Bitcoin mining crackdown in China is a boon for Texas

John King knew his small town of Rockdale, Texas, had landed on the global crypto map when three Chinese bitcoin miners showed up at City Hall unannounced this summer.

Then came the phone calls to the city’s Chamber of Commerce, from investors asking about power hookups, to connect mining equipment they planned to ship from China. None had ever stepped foot inside the rural Texas community, with a population of roughly 5,600 people.

“I didn't have any inkling [about what was happening in China] until my first phone call,” King said. “But there are lots of smaller miners that are pulling together and trying to come over here now.”

The interest, sparked by a crypto mining crackdown in China is poised to give Rockdale a significant lift, as miners scan the globe for new opportunities, setting off an exodus dubbed “the great bitcoin mining migration.” From neighboring Kazakhstan to Canada and the United States, Chinese players are scrambling to find real estate to rehouse their data servers, shifting the crypto power dynamic away from a country that’s long been home to more than half of the world’s bitcoin miners.

“Demand is much larger than the supply because now, all of our capacities are gone. We are building one more data center that will be deployed in October and it's already booked,” said Didar Bekbauov, founder of Xive, which helps miners relocate to Kazakhstan. “I think every spare kilowatt in Kazakhstan is already booked. Right now a lot of Chinese are reaching us like every day asking for capacities. It’s kind of a crazy market.”

Key drivers for mining migration

Cheap electricity has become a key driver in the migration, largely because the crypto mining process where new coins are entered into circulation, consumes enormous amounts of energy. The Cambridge Center for Alternative Finance (CCAF) estimates energy usage to total roughly 110 Terawatt Hours per year, roughly equivalent to the annual energy consumed by small countries like Sweden or Malaysia.

The state of Texas provides an attractive alternative with some of the world’s cheapest energy prices, in part, because the state’s deregulated power grid allows providers to choose between providers. The cost of electricity is roughly a quarter of where it is elsewhere in the country, according to Riot Blockchain CEO Jason Les, who recently acquired Whinstone U.S. just outside of Rockdale, the owner and operator of the largest bitcoin mining and hosting facility in North America.

Les said the structure of the Texas grid allows bitcoin miners to “act like a virtual power plant” by securing long term power purchase agreements up front, with the flexibility to sell some of that power back to the grid, when the market price of energy becomes very high during peak demand.

“It's kind of an economic calculation for miners. They see, ‘oh wow, the price of energy is going up’ so not only does it not make sense for me to mine bitcoin anymore, but it actually makes sense for me to take the power that I own and sell that back to the grid,” Les said. “When you have intermittent generation sources like wind and solar, loads like Bitcoin mining help provide that reliable demand."

That increasing abundance of renewable energy has also contributed to the boon, as miners face scrutiny over their carbon footprint. Roughly 20% of Texas’s energy is generated by wind power, though fossil-fuel generated natural gas accounts for nearly half of the energy mix.

“It really depends on the company itself. If a company comes into Texas and they start mining bitcoin, they can choose to buy all of their power from renewables if they want to,” said Josh Rhodes, a research associate at the University of Texas at Austin Energy Institute. “If they just go by what is on the market... about half of their power on the system just writ large is going to come from fossil fuels.”

Capitalizing on the exodus

Shenzhen-based BIT Mining has already invested $26 million in a 57-megawatt data center in Texas, according to Nikkei Asia, while Beijing-based Bitmain is planning to expand capacity at its Rockdale facility by 20,000 additional servers, according to King.

Whinstone is looking to capitalize on the mining rush, by adding an additional 400 megawatts to its facility or 200,000 servers total, to potentially host other miners coming into the market.

“We have been talking to a number of people and we're seeing what the hosting market looks like,” Les said. “What we're focused on is building capacity at that site, to kind of leave ourselves optionality there.”

Lawmakers have moved aggressively to take advantage of the exodus as well. Earlier this year, Texas Governor Greg Abbott signed a law to establish a legal framework for cyptocurrency investments in the state. In a subsequent tweet, Abbott declared that “blockchain is a booming industry Texas needs to be involved in.”

Viability of the power grid

For all of the excitement around Texas’ bitcoin boom, there are concerns about the impact the accompanying energy usage is likely to have on the state’s infrastructure, which suffered major power outages during peak usage this winter.

Rhodes conducted a study on the grid’s ability to withstand demand through 2035, and said much of the viability concerns largely depends on the miners’ ability to remain flexible and shut down operations during peak demand.

That flexibility can also lead to a lower carbon footprint, according to Rhodes.

“If they're not flexible and they just run 24-7, they increase carbon emissions on the grid because we're using more energy, and some of the energy that was produced in Texas is made from coal and natural gas,” he said. “If they're willing to be flexible, if they're willing to dial their usage down roughly 20% over the year at key times that it can actually reduce in net, negative carbon emissions. Because the grid builds a lot of wind and solar to handle the energy that these data centers or these mining facilities would want to consume.”

Back in Rockdale, King said the city is struggling to keep up with demand. The city can’t build out power substations quick enough, to distribute the electricity, as miners continue to take up real estate in his town.

“All of the power stations are taken up. There's no place to immediately hook on to the power lines without building a substation and that's where the holdup is going to be,” King said. “It's nobody's fault. It's because it wasn't anticipated that this was coming.”

Still, King is betting Rockdale’s future on crypto mining’s success, in part because he said there is no real alternative. The town built its fortune on aluminum for decades, as home to Alcoa’s largest smelting operation. It’s struggled to find a replacement, since production ceased operations seven years ago.

“We don't have an industry left here,” said King, who recently enrolled in an online MIT course to learn more about the blockchain. “We're welcoming the possibility of industry here of any sort, but I think, based on what's going on I think technology is where we're going to end up being.”

Akiko Fujita is an anchor and reporter for Yahoo Finance. Follow her on Twitter @AkikoFujita

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