(Bloomberg) -- For years, a Chinese company has dominated one of the most lucrative corners of the cryptocurrency universe. Rising political tensions, and the prospect of Donald Trump retaking the White House, pose an unprecedented threat to that reign.
Beijing-based Bitmain Technologies Ltd. has a 90% share of the market for computers used to mine Bitcoin. One top customer likens it to diamond producer De Beers at its height: so powerful that it can dictate global prices just by adjusting the output of its machines.
But with former president and China hawk Trump saying he wants Bitcoin to be “mined, minted and made” in the US, upstart rivals see an opportunity to finally wrest business from Bitmain. Some are leaning hard into the narrative that miners will do well to diversify their supply to hedge against geopolitical risk.
Trump’s rhetoric adds to an already worsening political environment for Bitmain in the US, where most Bitcoin is mined nowadays and concerns are rising that the equipment could be used for spying.
There are many reasons why Trump may “want to challenge a scenario where there’s a single dominant company that is a Chinese company in this space,” including national security concerns, said Rajiv Khemani, chief executive of California-based startup Auradine, a Bitmain rival.
The new dynamic is already playing out in the market. In July, Austin, Texas-based Bitcoin miner Core Scientific Inc. broke with tradition and announced an order from a unit of Jack Dorsey’s Block Inc. — even though Bitmain is one of its biggest investors.
California-based Auradine raised $80 million in April and shipped its first mining machines in late July. It counts Marathon Digital Holdings Inc., one of Bitmain’s largest clients, among its shareholders.
Bitmain declined to respond to questions from Bloomberg News.
When someone “mines” a Bitcoin, what they’re really doing is using specialized computing equipment to solve an enormously complicated mathematical puzzle. To get there, the machines (known colloquially as “rigs”) essentially use brute force by throwing trillions of guesses per second at the problem. Each successful attempt helps support the blockchain and is rewarded with Bitcoin.
Using a car analogy, mining rigs are akin to drag racers: immensely powerful and built for a narrowly defined purpose. They also gobble up power, accounting for about 0.6% of the world’s electricity consumption last year, according to the Cambridge Center for Alternative Finance.
As a result, the economics of Bitcoin mining largely boils down to the token’s price, access to cheap electricity and having the most efficient rigs.
Bitmain was founded in 2013 by Micree Zhan and Jihan Wu, according to a 2018 prospectus for a subsequently scrapped listing in Hong Kong. The company’s LinkedIn page says it is headquartered in Beijing.
From its early days, Bitmain set itself apart by offering powerful, reliable machines — and then constantly upgrading its signature Antminers to stay ahead of the competition.
“When they launch a new machine, it resets the competitive dynamic in the marketplace,” said Fred Thiel, CEO of Marathon Digital. “The people that get access to that have a competitive advantage immediately.”
Seeking to stave off the threat of tariffs, Bitmain shifted some production from China to Southeast Asia years ago, according to a distributor. Trump in 2018 imposed tariffs on electronics and other goods imported from China.
The company doesn’t currently have any US-based manufacturing, four people with knowledge of the matter said, asking not to be identified to avoid jeopardizing business relationships. It has production lines in Indonesia, Malaysia and Thailand, according to Taras Kulyk, CEO of Synteq Digital, a distributor of Bitmain equipment.
But even the production moves, and the competitive moat Bitmain built around itself, may not be enough to shield it in an era of increased competition and souring relations between the two top superpowers.
The shift of Bitcoin mining to the US — after China banned it — coincided with intensified US efforts to keep its geopolitical rival from obtaining the most advanced computing equipment, such as chips used to power artificial intelligence. This fight for chip supremacy is roiling entire supply chains. And it’s leading to more scrutiny of who’s mining cryptocurrency on US soil, and where the hardware comes from.
In May, President Joe Biden ordered a Chinese Bitcoin mining company called MineOne to vacate and sell a 12-acre property near Cheyenne, Wyoming.
One of the reasons was the presence of “specialized and foreign-sourced equipment” used to mine cryptocurrency — but “potentially capable of facilitating surveillance and espionage activities,” the Committee on Foreign Investment in the United States said in a statement at the time.
‘Generalized Concern’
At a July 25 hearing of the Senate Committee on Banking, Housing and Urban Affairs, Democratic Senator Elizabeth Warren pressed Treasury Department official Paul Rosen on whether the mining equipment at the North Range facility could have been used to spy on US military operations.
“There is a generalized concern that sophisticated equipment in proximity to sensitive facilities can be used for espionage,” Rosen, the assistant secretary for investment security, replied. The North Range site is near the F.E. Warren Air Force Base, which houses US nuclear missiles.
Rosen, who runs CFIUS, didn’t elaborate on how crypto mining machines could be used for spying, and the May announcement didn’t mention Bitmain. The Treasury Department declined to comment further. The US hasn’t presented any public evidence that mining rigs have been used for espionage.
Even so, MineOne was ordered to remove all equipment from the site in addition to vacating the property. Most of the rigs came from Bitmain, according to a person with direct knowledge of the matter.
Peeking Inside Rigs
MineOne agreed to sell its North Range and Campstool mining facilities in Wyoming to CleanSpark Inc. The company, which calls itself “America’s Bitcoin Miner,” was seeking a home for hundreds of millions of dollars worth of rigs it had agreed to buy in January — all from Bitmain.
That contract, with Bitmain Technologies Delaware Ltd., stipulates that all equipment “shall have a country of origin other than China” or any Office of Foreign Assets Control-sanctioned nation. It also gives CleanSpark the right to reject any products found to originate from China or OFAC-sanctioned countries, in which case Bitmain must replace them with identical machines manufactured elsewhere, the filing shows.
“That’s really important for us,” said CleanSpark CEO Zach Bradford. “Not just for the tariffs, but with the political situation being what it is.”
Bradford, however, scoffed at the notion that mining rigs can be used for spying. “There is no memory, there is nothing on these units that could actually be used for espionage,” he said.
Sphere 3D Corp., a crypto miner based in Connecticut which bought all its roughly 12,000 rigs from Bitmain, unwittingly got embroiled in the US-China tensions some two years ago.
A scaled-back order for Antminer machines was transferred to US-listed Bitfufu Inc., in which Bitmain owns a 41% stake, for distribution. Then, a paperwork error interrupted the shipment of 4,000 rigs, according to Sphere 3D CEO Patricia Trompeter.
Customs officers seeking to establish the equipment’s origins pried open one unit and found a tiny “made in China” tag inside, she said. The gear was held for three months until Bitmain helped resolve the issue, according to Trompeter, who declined to say how. “That was a very tough period for my company.”
Bitfufu declined to comment, as did US Customs.
Complicating matters further is the possible return to power of Trump, a crypto skeptic during his first term who has become an industry champion after a wave of donations from prominent digital-asset figures.
Speaking at a Bitcoin conference in Nashville, Tennessee, on July 27 in front of a rapturous crowd, Trump called for crypto to be “mined, minted and made” in the US. In a June interview with Bloomberg Businessweek, he framed it as necessary to stave off China — notwithstanding that country’s sweeping ban on cryptocurrencies, which includes mining. “If we don’t do it, China is going to figure it out, and China’s going to have it — or somebody else,” he said.
Trump hasn’t commented publicly about Bitmain, or whether he considers mining rigs made in China or elsewhere a potential national security threat. But signs abound that his “made in the USA” calls are starting to resonate.
Riot Blockchain Inc., which as of two years ago only used Bitmain machines, has placed hundreds of millions of dollars of orders with another Chinese manufacturer, MicroBT, since June 2023.
Riot’s purchase agreements are with MicroBT’s “onshore manufacturing sites within the US,” according to a Riot spokesperson. That gives it greater control of the supply chain, the spokesperson said.
For many miners, however, all this supply-chain reshuffling fails to address an uncomfortable fact: Bitmain’s rigs remain the gold standard.
“My reaction to people when they say you shouldn’t be buying Chinese machines, I say — because I’m a businesswoman — great, give me an alternative that’s equal or better that’s US-made,” Sphere 3D’s Trompeter said. “If I’m a Bitcoin miner and I need to be efficient, Bitmain has the most efficient machines.”
--With assistance from Kiuyan Wong.
©2024 Bloomberg L.P.