used to evaporate and ignite it.

“You can use bitcoin to sort out your excrement,” he says.

There’s always the question what to do with the heat during the warm season, which most people in Irkutsk are at pains to point out barely even exists. “Our heating season [ie when heating is necessary] is nine months,” says Tolmachev. “In the summer we can use it for greenhouses and swimming pools.”

One of the reasons the model works and is gaining traction is because it enables the individual to take part in mining – indeed, the lack of corporate standing is essential to the model, since industry pays up to four times more for electricity than private citizens.

“There is a simple business model,” says Frolov. “You buy the home [and processor] yourself using your own money, and get the heat as a complement. You mine some bitcoins which give you investment returns to pay the house and the equipment. We promote the idea that the house will pay the mortgage by itself: there’s no need to be a slave to the bank for 10 years, like I am right now.”

The individual model will also help if Russia decides to crack down on miners as China has done. A home is much harder for the state to intrude upon on than a big farm, says Frolov. He knows Dromashko and says he told him: “Don’t mine in one place, because you don’t know what will happen tomorrow. They can visit you and unplug you or whatever.

“But when you have private houses it’s my business, I’m just using it to heat my house. This computer? It’s a heater.

“First they have to get into your house, and to do that they have to find it, and they have to prove it is not a heater.”

Irkutsk’s quirky bitcoin mining industry attracts a confrontational, free-thinking, libertarian crowd. Tolmachev wears his attitudes on his sleeve in his Che hat, long hair and head-to-toe black clothing. “Che was a person who didn’t want to have money but had everything,” he says. “He was not a Communist, he was a Marxist. His image helped me in Putin’s Russia.

“Policemen and other administrative personalities do not like my outlook,” he adds. “I live in the system but I protest against the system. That is why Che Guevera: life is a fight.”

It really has been a fight. In 2011 people burned his shop to the ground. And last November he spent five days in jail after inviting Russian opposition leader Alexey Navelny to his home.

So for someone like Tolmachev, the original libertarian ideals of bitcoin clearly strike a chord. “I am like this too: an anarchist. All nations are the same,” he says.

Frolov is less of a revolutionary, but a great believer in the possibilities of cryptocurrencies. “I see the potential, I really like the people involved. I’m so excited by what I see, how the horizons are opening,” he says.

He’s also practical. “I don’t know what the future of bitcoin mining is but I know what the future of heating is. I’m 100% sure that the need for heating in Siberia will be forever.”

Dromashko, too, is a big believer in bitcoins ideals. “Bitcoin will take its place in the global economic system,” he says. “And if bitcoin has a future than mining has a future too.

“The idea of a decentralized system is great. I’m a citizen and I do not like it when government or other authorities control my money transactions and try to limit my freedoms.”


Naturally, alongside this grass-roots individual opportunism is a more corporatized approach to bitcoin mining, and this finds its clearest expression outside of Asia Pacific, with Canada and Sweden among the leaders.

Miner One, for example, is a crowdfunded cryptocurrency mining company which has set up its mining operations in Luleå, Sweden, close to the Arctic Circle. Luleå is also home to the so-called Node Pole, a hub built specifically to support the cloud industry and data centres, but also a natural home for bitcoin mining operations: just like Irkutsk it has a cold climate and plentiful green energy. Pranas Slusnys, the CEO of Miner One, tells Euromoney he’s already seeing Chinese bitcoin mining companies setting up nearby.

Slusnys believes that bitcoin mining is getting a lot harder to make money from, and is calculating that this will be to the advantage of professional operations like his as more players drop out.

There are clear arguments supporting his view that mining is becoming tougher. For a start, there are conditions hardwired into bitcoin that limit the number of tokens that can ever be mined –  a maximum of just under 21 million of which about 16.7 million are already in circulation. Additionally, roughly every four years, the rewards for bitcoin mining halve: where originally mining a block of bitcoin yielded 50 bitcoins, today it yields 12.5 bitcoins.

And the calculations required to mine bitcoins are getting steadily harder, increasing the level of energy consumption per coin gained. This difficulty level adjusts itself according to the amount of computational power that is being employed, in order to keep the rate of new block discovery constant; it adjusts after every 2016 blocks, which is roughly every two weeks.

“That all means you are getting less profit for the same equipment,” says Slusnys. “So we can expect that when the bitcoin price is decreasing and the difficulty is increasing, only the best mining operations from the most efficient operators will stay in the business.

“For the rest of them, it will no longer be profitable to stay in the business.”

A company like Miner One benefits from the fact that Sweden seems to be right on board with promoting itself as a centre, if not for bitcoin mining explicitly then certainly for data centres. This contrasts with China, which is clearly moving against bitcoin miners, and Russia, where operators fear that it might do so.

Slusnys says companies like his receive a discount on tax as a data centre operation. And Node Pole is not some out-of-nowhere hipster start-up but is owned by Sweden’s utility companies Vattenfall and Skellefteå Kraft.

Sweden is also quite happy to accept Chinese investment. Magnus Wikman, the CEO of Node Pole, points to Chinese tech company Canaan Creative, which has set up within the Boden Business Park, part of the same overall cluster. Canaan’s CEO NG Zhang says in a statement that “we came to the conclusion that Boden is the best location for us to drive blockchain technology to the next level.”

“Sweden seems very open to bitcoin mining and in general is rolling out the red carpet,” sasy Slusnys. “Facebook is up there, Hydro66 [a date centre provider]. I think Sweden is one of the leading countries in its support of data centres, and of cryptocurrencies.”

That’s probably true. But it doesn’t have the Soviet bunkers or the plumbing-rigged processors. Bitcoin mining, for the moment, has room for many different approaches.


Chris Wright
Chris Wright
Chris is a journalist specialising in business and financial journalism across Asia, Australia and the Middle East. He is Asia editor for Euromoney magazine and has written for publications including the Financial Times, Institutional Investor, Forbes, Asiamoney, the Australian Financial Review, Discovery Channel Magazine, Qantas: The Australian Way and BRW. He is the author of No More Worlds to Conquer, published by HarperCollins.

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