Chinese Miners Forced to Shut Down Their Businesses, As Cryptocurrency Prices Plummet

Omar Faridi
  • Cryptocurrency mining is no longer profitable for operators of small mining farms in China.
  • Local residents reveal they were forced to shut down their mining operations due to the extended crypto bear market.

A Chinese cryptocurrency miner with the surname Li recently revealed that he had invested “hundreds of thousands” of Chinese yuan (CNY) to purchase nearly a hundred mining rigs during the second half of 2017 - when digital currency prices reached their all-time highs.

Li also resigned from his job at a small financial firm and began focusing on his crypto mining business. As many digital asset investors have now admitted, Li had hoped to make some “quick and easy” money by mining Bitcoin (BTC).

Cryptocurrencies Drop 99% From All-Time High

However, the prices of all major cryptocurrencies have dropped drastically - with some popular crypto assets such as Nxt and Qtum losing as much as 99% of their value from the time when the market capitalization of the crypto market exceeded $800 billion (in January 2018).

Because of the huge drop in cryptocurrency prices, Li said:

By mid-June, my mining business’s profit margin had dropped by 90%. One of my friends who also mines altcoins suffered more, nearly losing all his investment.

Chinese Miner

After suffering huge financial losses, Li was forced to shut down his mining farm and he also tried to sell his mining rigs by posting an ad on an e-commerce platform for second-hand electronic hardware items.

However, Li struggled to find buyers for his expensive mining equipment as he claims to have not been able to find a party that has made a reasonable offer - even though it has now been three months since he posted the ad.

Useless Piles Of Scrap Metal

The Chinese resident also said he was only able to sell two mining machines for just 700 yuan (appr. $105). When he tried to sell the mining hardware equipment to other local electronics dealers, they also refused to take them.

At the time when Li had purchased the crypto miners, they were in very high demand and hard to get, however, he now describes them as useless piles of scrap metal that lie covered in thick layers of dust.

Another Chinese miner with the surname Ma revealed that he had to close down his mining farm as well, due to the extended crypto bear market. Ma said he then sold four of his mining rigs for only 850 yuan (appr. $125) - which is less than 25 percent of what a new machine costs.

Commenting on the significant drop in prices of mining hardware, Ma said that devices which had been introduced in early 2018 with computational [capacity] of “10 TH/s per chip” now only trade for around 1,000 yuan (appr. $150).

New Mining Equipment Cheaper Than Used Hardware

Also, mining equipment developed using newer technologies, which are now increasingly being offered by relatively small hardware manufacturers, can be purchased brand new for even cheaper rates than used equipment of equivalent computational power.

When crypto prices skyrocketed, the Chinese residents said that vendors selling digital currency miners could be found everywhere in Huaqiangbei, which is a popular electronics hub in Shenzhen, China.

A Shenzhen-based vendor said:

All of mining machines are [now] sold at a discount of 30%. If you want to buy more than one, we can offer a better price and will give you more power cables and associated accessories for free.

Chinese Vendor

Liang Sizhong, a local PC repair shop owner, said:

Mining rig retailers and miners, the sellers of second-hand miner components ... are … under tons of pressure as the price of used graphic cards [has dropped] sharply. [In most cases], we do not collect used devices for recycling.

Liang Sizhong

How Bakkt Can Bring the Crypto Space an Institutional Investor Influx

Cryptocurrency enthusiasts have for years been waiting for institutional investors to enter the space. While the introduction of bitcoin futures contracts on regulated exchanges in late 2017 didn’t gain a lot of traction, but Bakkt may.

Bakkt is a long-awaited bitcoin futures exchange and on-boarding platform from the Intercontinental Exchange (ICE) - the parent company of the New York Stock Exchange – and it’s set to launch this year. Bakkt itself has remained tight-lipped over the precise launch date after delaying its launch last year, with ICE CEO Jeff Sprecher in February simply saying “later this year.”

It’s possible that this quarter may see the launch or at least more news about when the exchange is finally coming. At the end of March, Bakkt CEO Kelly Loeffler explained:

While we’re not yet able to provide a launch date, we’re making solid progress in bringing the first physical delivery price discovery contracts for bitcoin to the U.S.

Bakkt’s launch could be a major milestone for the cryptoasset industry. A venture backed by Microsoft and Starbucks, its institutional pedigree alone will switch many cautious investors on. Specifically, the firm is set to help consumers pay for goods and services with cryptocurrencies, with Starbucks being the flagship retailer in its arsenal.

Bakkt’s Bitcoin futures contracts will be the first physically-settled derivatives on a regulated trading platform. This means investors will receive the contract’s underlying asset, bitcoin, when it expires.

Currently the Chicago Mercantile Exchange (CME) offers cash-settled bitcoin futures contracts, meaning investors get the equivalent of BTC’s value in fiat when the contracts expire. This is seen by some as a major development in the cryptocurrency space, as it shows traditional finance is willing to interact with the nascent cryptoasset industry.

It’s worth noting that earlier this year the ICE’s CEO called Bakkt a “bit of a moonshot bet,”  as it was organized in a way “very different than the way ICE typically does business.” The firm has its own offices and management team, and could undergo more rounds of financing in the future.

Bakkt And a Potential Bitcoin ETF

What’s significant about Bakkt’s launch beyond this, is that it may bolster the chances of a Bitcoin Exchange-Traded fund (ETF) being approved. Such a product would make it easier for institutional investors to gain exposure to cryptocurrencies.

In August, the US Securities and Exchange Commission (SEC) rejected nine other ETF applications, in particular highlighting how those applying hadn’t provided evidence that “bitcoin futures markets are of significant size’” for an ETF to be launched.

Once Bakkt is launched its trading volumes may very well help quell the SEC’s concerns over the bitcoin futures markets’ small size as institutions and other investors may feel comfortable entering it. Larger futures contracts trading volume, increased liquidity and a well-established company involved may prove enough to convince the SEC that the time is right for a Bitcoin ETF.

Bakkt therefore represents a very significant milestone for a maturing cryptoasset industry and may well herald the “institutional influx” that many have been anticipating since 2017. Despite the markets remaining relatively flat throughout 2019 these looming decisions in the U.S. have the power to move the entire industry forward, for better or worse.