How Can Bitcoin Miners Get Through the Crypto Bear Market
Since late July 2018, trading volumes of Bitcoin (BTC) and other cryptocurrencies have dropped dramatically by over 30%. From last year’s high point of $20,000 to the current $ 6,000, Bitcoin has made some millionaires overnight but has also brought anxiety and despair to many.
Written by SV Insight Research, this article aims not to create anxiety but to analyze how the miners, mines and mining rig manufacturers can get through this ongoing bear market.
Why is China Leading the Mining Rig Manufacturing？
If we consider the entire mining industry process, the upstream of mining includes ASIC Design, Foundry and OSAT (outsourced semiconductor assembly and test); the midstream includes mining rig manufacturers such as Bitmain, Canaan, and Ebang International; the downstream includes miners, mining pools and mines.
In other words, first the mining rig manufacturers make the rigs, then the miners purchase the rigs. Miners can choose to mine individually, but most of them now choose to mine collectively, which in turn lead to mining pools. The mines are collections of large amounts of mining rigs. Most mining pools choose to create their own mines and use their own hashing power for mining.
SV Insight analyzed data from Bernstein and other sources and came to the conclusion that the leading ASIC designers highly overlap with the mining rig manufacturers. Only the ASIC design services, foundry, and OSAT sectors have some players from Silicon Valley or Taiwan. This means the top 3 mining rig manufacturers, Bitmain, Canaan, and Epang, all designed their own mining rig chips and outsourced manufacturing, assembly and testing.
Why is China, instead of Silicon Valley, leading the mining rig chip game? Shanghai Wayi Technology founder Peicai Li told SV Insight that the reason lies in mining rig industrial scale and manufacturing supplies.
The first inventor of ASIC mining rig is commonly known as Canaan founder N.G. Zhang. He was short on funding when he first invented the Avalon mining rigs. The earliest rigs used 110 nm (nanometer) process, which was due to lack of funds. Peicai Li confirmed that the tape-out of 110nm only cost 1 to 2 million RMB.
This reflects the initial mining rig manufacturers’ status: small team, lacking in both experience and funding. None of the big companies dabbled in the mining industry before 2017 due to the low output value.
Mining rigs’ demand for chip technology is way lower than its demand for iterations. Even with a chip, the mining rig itself still needs to be produced. That is when Shenzhen’s factories showed their advantage over overseas companies. “They could get the blueprint in the morning and produce the PC board in the afternoon, “ said Peicai Li. This kind of speed gave China’s mining rig manufacturers an absolute advantage, and whoever has the faster iteration speed could overtake competitors. This is how Bitmain became the leader.
According to the Q2 Hurun Greater China Unicorn Index, Bitmain is currently valued at 70 billion RMB. Canaan and Ebang are valued at 20 billion RMB and 10 billion RMB respectively.
This year, these top 3 companies are planning to launch IPO in Hong Kong. According to their prospectus, Bitmain’s 2017 profit was over 1.1 billion USD and projected 2018 profit is above 2.2 billion USD. Canaan’s 2017 profit was 360 million RMB, which was 125 times of its 2016 profit and 230 times of its 2015 profit.
It would be wrong to assume these billion dollar profits all go to the manufacturers. A large portion of this profit goes to the foundries.
Accordingly to Bloomberg, currently, 90% of global mining rigs use ASIC chips manufactured by TSMC. Crypto mining chip earning is estimated to make up 7% of TSMC’s revenue in 2018. Based on TSMC’s 2017 revenue of 33 billion USD, it would be around 2.3 billion USD.
Global Unichip Corporation, a sub-company of TSMC, has assisted Bitmain in designing the earlier generations of mining chips. Along with another chip design service company Alchip, these companie’ stock value rose by more than 180% in 2017.
TSMC is obviously one of the benefiting enterprises in this industry. Besides 80% of the orders from Bitmain, it is also the foundry for 60% of Canaan’s chips. Samsung is the foundry for part of Ebang International’s chips. It is rumoured within the industry that Samsung is accelerating its deployment of the 7nm production line, hoping to take part of the orders from Bitmain and TSMC.
The Keypoint of leading in mining manufacturing industry: who is being the first use the 7nm ASIC chip
The 7nm process is currently the most crucial technical barrier for mining rig manufacturers.
Peicai Li commented that “Right now both Bitmain and Avalon belong to the same generation of the process. Chip design has hit a technical wall — — 7nm process.” In the mining process, miners’ demand for mining rigs is rather simple: higher hashing power and less power consumption. The 7nm process currently represents the most advanced integrated circuit manufacturing standard globally.
The 7nm process refers to chip foundry’s corresponding production line. The 7nm process of Samsung used the more advanced technology and its performance almost reached full capacity. As a result, the mass production would start relatively late. In comparison, TSMC’s 7nm process uses traditional lithography technology, with limited performance improvements, so it will have the advantage of starting mass production earlier.
Previously the industry conducted a comprehensive study on TSMC’s 7nm process technology and discovered that compared to current ASIC chip’s 16 nm process, the new 7nm process would reduce power consumption by 40% and increase speed by almost 65%.
In fact, since last year the industry has been discussing mining rigs entering the 7nm generation. Japanese enterprise GMO is also said to start mass production on 7nm chip mining rigs, however, it is still under pre-sale status.
On Aug 8, 2018, Canaan announced the first global 7nm process ASIC chip mining rig — — Avalon A9 series. Based on officially published data, the hashing power threshold has jumped from the original 14Th/s to a whooping 30TH/s. That is an increment of over 100%, with typical power consumption at 1720w.
SV Insight compared the current mainstream mining rigs’ model, power consumption, and chip process, and discovered that the mainstream AntMiner S9 was the first global 16nm process chip mining rig, released by Bitmain in June 2016. It is evident that the earlier a manufacturer launches the next generation process, the more likely it would produce the next generation’s mainstream mining rigs. Since Avalon is now releasing the 7nm A9 mining rigs ahead of Bitmain, it would obviously bring new challenges to the mining rig game.
Some industrial professionals commented that based on process, 7nm and 10nm belong to the same generation, so the space for improvement is limited. In addition, the cost is a huge factor for miners. The presale price of GMO’s 7nm process mining rig is close to 2000 USD, while A9’s price is to be determined. Based on GMO’s price, the cost for using 7nm process mining rigs is about 3 times that of using AntMiner S9. AntMiner S9’s price competitiveness is one of the main reasons for it to become the mainstream choice.
Moreover, the foundries with advanced process production lines are not waiting around for mining rig manufacturers at all times. Currently, TSMC only has 2 production lines for 7nm process, which are dedicated mainly to orders from the big clients’ — — Apple’s A12 chip order, followed by HI-SILICON, Qualcomm, Broadcom, and others big companies. TSMC once revealed that in 2017, the big clients contributed 200 billion TWD (approximately 6.5 billion USD) to its revenue, which is higher than that of the entire ASIC chip industry.
As a result, the OEM is the bottleneck for the lifeline of the entire mining rig manufacturing business. “When bidding for TSMC’s capacity, the main mining rig manufacturers are fighting against tycoons like Apple. Mining rigs and Apple phones are also fundamentally different: mining rigs are production tools affected by Bitcoin price, while Apple phones are consumer productions. As a result, for the foundries, the stability of mining rigs is not as good as that of Apple products. “ BTCC SVP Denver Zhao commented.
Therefore, China’s first 7nm process Avalon A9 mining rig’s mass production timeline, delivery timeline, and its price, would become indicators of China’s mining rig industry.
Ming Pools: Keep the Miners, Survive the Bear Market
Besides the chinese enterprises leading the mining rig manufacturing industry, the centralization of mining pool’s hashing power is another undeniable fact. Essentially, individual miners are becoming less common, while most miners have joined mining pools. The major mining pools with massive hashing power are often backed by chinese mining rig manufacturers.
Based on BTC.com’s hashing power data analysis from Aug 5 to Aug 8 2018, the top 5 mining pools are : BTC.com, AntPool, ViaBTC, BTC.TOP and Slushpool. Judging from the data for the past month, past quarter and past year, only the top 3 to 5 mining pools rankings showed changes from time to time, the top 2 mining pools have always been BTC.com and AntPool.
BTC.com was built by Bitmain Operations and Technology teams; AntPool also belongs to Bitmain; ViaBTC received investment fundings from Bitmain.
Despite having Bitmain’s support, BTC.com’s Operations team expressed that they had to “snatch” miners as well: when expanding number of customers in the initial stage, we had to fight for clients against others like f2pool, AntPool, and Bitmain.
The centralization of mining pools’ hashing power is due to contributions from major miners with huge hashing power. Thus, these major miners are the targets of all mining pools.
For the mining pools, attracting miners is the most important agenda regardless of market conditions. However, more skills are required to attract miners during the bear market. Multiple professionals within mining pool industry have disclosed to SV Insight that “Mining pools need to attract and maintain miners in order to keep moving forward, however it has become increasingly difficult.”
Despite the difficulty, mining pools have found ways to survive.
This is related to the source of profit for mining pools. To put it simply, mining pools will pay out the rewards periodically according to each miner’s hashing power. Due to the cost incurred in terms of operations, technology and relevant risks, mining pools will charge a variable amount of technical service fee. This technical service fee is the main source of profit for mining pools.
With the dawn of the bear market, most mining pools launched pricing wars and lowered the service fee to 1%. According to Peicai Li, this is a very small profit margin for mining pools. Of course, based on SV Insight’s research, not all mining pool’s technical service fee ratio would be disclosed to the public, it is usually calculated when miners obtain actual profits.
Right now, mining pools are also working on miners’ profits, hoping to attract more miners through raising miners’ profits. Normally mining profits consist of 2 parts: block reward (currently 12.5 Bitcoins) and transaction fee which is incurred when Bitcoin is transferred.
Currently, there are mainly 4 profit models for miners: PPS, PPLNS, PPS+, and FPPS. The later two PPS+ and FPPS are more widely accepted by miners, because transactions fees were not shared with miners in the past under PPS and PPLNS models.
According to BTCC SVP Denver Zhao, there are plenty of mining pools under both PPS+ and FPPS models. From PPLNS to PPS to today’s FPPS, each model started with drastically increased transaction fees. The purpose is to reward miners with profit sources which were originally not open to them, in order to increase their mining profit margin.
Besides adjusting the profit distribution, mining pools also tried to increase the depth of their service to miners to make them stick around.
For example, BTCC mining pool has optimized its App such that miners can not only enjoy basic functions such as checking profit, but also receive airdrop rights and be able to trade, borrow funds and socialize within the App. Peicai Li also observed that some mining pools have released their own tokens to attract miners. However, the effectiveness is still to be watched over time.
Overall speaking, compared to mining rig manufacturers’ high profit, most mining pool partners who SV Insight has interviewed believe that mining pools are stable in the bear market. As a purely technical link, a stable mining pool might only require 4 to 5 workers for maintenance, which costs around 15,000 USD a year. Since not much cash flow is required, it won’t be hard to push through the bear market. Based on Peicai Li’s calculation, the profit for a mining pool which charges 1% service fee and has a decent hashing power could be up to 2 or 3 Bitcoins per day.
With a stable amount of miners as well as solid technology, operation and maintenance, a mining pool could have stable hashing power and outdo the theoretical number of blocks. Denver Zhao believes that this is an earning supplement for the mining pool.
Mining：No Longer a Highly Profitable Industry
During America Gold Rush, one trait was the high uncertainty. Because the more people joined the gold rush, the higher uncertainty for each individual to hit gold. The miners also had to take the risk during the road to the west.
There is also high uncertainty in the Bitcoin world, however, it is not related to mining itself. Some miners admit that after so many years of ups and downs, mining is a relatively stable income source, the payback period is also acceptable as compared to some other industries.
According to a cost analysis of Bitcoin mining, done by Sam Doctor’s data research team from American research institute Fundstrat, the main cost of Bitcoin mining comes from 4 aspects: mining rig cost, data center maintenance fee, machine maintenance fee, and cost of electricity.
In other words, first of all, a miner needs to buy the mining rig with money, then when the rig is running, there would be cost related to machine radiating, cooling, safety, technical maintenance, wear and tear. Adding the cost of electricity to these costs, you would be getting the total mining cost.
Peicai Li uses the mainstream AntMiner S9 as an example, the current payback period is over 314 days, which is close to a year. Even for the major miners, the payback period is above 300 days. Data from Wayi Mining shows that for S9i mining, the current static payback period is around 252 days. During the payback period, cost of electricity takes up half the cost, the main risk of mining currently comes from Bitcoin price drops.
At the beginning of this year, China’s Office of the Leading Group for the Special Corrective Action on Internet Financial Risks issued a document. The document demands each region to guide enterprises within its jurisdiction to exit the mining business and to report on the progress periodically. Would this affect the Bitcoin mining business?
The professionals SV Insight interviewed stated that although Bitcoin mines accumulated lots of mining rigs and used huge amount of electric energy, the actual reason for shutting down mines is illegal electricity usage instead of policy change. Mines which used electricity legally and paid various taxes were not shut down. However, some mines did put their expansion plans on hold.
How to Get Through the Bear Market？
During the interview, more than one interviewees mentioned the challenges faced by Bitcoin-mining industry during the bear market.
From the upstream, for the tycoons which sell mining rigs: both Bitcoin price and higher hashing power requirement are squeezing miners’ profits, causing the sale of mining rigs to hit a bottleneck, which leads to reduced cash flow; at the same time chip R&D, especially the tape-out cost, takes out a huge portion of mining rig manufacturers’ overall profits.
Tape-out cost is related to the last step of chip design: tape out. Tape-out cost and assembly cost are both determined by process technology. The more advanced the process is, the more expensive it gets. The tape-out cost for the 16nm process is currently between 6 to 8 million USD. Judging from this, the tape-out cost of 7nm process might exceed 10 million USD. At the same time, tape-out cost is also related to output volume. Based on the iteration speed of mining rigs which is between 6 months to a year, the output volume for each chip production is not going to be that high.
Due to these factors, as the “tool sellers” of the Bitcoin-mining industry, mining rig manufacturers face challenges in both product iteration and cash flow. “If the bear market lasts a year or two, the overhead costs are quite high, so cash flow is very important,” said Peicai Li.
Mining rig manufacturers have started seeking opportunities in new markets, such as Artificial Intelligence. During Canaan’s press conference on Aug 8 2018, it launched televisions and electric heaters carrying mining chips. “Mining rig manufacturers have gained profits and experience on ASIC mining rigs, it is a smart move for them to transition into new product lines.” said Denver Zhao.
As mentioned above, as bear market approaches, the lower sales volume of mining rigs might affect the profits of TSMC and other foundries in the downstream. However, the effect on foundries is quite limited.
The effect on mining pools is also relatively small. The interviewees believe that mining pool is a technical link with relatively low profit and high stability. Since mining pools do not participate in any trading, it also has the lowest risk in terms of policy control. Still, mining pools are under transition, whether it is trying to launch their own tokens or providing more services to miners. Denver Zhao believes that mining pools need to work hard in expanding Bitcoin’s ecosystem: the more perfect the ecosystem becomes, the higher Bitcoin price would be.
According to Satoshi’s design concept of Bitcoin, as Bitcoins get completely mined in 2140, user transaction fees would support miners and maintain Bitcoin network. “Miners and mining pools have huge responsibilities in maintaining blockchain network stability, so there have to be economic incentives for them. These incentives will not go away even though all the Bitcoins are mined.”
“You just need to hold on.”
One interviewee experienced the Bitcoin price fluctuation in 2014, when the price dropped from 8000 RMB to 4000, 1000 and eventually 900. He said:” I felt lucky to sold all my 10 Bitcoins at 1800 RMB per each. However I really regret it now, I will never be able to buy them back at that kind of price anymore.”
This interviewee also expressed that although he couldn’t predict when the bear market would end, there is little chance of seeing the bull market this year.
Perhaps, for people who have experienced the 2014 bear market, 2018 is not the coldest winter yet. Only those would catch the turn now will usher in the next bull market.
