Bitcoin mining in 2020: Big companies enter the market, and China gradually loses ground

Original title: "Bitcoin Mining 2020: Big Companies Enter the Market, China Gradually Loses Ground"

Original source: TechFlow

At the beginning of 2021, Bitcoin has broken through a new high of US$32,000, and a number of cryptocurrencies have also launched attacks on high points.

As a miner at the top of the cryptocurrency food chain, what have you experienced in the past year?

During this year, from the 312 crash to the halving of mining output, from the DeFi wave to the new high of Bitcoin, from the infighting within Bitmain to the settlement and separation... the mining industry is undergoing a quiet upheaval.

These changes are geographical. The center of Bitcoin mining is gradually shifting from China to Northern Europe, North America, Central Asia and other places. They are also psychological. The cost of entry for new miners is getting higher and higher. Old miners who have experienced multiple rounds of bull and bear markets are "sitting on the tree and waiting", ready to deal with the reefs and vortices of the currency market at any time.

These changes are concrete, with the Antminer S9 mining machine going from being "retired" scrap metal worth hundreds of yuan to being popular again. They are also abstract, with the status of miners undergoing a huge transformation from being ignored to being envied by everyone.

What did 2020 leave for the crypto mining industry? TechFlow tried to summarize the five major changes.

Bitcoin halving: Insufficient supply from miners may be the reason for Bitcoin's growth

On May 12, the Bitcoin block reward dropped from 12.5 BTC to 6.25 BTC. After the halving, the annual inflation rate of Bitcoin dropped from 3.7% to 1.8%.

The lack of supply has fueled the rise of Bitcoin. Bitcoin miners regularly sell the mined Bitcoins to the market in order to pay electricity bills or buy new machines. After the halving, the output and selling pressure were cut in half, and the annual inflation rate of Bitcoin dropped from 3.7% to 1.8%, which is lower than the fiat currencies of most central banks in the world.

Since PayPal launched its Bitcoin service at the end of October, it has purchased more than 100% of the new supply of Bitcoin.

Source: Pantera Capital

At the same time, institutional funds from the United States are continuously buying Bitcoin, pushing up the price of the currency.

On December 11, the Wall Street Journal reported that MassMutual, one of the top five life insurance companies in the United States, has purchased $100 million worth of Bitcoin for its general insurance accounts through the New York Digital Investment Group (NYDIG).

Another crazy listed company is MicroStrategy. Starting in July this year, MicroStrategy began to buy Bitcoin in large quantities. Through several continuous purchases, it exchanged 40,824 Bitcoins for US$475 million.

According to statistics from Bitcoin Treasuries, there are currently more than 16 listed companies holding Bitcoin. In addition, the trust company Grayscale Investments bought 350,000 Bitcoins in the second half of the year.

In 2020, Bitcoin rose three times, and the "halving market" predicted by crypto analysts at the beginning of the year was fulfilled.

Major Chinese and American companies enter Bitcoin mining

With Bitcoin leading the rise of major cryptocurrencies, crypto mining has become a business coveted by large companies.

On January 4, Nasdaq-listed company The 9 announced that it would enter the cryptocurrency mining industry. “The expected goal is to contribute 8-10% of Bitcoin’s global computing power, 10% of Ethereum’s computing power, and 10% of Grin’s computing power.”

The9 is an online game operator that was the exclusive agent for World of Warcraft in China from 2004 to 2009.

Before The9, Wall Street capital had already made a big move into Bitcoin mining.

In 2020, American mining companies were the largest customers of Bitmain and other mining machine manufacturers. According to incomplete statistics, in 2020, Bitmain and American companies reached a cooperation agreement on 200,000 S19 mining machines.

According to Bitmain’s official website, on December 18, Bitmain announced that it had signed an ordering agreement with North American blockchain custodian Core Scientific, which will last until September 2021. Bitmain will deliver more than 58,000 S19 series Antminers.

In the past 12 months, Core Scientific has purchased a total of 76,024 S19 series Antminers, worth more than US$129 million.

Core Scientific has secured cheap electricity in five cities across the United States, with the total project area exceeding more than 600 acres.

Riot Blockchain, Inc., a US-listed company, has ordered more than 30,000 S19 series mining machines from Bitmain in batches this year.

Marathon, also a listed company, purchased 10,500 S19 Pro Miners in August this year, and announced in October that it would establish a 105-megawatt Bitcoin mining data center in a joint venture with Beowpf Energy. In the same month, it signed a new contract with Bitmain to purchase another 10,000 S19 Pro mining machines.

Why are these big companies stepping into Bitcoin mining? In addition to the benefits of Bitcoin mining, the incentive for stock prices may be an important reason for big companies to deploy mining.

Bit Digital Inc. (NASDAQ: BTBT) has seen its share price increase more than 70-fold in the past 12 months.

Bit Digital's financial report for the first three quarters of 2020 shows that as of September 30, 2020, the company operated 22,869 mining machines, including 16,964 new ones in the third quarter, and produced a total of 814.23 bitcoins, including 739.51 new ones in the third quarter.

On the other hand, after Bitcoin hit a new high of $24,273 on December 20, Bitcoin mining listed companies all saw varying degrees of increases in the U.S. stock market: Marathon rose 24%, Riot rose 10%, Bit Digital rose 12%, and CleanSpark rose 18%.

In addition to boosting stock prices, the above-mentioned companies' entry into mining is also a battle among American consortiums for mining centers.

"The United States is rapidly developing into the world's major Bitcoin mining center, and the country's Bitcoin mining electricity energy accounts for 14% of the global total." In July this year, a mining report commissioned by Fidelity Investments to BitOoda stated that China's mining accounts for only about 50% of the world's total.

A month before the report was released, Fidelity was revealed to have participated in the $6.1 million IPO of Canadian mining company Hut.

Earlier this year, Layer 1, a mining company co-invested by PayPal co-founder Peter Thiel and DCG (Digital Currency Group, the parent company of Grayscale Investments), began operations in Texas and will cover dozens of acres.

The goal of Layer 1 is to "change the situation where the U.S. mining industry lags far behind China" and it plans to control 30% of Bitcoin's computing power by the end of next year and become the world's largest mining farm.

The operator behind Core Scientific is an organization called Foundry, and the $23 million in financing that Core Scientific just announced came from Foundry, which is a subsidiary of Digital Currency Group (DCG).

Although some of the early dividends of mining have been missed, the determination of American companies to enter the mining industry should not be underestimated. Americans want to take the initiative of Bitcoin back from Chinese miners.

It is not difficult to find that DCG, the parent company of Grayscale Trust, appears behind Core Scientific and Foundry.

In addition to controlling Grayscale Trust, DCG is also the parent company of Genesis, one of the largest cryptocurrency over-the-counter trading and lending platforms, the well-known blockchain media Coindesk, and the exchange Luno, and has directly invested in crypto institutions such as Bitpay, Circle, Coinpst, and Coinbase.

DCG has made a big move in the crypto ecosystem. As a supply source, DCG has clearly considered the Bitcoin mining industry.

Mining centers are shifting abroad

In 2020, a phenomenon that is easily overlooked is that Bitcoin mining centers have quietly shifted from China to abroad.

According to the Bitcoin Mining Map designed by the Cambridge Center for Alternative Finance, in the second quarter of 2020, Kazakhstan's mining industry accounted for about 6.17% of Bitcoin's average monthly hash rate, only slightly lower than Russia (6.9%) and the United States (7.24%), while China remained the undisputed number one (about 65%).

In September 2019, China accounted for 75.62% of mining.

Source: https://cbeci.org/mining_map

In half a year, China’s mining share fell by 10 percentage points. The share lost by China was divided up by the aforementioned North America, as well as Northern Europe, Central Asia, Southeast Asia, Iran, Russia and other regions.

For Bitcoin mining, electricity cost is the key factor affecting the rate of return. The lower the electricity cost, the greater the return.

Recently, Genesis Mining operations director Phipp Salter told Bloomberg that miners are moving from China to Nordic countries, namely Sweden and Norway, because "these countries are considered safer and more stable."

He explained that profitability at the company’s data center in Boden, Sweden, had more than quadrupled thanks to wet weather and the continued rise in bitcoin prices.

"Electricity prices here are among the lowest in the world, excluding fees and taxes, and are virtually carbon-free, made up mostly of hydro, nuclear and wind power," the Bloomberg article said.

In addition, in November this year, Dutch blockchain company Bitfury Holding BV announced an investment of US$35 million to expand its Norwegian mining farm.

In addition to Northern Europe, Kazakhstan has also become a new center for Bitcoin mining.

In June, Kazakhstan’s Minister of Digital Development Bagdat Mussin announced that the ministry plans to attract $738 million in investments for activities related to cryptocurrency mining by 2023.

According to Zhumagapyev, there are currently 14 cryptocurrency mining farms that have cumulatively brought in about $201.7 million in investments.

Kazakhstan, which mainly relies on thermal power, has a surplus of 4,000MW (megawatts), with a cost of about $0.03 per kilowatt-hour.

"There are a lot of people mining in Kazakhstan now. The president's brother is mining there. There are also people from Greece, Germany, Japan, South Korea and Iceland." said a miner from Kazakhstan.

Kazakhstan’s main mining companies come from China, South Korea and other countries, including the aforementioned Genesis Mining and Bitfury, which have mining operations in Central Asia.

On the other hand, the location is in Siberia. Earlier this year, Russia's nuclear power leader Rosatom was exposed by Coindesk to open energy supply to Bitcoin, and on December 30, a subsidiary of Russian gas giant Gazprom announced the opening of a Bitcoin mine.

In July this year, Abdolnaser Hblockquotemati, the governor of the Central Bank of Iran, issued a statement: "The government's economic committee approved a mechanism for digital currency mining, which will be discussed later at a cabinet meeting."

Three months later, the Iranian Republic News Agency (IRNA) reported that Iran revised the country’s cryptocurrency regulations, requiring licensed bitcoiners to sell their bitcoins directly to the Central Bank of Iran to fund imports.

Iran has issued 1,000 licenses to crypto miners, including one to Turkish mining giant Iminer. Iranian power plants are allowed to mine cryptocurrencies, while Bitcoin miners have been granted exclusive rights to use electricity produced by three of the plants.

In November this year, the Venezuelan army posted a video on Instagram, turning the camp into a mining center. Prior to this, the Venezuelan government clearly stipulated the legality of crypto mining.

In December, Venezuela’s Crypto Assets Regulatory Authority (Sunacrip) and Venezuela’s state-run electric power company (Corpoelec) signed an agreement to improve the development of Bitcoin and other cryptocurrency mining activities across the country by establishing guidelines.

………

Low electricity prices, policy encouragement, clean energy, entry of giants... these conditions are enough to give birth to a batch of mining farms and new mining centers.

Will China lose its dominance in Bitcoin mining? Due to China's unique advantages in the hardware industry, cryptocurrency mining has risen rapidly. Mining machine manufacturers, mining farms, miners... China covers the entire cryptocurrency mining industry chain. Bitcoin was once called "Chinese currency" by Americans.

On the one hand, there is the encouragement of foreign policies and the rise of local miners, and on the other hand, domestic miners are moving abroad. In the future, can China still maintain its leading advantage?

Miner's attitude: Not recommended, but newcomers are welcome

According to Tokenview data, Bitcoin mining revenue reached a new high of $0.209/day/T hash per second on December 29.

But this is far from last year’s highest of $0.498/day/T hash per second and $3.839/day/T hash per second in 2018.

For Ethereum miners, 2020 was even more thrilling. As DeFi became popular, Ethereum miners earned $295.1 million in August, a month-on-month increase of 98.2%, a two-year high.

In September this year, the Ethereum mining income reached $0.103/day/M hash per second. "It takes only one month to get back the investment, and the rest is the residual value of the machine," said miner Xiaoming.

Source: Biyin Mining Pool

On January 4, as the price of Ethereum ETH broke through US$1,100, the profits of major mining machines also soared. OKpnk showed that the Ethereum miner's fee income was 3 times (6 ETH) the block reward (2 ETH).

In the past three months, the computing power of the entire Bitcoin network has fluctuated between 120 and 160 EH/s. In the past three weeks, the fluctuation range has shown signs of narrowing.

According to past statistics, the rise in Bitcoin prices will lead the rise in computing power by about half a year. This wave of Bitcoin price increases began in mid-October this year, and has risen by more than 150% so far.

Therefore, some organizations predict that the next six months will be the golden period for mining.

Has the golden age of mining really arrived?

But in fact, Bitcoin miner Xiaoming revealed that mining will be more difficult in 2021, because a large number of mining machines and mining farms are still in a dormant state. They will be turned on when the revenue increases, and then the revenue will fall.

“Many S9-level mining farms with slightly higher electricity costs and poor environments are not running. When the profits are appropriate, they will be turned on to reduce the profits.” Xiaoming said.

As Bitcoin broke through $34,000, the price of Ant S9 also increased fivefold from 110 yuan of "scrap metal" to 600 yuan in one month.

"Recently, a Russian miner directly placed an order for 10,000 S9s," Xiaoming revealed.

Jiang Zhuoer of Litecoin Mining Pool also recently stated that he still has "vast numbers of BTC mining machines, with nearly 100,000 S9s alone that need to be powered on."

But it is still a profitable business, just not as profitable as imagined. There is no more getting rich quickly, and Bitcoin mining is a red ocean.

Xiaoming's current attitude is: New miners are welcome to join, but not recommended. "Whether new miners buy machines or build mining farms, it is good for old miners. Otherwise, when the market is bad, how can they buy cheap mining machines? When the market is good, who can they sell high-priced mining machines to?"

05 Outlook for 2021

Taking the Antminer S19 95T as an example, the futures price on the official website is shown as 19,200 yuan, but the lowest over-the-counter price has been hyped up to 25,000 yuan.

According to media reports, the mining machine manufacturers such as Bitmain have scheduled their mining machines for July next year.

Is now a good time to start mining?

When it comes to purchasing new mining machines, the investment of 20,000 to 30,000 yuan for each machine also accumulates costs and risks.

"The S19 has such a good power consumption ratio that we are betting that others will not follow suit and buy machines of this level." Xiaoming explained that once a high-computing power machine is put into use, the computing power will soar. However, according to the current computing power growth and coin prices, he expects to recover his investment in one year, and "the remaining machines will be considered as profits."

On the other hand, the impact of technological improvements in mining machines on the industry is decreasing, and the energy consumption of mining machine iterations before S9 has increased by more than 1 times.

For Ethereum miners, the average payback period for purchasing graphics card machines is about one year. According to Wu, there are still more than 10 mining machine manufacturers manufacturing new Ethereum mining machines, including high-computing ASIC machines.

Ethereum 2.0 was launched on December 1. According to the roadmap set by Ethereum co-founder Vitapk Buterin, Ethereum 2.0 will be realized in the next five to ten years.

Technological iteration is no longer rapid, and the payback period is longer, which is exactly the premise for the entry of institutions mentioned in the second part.

In the early days, Bitcoin mining did not require complex and high-performance equipment. Bitcoin could be mined using just a personal computer CPU. However, as the Bitcoin network expanded and computing power grew, costs continued to rise, and generation after generation of miners were eliminated.

In the next few years, as the Bitcoin halving process progresses, Ethereum mining machines will gradually turn to POS, and miners will be able to mine less and less cryptocurrency. In this increasingly smaller world, all miners can hope and expect is that the price of the currency will maintain the status quo or continue to rise.