The 2020 rainy season is tougher than ever for Chinese Bitcoin miners

This should be the best time of the year for Chinese bitcoin miners. The monsoon season, generally from June to October, brings a lot of rain and therefore cheap hydroelectricity.

But this year is different and proving tougher than ever for Chinese bitcoin miners and mining operators who are estimated to dominate 65% of the global bitcoin mining industry. Since last summer, many bitcoin mines (find out how buy Bitcoins in our guide) rushed to build new locations in China's southwestern region in anticipation of a noticeable rise in bitcoin prices following the May 2020 halving.

But the mining difficulty nearly doubled from last year's monsoon season, while block rewards have halved. This means that it is now harder to mine, and the rewards are lower.

More difficult than ever

Many miners expected the price of bitcoin to rise sharply after the halving, said Kevin Pan, CEO and co-founder of PoolIn, one of the two largest bitcoin mining pools in the world (along with F2Pool).

"In reality, not only was there not much price momentum driven by the halving, but there was the mega sell-off on March 12, which caused a large forced liquidation and losses," he said.

For two months after the halving, the price of bitcoin remained essentially static around $ 9.000. While it crossed $ 10.000 last week and now stands at around $ 11.000, it remains at a similar price level to this period in 2019.

By contrast, the network's mining difficulty rose to an all-time high two months after the halving. Without a significant price breakdown, bitcoin miners' daily earnings fell 70 percent from last year, Pan said, although the recent jump in bitcoin prices has helped improve the situation.

Tug of war

Another reason for the increase in the number of bitcoin mining companies is the push of local governments in Sichuan to establish the so-called “demonstration zone for the use of excessive hydroelectric power” since the end of last year.

Mining companies and hydroelectric power plants that choose to establish themselves in these industrial parks can generally enjoy a stable operating environment with a constant and economical energy supply.

In return, they give a portion of their profits to local governments and the Chinese State Grid, the state utility monopoly. In previous years, many mines in Sichuan and Yunnan used what is called "direct supply" electricity.

In practice, power plants sell electricity directly to mine operators without having to share the profits with other parties. Although local governments have attempted to correct that model adopted by many power plants, this has created a kind of tug-of-war between local governments, hydroelectric power plants and the State Grid, Pan said.

This tug-of-war will continue to be a risk factor for potential investors in those mining companies.