Inside China’s underground crypto mining operation, where people are risking it all to

Kirk is mining for bitcoin in the Chinese province of Sichuan, hoping every day that he doesn’t get caught by the authorities. 

Like other crypto miners who have gone underground since Beijing cracked down on the industry earlier this year, Kirk — who asked only to be identified by his nickname to ensure his safety — is getting creative to evade detection. 

Kirk has spread his mining equipment across multiple sites so that no one operation stands out on the country’s electrical grid. He has also gone “behind the meter,” drawing electricity directly from small, local power sources that are not connected to the larger grid, such as dams. He’s taken steps to conceal his geographic digital footprint, as well.

Kirk tells CNBC that he is used to “getting around things” when it comes to running a business in China, but the last six months have really raised the stakes. 

“We never know to what extent our government will try to crack down…to wipe us out,” Kirk said.

Kirk is not alone. 

Although Beijing exiled its crypto miners in May and then doubled down on its mining ban in September and again in November, multiple sources tell CNBC that as much as 20% of all the world’s bitcoin miners remain in China. This is well off its peak of around 65% to 75% of the global market, but it is substantially more than an official estimate from Cambridge University that puts China’s current share at 0%. 

Data from Chinese cybersecurity company Qihoo 360 shows that underground crypto mining appears to be alive and well in China. In a November report, the research group estimated that there are an average of 109,000 active crypto mining IP addresses in China on a daily basis. Most of those addresses, according to the report, are in the provinces of Guangdong, Jiangsu, Zhejiang, and Shandong.

Crypto mining has survived in China, in part, because lot of miners weren’t sure whether Beijing was actually serious about the ban. 

China has repeatedly lashed out against digital currencies, but each time, the sting wore off, and the rules eventually softened. The country’s announcement this spring that it would be cracking down on crypto mining dovetailed with the centennial of the founding of the Chinese Communist Party, a time when there was pressure on lawmakers to show strength. Some miners – especially smaller-scale operators who didn’t have the resources or the connections to migrate abroad – figured a lot of the crypto talk by the government was bravado, so they powered down, laid low for a few weeks, and then came back online, taking a few extra precautions when they did. 

But this crypto crackdown appears to be different for a few big reasons.

For one, China is short on power, a resource vital to the process of bitcoin mining. The country has been dealing with its worst energy shortage in a decade, resulting in power cuts.

Beijing has also made it clear that crypto mining stands in the way of its aggressive climate targets, as it pushes to achieve carbon neutrality by 2060. In November, government spokesperson Meng Wei slammed bitcoin mining, calling it an “extremely harmful” practice and vowing stricter enforcement measures.

There’s looming competition from the digital yuan, as well. The country is testing its own central bank digital currency, which could grant the government greater power to track spending in real time. Making it harder to transact in rival cryptocurrencies could be part of a larger plan to ensure adoption of this new central bank digital currency, according to Fred Thiel, CEO of Marathon Digital Holdings and a member of the Bitcoin Mining Council.

“China’s government is doing everything they can to ensure that bitcoin and other cryptocurrencies disappear from the Chinese financial systems and economy,” speculated Thiel. “Part of this is to ensure the adoption of China’s central bank digital currency, and part of this is most probably to ensure financial surveillance activities are able to see all economic activity.”

Whatever the impetus, the government’s growing hostility toward crypto-related endeavors is apparent.

In the provinces of Zhejiang, Jiangxi, Hebei, and Inner Mongolia, for example, the government has taken varying degrees of action, such as asking local officials to run their own self-compliance checks, screening IP addresses for illicit mining activity, raiding illegal underground crypto mines, and arresting and expelling party members suspected of participating in crypto mining schemes.

Authorities appear to be paying special attention to mining happening at research institutions, community centers, and schools, where electricity prices sometimes cost less than the going rate. In November, the government vowed to hike energy prices for institutions that use subsidized power to mine.

Authorities are also zeroing in on state-owned businesses taking part in the trade.

This week, China’s Central Commission for Discipline Inspection, the country’s anti-corruption watchdog, said it had identified dozens of state-owned entities in the eastern province of Zhejiang that were using public resources to mine for twelve cryptocurrencies, including bitcoin, ether, litecoin, and monero. Of the nearly 50 people who were penalized, 21 worked at state-owned enterprises or Communist Party agencies.

State-owned entities have been tied up in crypto mining schemes elsewhere, too.

In the coastal region of Jiangsu, the communication watchdog for the province found that 21% of the IP addresses participating in crypto mining were from state-owned institutions.

Despite the government’s significant and growing efforts to weed out all crypto miners, many, like Kirk, have found ways to survive undetected.

When China began its crypto mining takedown in May, most of the industry went dark virtually overnight, as miners waited for the dust to settle.

CNBC spoke to multiple participants in China’s illicit crypto mining market, some of whom have spent time on the ground in China and others who have direct knowledge of how these operations continue to exist under the ever-increasing scrutiny of regulators.

The biggest players in the business, who already had connections overseas and cash to spare, got out fast. Many shipped their gear and moved their teams to Kazakhstan, the U.S., and other international destinations with low-cost power and available hosting capacity.  

Some heavy hitters left their gear sitting in warehouses in Asia and headed to greener pastures empty-handed, instead placing orders for the latest-generation machines to be delivered to their new homes abroad.

But smaller miners with limited disposable income and fewer international connections found it hard to relocate thanks to pandemic-related travel restrictions, supply chain and shipping bottlenecks, and trade war headwinds between China and the U.S.

Selling gear wasn’t all that effective as an off-ramp either, as the flood of inventory into the resale market tanked the going rate for mining rigs.

Medium-sized miners were “100% screwed” in this year’s crackdown, according to one expert speaking to CNBC. They couldn’t offload their equipment to recoup their losses, nor could they mine at full capacity again, because their electrical footprint is easy to pick out.

But for the smaller mines, like the ones Kirk runs, it’s been easier to fly under the radar. Some divided their mining operations into multiple farms across the country that…