Falling prices outweigh equipment updates from Bitcoin miners
Bitcoin’s price drop last week has cast a shadow over mining companies, which have spent more than $ 500 million on equipment overhaul over the past six months in preparation for the network’s next halving.
Bitcoin (BTC) mining farm operators in three countries told CoinDesk that they have been on a buying spree to upgrade or expand facilities since September, reflecting a shared commitment to staying in the mining game long term.
In May, the amount of newly minted bitcoins awarded to a successful miner every 10 minutes or so will be programmatically halved, reaching the top line of these companies. Since older equipment isn’t profitable even before the payoff is reduced, more than $ 500 million has been invested in newer, more efficient machines that can produce more bitcoin, according to a CoinDesk calculation.
But the recent drop in bitcoin’s price, which fell below $ 5,000 on Friday and recorded a 50 percent drop from its peak above $ 10,000 in late 2019, is creating further uncertainty about farm profitability. mining companies.
According to data from the mining group PoolIn, even the most efficient equipment on the market, such as MicroBT’s WhatsMiner M20S and Bitmain’s AntMiner S17 Pro, is generating daily profits with a gross margin below 50 percent. That estimate is based on bitcoin’s current price and mining difficulty (a measure of how competitive mining bitcoin is) with an average electricity cost of $ 0.05 per kilowatt hour (kWh).
If bitcoin’s price doesn’t recover to a higher point after halving, which will essentially cut mining revenue in half, mining farms would have to endure a longer recovery period for their investment.
“We have decayed and continue to mine, and we have bought a lot of new machines,” said Zheng Xun, CEO of Hashage, which operates multiple sites in China’s mining center in Sichuan province. “We already have a large scale, so we probably won’t buy more at the moment. We keep cash flow to see how the market develops after halving.”
That said, it remains to be seen how bitcoin’s overall computing power will react to bitcoin’s price drop in the coming weeks as older mining equipment is expected to shut down. If the computing power and difficulty of mining on the bitcoin network decrease significantly, holders will be able to mine more coins.
But for now, the network’s seven-day moving average hash rate has been trending downward since last week’s price drop, dropping to 108 departures per second (EH / s) from 118 EH / s around 9 of March.
Chris Zhu, co-founder of mining group PoolIn, said in an online panel via WeChat on Friday that his expectation before the price collapse lowers Bitcoin’s hash rate would still rise slowly. Now he expects computing power to decrease by 20-30 percent in the coming months.
The overspending of global mining farms is reflected in the significant growth in bitcoin’s total computing power in the past half year.
Since September 2019, the hash power on the bitcoin network has increased by 30 percent, from around 90 EH / s to more recently around 120 EH / s.
Since most of the new equipment is priced between $ 20 and $ 30 per terahash per second (TH / s), mining farm operators may have spent more than $ 600 million in the past few months to prepare for the next event. from halving. (For the context, 1 EH / s = 1 million TH / s.)
Artem Eremin, product manager at 3logic, a bitcoin ASIC miner reseller, said that its customers in Russia and Central Asia have been actively buying Bitmain’s AntMiner S17 since October, preparing to replace the old ones. (ASICs, or integrated circuits for specific applications, are custom computer chips for heavy-duty activities like mining.)
3logic now sells around 2,500 units of the newest equipment per month. In October and November, it used to be about 5,000 units, Eremin said, although buying momentum slowed in December. According to different estimates, one third to one half of all mining computers in Russia could have been replaced by the new models at this time.
Igor Runets, CEO of Bitriver, a mining headquarters in Bratsk, Russia, said his clients had been buying new ASICs quite actively since last fall, but reduced their purchases in January. “There was the Chinese New Year, the coronavirus outbreak, and then the buying activity just didn’t make a full recovery after that.”
Similarly, in China, the largest mining farms have modernized their facilities with first-line equipment in large quantities since the second half of 2019, when major manufacturers began shipping equipment in bulk.
Zheng said his company expanded its facilities by 30 percent with the latest machines supplied by Bitmain and MicroBT since the end of summer in China last year, and the deployment took place before the Chinese New Year.
Some, like Spark Capital by Gabriel Xia, a China-based fund, even started replacement and upgrade work very early in the summer of 2019. He said the following, “We sold all the old S9s in the summer of last year when their price in the second-hand market doubled and we started buying new equipment “.
Behind this recent buying push is the massive amount of investment that has been poured into the bitcoin mining space in 2019 alone.
In perspective, bitcoin’s hashing power reached 1 EH / s for the first time around February 2016. Then it took the network about 30 months to reach 50 EH / s in September 2018, even after the bull run. from 2017.
But it only took the network 15 months to double that level and reach 100 EH / s in January 2020.
This accelerated growth was made possible by major manufacturers, such as Bitmain, MicroBT, and Canaan, which have produced and shipped more powerful equipment using more advanced computer chips.
But technological advancement also means that new equipment has become much more expensive. With greater barriers to entry than in 2017, the space has been consolidating, squeezing retail miners.
In 2017, even in the wake of the Bitcoin bull run, it may not be so common to hear a customer place a single purchase order worth more than $ 15 million for mining equipment. But things changed in 2019.
“With an order of 100 million yuan [$ 15 million] in 2017, it could be the largest miner in the entire network,” said Xia, whose company has been mining since 2016. By 2019, “$ 15 million would only make it just a great customer. “
Traditionally, mining farms would sell fresh bitcoins to finance their operations. However, in recent years, a new financial services market has emerged to help them raise working capital, even if they want “hodl” (bitcoin slang to keep rather than sell).
Xia said Spark Capital’s mined assets have been pledged as collateral for the loans it obtained to pay utility bills and expand operations. The company is betting that it will be able to sell the coins at a higher price later, and in the meantime it is shortening the time it takes for the machines to pay for themselves.
He reported the following: “We are looking at a longer term when we scale.”
Echoing that strategy, Dmitry Ozersky, CEO of Eletro.Farm, an agricultural operator in Kazakhstan, said that 90 percent of its clients do not sell their mined coins regularly, but rather expect large price increases.
He said the following: “Some sold for $ 12,000, but now they are expecting the price to exceed $ 10,000 again.”
Cynthia Wu, vice president and chief custodian of Martixport, Bitmain’s crypto financial services spin-off, said the startup now has up to 200 large farms as clients. And of about $ 100 million in outstanding loans, the vast majority was loaned by miners to pay electricity bills and new construction.
But what goes hand in hand with that option is the risk of its promised collateral strength being liquidated when the bitcoin price falls more than 50 percent in two days.
With major lenders applying an average collateral rate of 60 to 70 percent, a borrower would face the imminent risk of his promised bitcoin being forcibly liquidated unless he chooses to commit additional assets. Even assuming they borrowed when the bitcoin price hit its recent high of $ 11,000.
Reluctance to sell
Regarding the liquidation strategy, Wu said it can vary from jurisdiction to jurisdiction.
He also said the following: “In the United States, people would sell because that is how they manage their cash flow. But in China, miners are more long-term hodlers, they are more reluctant to sell. In China, it’s a very typical mining mindset: don’t spend a lot of what you mine. “
Sharif Allayarov, head of the Matrixport business in Russia, says that industry veterans, who have been there since 2012 or so, also often hesitate to sell.
Allayarov said the following: “Newcomers are trying to jump into fiat as soon as they can, but as they stay in business and watch cryptocurrencies grow, they are less likely to be liquidated quickly.”
Ethan Vera, chief financial officer and co-founder of the Luxor Tech mining group, said there are definitely miners interested in borrowing money to pay bills, but “those are generally OGs in the space who are longtime miners and very optimistic.”
He added the following: Newcomers want to find ways to limit their exposure to falling prices.
“In general, many professionals are entering the mining space in North America. They are from investment banking, corporate finance, oil and gas. Historically they use financial instruments as a way to hedge their commercial risk, “said Vera. “My conversation with these great miners wants to find ways to limit their exposure to the value of hashrate and the price of bitcoin.
They are also not interested in trading derivatives, at least not in Russia, Runets and Ozersky said. The crypto options and futures market is not mature enough right now and miners got into this game to take advantage of the risk, not spend money on hedging against it, Ozersky reported.
However, Matrixport did see some interest in its optional product, Wu said. Of around 70,000 BTC in options traded on the platform since the product’s launch in October, the big miners accounted for around 70 percent.
“They want to be more protected when the market moves,” said Wu. “The miners also want to speculate, with the price, to improve their performance.”
See you later, S9
Meanwhile, the latest review strategy among large mining farms also leads to an inherited problem: what do they do with older mining equipment like AntMiner S9 and equivalent models, which have dominated the mining market since 2017?
With bitcoin and halving in two months and bitcoin’s price in the $ 5,000 range, well below break-even point for these older models of around $ 8,000, will they all close soon?
“Everyone is trying to get rid of the S9s,” said Eletro. Ozersky from Farm. However, he believes that the S9 are still far from over. The bottom line is that it all comes down to the miners’ strategy.
At Bitriver, which houses 70 megawatts to power ASICs for its customers, only about 25 percent of the team is S9, Runets said. “Those who wanted to sell them have already sold them.”
Spark Capital’s Xia, whose firm has already sold all of its S9s, estimates that the S9s are only contributing around 20 to 25 percent to the entire bitcoin network.
“People have different strategies: some wanted to switch from old machines to new ones, some chose to buy the old ones cheaply, hoping to pay for them quickly,” Runets said.
Those who stick to the S9 don’t want to go offline, even if they are now working on the brink of balance, Runets said. “No one goes offline, and even halving, people are going to squeeze as much out of their old ASICs as they can.”
According to these mining farms, there is an option to switch the S9s to lower power consumption at 700 watts instead of 1,600 watts, producing 9 TH / s instead of 13 TH / s.
Similarly, some, like Electro.Farm and the Poolin mining group, also offer customers the option of increasing the productivity of the S9 by combining two units in one.
The idea for both options is to increase the overall gross margin so that the S9s continue to generate daily, albeit modest, profits at an average cost of electricity of up to 5 cents per kWh.
In addition, there are also smaller individuals or farms that are somehow able to find much cheaper electricity than larger farms.
“If you can find an electricity cost of $ 0.02 per kWh, sure, you can still play around with S9,” said Zheng of Hashage, referring to the impending rainy summer season in China that comes after Bitcoin’s halving hours in May.
People in Siberia could even use an S7 with some profit until the end of February, Eremin said. Retail miners, though less and less, can still be found in Kazakhstan and the breakaway region of Abkhazia as well.
“But here’s another thing: These old ASICs are taking up space and making less money for farms, as they generally charge a fee for every kilowatt”, Eremin said.
Therefore, large farms are encouraged to replace old ASICs with new ones.
For now, Runets said he doesn’t want to see parts of his farm abruptly go offline, so Bitriver plans to offer temporary discounts on the price of energy to keep his clients’ machines buzzing.
But in the long term, Xia said, “MicroBT’s S17, S19 or M20 and M30 will become the new S9 in the next cycle”.
Disclaimer: This press release is for informational purposes information does not constitute investment advice or an offer to invest. The views expressed in this article are those of the author and do not necessarily represent the views of infocoin, and should not be attributed to, Infocoin.