There’s been a lot of hype around cryptocurrencies so far in 2018. And Montreal has increasingly been at the centre of conversations around Bitcoin mining, thanks to Quebec’s low electricity rates and frigid winters.
We spoke to Kassim Tremblay, co-founder and Vice President at Floxis inc., a local Bitcoin mining operation, to get a clearer picture of the state of Bitcoin mining in the province, why so many Chinese mining operations are looking to invest here, and what that could mean for our local ecosystem.
Cryptocurrencies and Bitcoin mining
To start at the beginning: Bitcoin is one example of a cryptocurrency. It’s a digital asset, it’s not physical. When people exchange it, and submit to the network and say they want to send bitcoins between people, this transaction is sent to the network and included in a block.
“The way you can understand a block is like a page in a book,” Tremblay told MTLinTECH. “So I write my transaction and a million others that need to be processed on that page. But in order to make these transfers, you need to approve the page. You need to find a special mathematical solution. How it works is like Jeopardy. Basically you want to find the question to an answer. A quick example is, let’s say the answer is 10. My computers here will try and say, ‘Is it 9+1? Is it 8+2?’. Then it’s a world competition to find the question to the answer that everyone has. The first one who is able to find it approves the page, or the block. And then all transactions are processed.”
Once the solution is found, it’s crucial to publish it as fast as possible to ensure you’re the first one. And then what are called ‘nodes’ check if it’s correct. If it’s correct, you move on and turn the page and start filling another page of transactions. At that point, the worldwide competition starts again.
“For the Bitcoin, it’s every ten minutes. For other cryptocurrencies, for example Ethereum, it’s every fourteen seconds. There’s different block sizes and time, different difficulties to find the solution. All this is adjusted in real time depending on how many people are trying to find the solution.”
So why do miners want to try to find solutions? Why do they want to prove these blocks? Every time you are the first one in the world to prove a block, you receive a certain amount of that coin, a newly admitted coin.
“Everyone who owns a coin at that time, it basically get’s diluted. If we’re talking about Bitcoin, and you’re the first one to prove the block, you receive 12.5 bitcoins. So at $10,000 apiece, that’s a lot of money. Ethereum is a little different; rewards are smaller but there are more blocks, and every coin is different. To do these trials, to try if it’s 9+1 or 8+2 or so on, you need calculation power. You need machines that try these questions to find the one that is good. The more machines you have, the better chance you have of finding an answer. But it doesn’t guarantee that I have ten times more machines than you that I’ll find it systematically ten times more. But in the long run, statistically, that’s how it goes.”
There are specialized machines called ASICs for certain coins. ASICs can be used for Bitcoin or Litecoin or Bitcoin Cash, whereas other coins like Ethereum are mined with GPUs (graphic processing units). They’re different machines, but what they have in common is that they consume a lot of electricity to do the calculations. Which is where Quebec’s low electricity costs become an advantage.
“They dissipate a lot of heat. And we’re talking a very very dense level of electricity usage, so a very high level of heat generated. Quebec is very well positioned worldwide to answer these two problems. The electricity is some of the lowest on earth, so that’s a huge advantage. Here in Canada we have Quebec and Manitoba with very low rates. And it’s cold most of the months of the year, so you’re able to pump cold air from outside, put it through your machines that heat up, and throw it back outside instead of, for example, a mining operation in Texas where you would need an AC to keep your machines cool. And that’s more cost, and less efficiency. That’s why Quebec is a big turning point.”
Increased interest from Chinese Bitcoin mining operations
So why are we seeing all this momentum now? It’s mostly because China has been cracking down on exchanges and recently cracking down on mining operations. Why? Because these mining operations used subsidized electricity and the government is saying that using so much electricity is hindering its development in other industries. As a result, they’re not subsidizing it anymore.
“At that point it becomes way less interesting for miners in China to mine there. And in general, the Chinese government has a very opposed stance to cryptocurrency, they’re not very pro cryptocurrency. The subsidized electricity is one reason. And in general the Chinese like to control their money and keep it inside the country. When people are buying cryptocurrency, they’re exchanging their yuan to bitcoin or something else, so a lot of money is leaving the country.”
“These Chinese miners—and we need to understand that 60-70% of the hashing power, the amount of machines doing calculations, is in China—they’re the main mining market in the world. And they’re receiving pressure because of unsubsidized electricity and the fact the government is cracking down on them. They’re looking elsewhere in the world to move their mine or to make investments.”
These Chinese mining operations generate hundreds of millions of dollars in cryptocurrency in a year, and for their next development they’re going to be looking outside of China. That’s where Quebec comes in. A few main mining players, such as Bitmain, have already announced their intentions to set up shop in Quebec. Essentially, 70% of the world’s hashing power is looking for somewhere else to go. And Canada, Iceland, and Sweden, all countries with a low cost of electricity and favourable weather, have become targets.
A lot of these operations are still just prospecting, and nothing is for sure yet. But it is believed that 1,000 megawatts of this demand is firm. That represents something like 2-3% of the network, of the power grid here in Quebec. That’s a big number.
“These people are coming, they’re asking hydro where they should go to open a mine. What happens is that local players are ready to service these Chinese clients. Usually they already have mining operations and they’re ready to open new mining operations to host these Chinese machines, or to start a new mining operation for these Chinese clients—who, instead of investing their money in China, are investing it here in Quebec. These major players—there’s NuVoo, there’s Bit farm—are growing at an exponential rate right now because of their organic growth and the fact that more and more demand for what we call hosting services.”
A hosting service is where the client comes and buys their own machine, and a player here in Quebec hosts them here in their building, providing the required ventilation and power hookups. Then they take a cut, either of the coins being mined, or a fixed price per kilowatt per month.
The future of Bitcoin mining in Quebec
“As a mining operation, we’re not a big operation like these guys hosting Chinese clients, but we’re bigger than a home operation. What we see on the horizon is that we’re mining a lot with a certain generation of machines for Bitcoin which is called S9 Miners. There’s probably a new generation coming up, and we’re probably going to see in the next months the diminishing power and position of Bitmain. As other players are coming up with ASIC chips, the market for the hardware is diversifying right now. The hashing power in general will increase in the world. It’s not all the mining in China that’s going to shut down and here open up, it won’t be a 1:1 thing.”
In the long term, Tremblay predicts that the margins seen in the industry right now will probably go down. He also predicts that GPU mining, the main one being Ethereum, will probably move into Proof of Stake somewhere next year. Basically, to approve the blocks, machines do calculations called Proof of Work. They do the work to be able to prove the block. Proof of Stake does not require machines. Instead it’s people who have the cryptocurrency who put it in state, so they put it in a special account where they get to vote on which block will be approved. And if their block is selected, they get the award for approving the block instead of doing calculations.
Why is this important?
“If all coins tomorrow morning move into Proof of Stake, they’re not going to be mining anymore with machines and electricity. It’s very unlikely. Certain coins have that development in mind, because it will allow them to scale the amount of transactions they’re able to do in a minute. We’re talking ten times, a hundred times, a thousand times more transactions. So for the Ethereum network, which is a decentralized computer, it’s not necessarily a currency.”
“You need to see Ethereum as a token to be able to run smart contracts and programs on a decentralized network instead of seeing it as money, to pay for coffee or buy a house. This kind of application, Ethereum, needs a lot a lot of transactions a second, so they need to be able to scale. That’s why we’re likely going to see them as the first big major Proof of Stake deployment in the cryptocurrency field. And that’s going to affect the mining aspect a lot.”
In contrast to China, the Quebec and the Canadian government have been generally pro-crypto so far.
“Obviously they’ll want to tax this. The most likely scenario for now is that cryptocurrencies will be considered a security, so you will have the same laws that securities do. They already said in 2017 you should declare your crypto as such. Depending on the size of the mining operation, it’s not too sure a lot of people will do it. But that’s a challenge for the coming years for sure. On the legislation side, I’d say we’re pretty good here in Canada. Hydro is really open to receiving mining operations. Obviously they want to be prudent because they know this is a high volatility high risk industry. It’s still not settled or in place. So maybe some mining operations come in with hundreds of millions of dollars of investment and they’re ready to pay upfront for the site and electricity for a year. Hydro is really taking a high risk approach. But at the same time they want to be nimble.”
Impact on the local ecosystem
On the local side, it’s important to note that interested Chinese mining operations are buying up a lot of the 5 megawatt and up sites currently available in and around Montreal. Five megawatts in the minimum level to get the best electrical rate from Hydro Quebec. Although it is interesting to note that Hydro Quebec recently announced the possibility of raising their rates for such operations.
“We’re starting to see saturation in these mining operations. Basically it’s very hard to find an interesting site that has 5 megawatts and more at a reasonable price. We’re seeing a lot of owners understanding the demand and jacking the rates. A lot of buildings are being sold that you never thought could be sold, but they have a big electrical entry or old manufacturing facilities, or something like that. The bigger players like Bitmain, if they say they want 300 megawatts, there’s very very few if any sites big enough for the taking in Quebec. So certain big big players are creating new installations.”
Tremblay notes that aside from electricity rates, the market and availability of funds in Quebec are also attractive.
“You can also look at the amount of IPOs being done here in Canada for mining operations. The fact that a lot of these companies are doing RTOs (reverse takeovers). That’s one thing that’s going to affect it. For a Quebec player here, either you stick to your thing and continue running your mining operation. If you want to take advantage of this big move from the Chinese, then you’ve got to have a big space ready with a lot of electricity, the correct ventilation systems, and be able to receive or host these Chinese miners. And that’s mostly the big plays we’re seeing right now.”