Bitcoin production is decreasing and computing power is skyrocketing. Is the “year of mining disasters” for 16nm mining machines inevitable?

Around May 11, the third Bitcoin production cut will arrive as scheduled.

By then, the Bitcoin block reward will be reduced from the current 12.5/block to 6.25/block, and the fate of a large number of old mining machines will be rewritten. They used to be the security shield and value source of Bitcoin, but from then on, what awaits them will be electrical appliance decomposition sites and garbage recycling stations.

Faced with the increasing difficulty of mining and the difficulty in finding 7nm mining machines, many miners who have a large number of old mining machines are pinning their hopes on the price increase of coins due to the production cuts and the cheap electricity brought by the flood season in "Yunnan, Guizhou and Sichuan" in May.

So, what is the current status of the previous generation of 16nm mining machines? Will the so-called "production reduction bull market" come as expected? Can the distant water of the "flood season" save the 16nm mining machines from the near fire? How should the old miners plan to minimize this disaster from the perspective of God?

1. Current status of 16nm mining machines: surrounded by strong competitors

According to the latest data from f2pool, as of March 3, 2020, based on an electricity fee of 0.38 yuan/kWh and an output of 0.00001624 BTC/T/day, mining machines such as Shenma M3, Avalon A741, Ebit E9+, and Antminer T9+ that use a 16nm chip process have reached their shutdown price.

Surrounding the 16nm mining machine fleet, only the Bitmain S9 series is struggling to support, and the comprehensive electricity cost of mining has reached 92%. The tool that the mining industry once relied on is about to exit the stage of history, which is tragic.

The first generation of mobile phone ant s9

And the worst part doesn’t end there.

According to a survey conducted by the third-party evaluation agency TokenInsight at the end of 2019, a total of 43 mining machines from the five mining giants Bitmain, Canaan Creative, Shenma, Ebit, and Innosilicon that are currently operating and selling mining machines on the entire network were surveyed. It was found that under the mining difficulty at the time, more than 25 mining machines had a payback period of more than 700 days.

If the life of an Asic mining machine is 18 months (540 days) taken into account, nearly 58% of the mining machines will not be able to make a profit. These 25 models of mining machines are all 16nm process mining machines without exception.

With the rapid delivery of new mining machines, the situation of old mining machines will become even more serious.

Since the beginning of 2019, with the rapid delivery of orders for high-performance mining machines with 7nm and 8nm chips, the network's computing power and difficulty have risen sharply, reaching historical highs of 123EH/s and 15.3T respectively. Since the beginning of 2019, the network's SHA256 mining computing power has risen from around 55EH/s to 123EH/s, an increase of 123%. The mining difficulty has increased by 23% cumulatively, reaching a historical high.

These newly delivered mining machines include Bitmain’s Ant S15, S17, T17, S19 (all using 7nm chips), Shenma Mining Machine’s M20 (using Samsung’s 8nm chip), and Avalon’s A10 and A11 (using 7nm chips).

At the same time, the emergence of more powerful 5nm chips has further intensified this competitive landscape.

In December 2019, Bitmain successfully returned 5nm test chips, making it the first company in the world to complete the packaging of 5nm test-level chips. Mining machines equipped with this type of chip will also be launched in the first half of 2020. Canaan is also following TSMC's 5nm process. Avalon Sales Director Chen Feng also said that more powerful 5nm mining machines are on the way.

The old generation of mining machines are surrounded by powerful competitors.

“I think 40% is available.”

When asked about the proportion of computing power of new high-performance 7nm/8nm chip machines in the entire network, Jiang Zhuoer, founder of Litecoin Mining Pool, told OKEx Intelligence Bureau.

The exponential growth of Bitcoin network computing power

In other words, it took only a little over a year for the computing power of the new generation of mining machines to increase from 0 to 40%. As the domestic epidemic is gradually brought under control and mining machine manufacturers resume work as normal, 7nm mining machines will be delivered quickly, and the computing power and mining difficulty of the entire network will inevitably be pushed up again. By then, the profit margin of 16nm mining machines will be further squeezed.

In contrast to the unsatisfactory profitability of old mining machines, the performance of the new generation of mining machines is outstanding. Taking the Ant S17+ as an example, the shortest payback period is 230 days.

As mining difficulty continues to increase, will the Antminer S9, the representative of the 16nm mining machine era, which is still the main force of some mining farms and accounts for 60% of the BTC network's computing power at its peak, bid farewell to the mining circle stage that it has dominated for 3 years at some point in the future?

For small miners who still use low-computing power mining machines to mine, are they really going to be eliminated by the market?

2 After the production cut, it is almost inevitable that 16nm mining machines will be eliminated?

The Bitcoin block reward will be reduced from the current 12.5 to 6.25, which is not good news for miners.

With strong competitors surrounding us, will the production cuts lead to the elimination of the remaining 16nm mining machines on the market?

"The halving itself is to reduce inflation, but it is a double-edged sword for miners. The halving in May coincides with the replacement of old and new mining machines, and 16nm mining machines are facing closure. Currently, the entire Bitcoin network has about 110E computing power, of which about 40% are mining machines from the S9 era. With the end of the first flood season after the halving, this batch of mining machines will basically enter its final stage. Miners need to make arrangements in advance and control their own risks."

F2Pool COO Dayu said this at an online salon recently held by DeepChain Finance.

Shenyu, co-founder of F2Pool and Cobo Wallet, said:

“The halving of Bitcoin is a fatal blow to existing miners, as their income is directly cut in half. If the price of the currency does not fluctuate drastically at this critical juncture, it may cause the mining machines that currently account for about 50% of the electricity costs to be unable to mine, because their marginal income is less than the marginal cost, and they can only choose to shut down.”

Shenyu also believes:

"At the same time, this period is just the time for 16nm mining machines to be upgraded to 7/8nm mining machines, which has increased the risk of the previous generation of mining machines shutting down. It is preliminarily estimated that the halving will take place in early May 2020. If the price of the currency does not rise sharply during the halving, the current 30-40E mining machines represented by S9 will have to be shut down, and the computing power of the entire network will drop significantly. At the same time, the payback period of the mining machines will be longer."

In other words, with 7nm mining machines competing against each other, the reduction in Bitcoin production will only accelerate the elimination of 16nm mining machines. If the price of the currency performs poorly in the future, the situation of 16nm mining machines will inevitably be made worse.

After the production cut, what will happen to the price of Bitcoin? The future is unknown, but looking back at history, we may be able to find some clues.

The first Bitcoin production cut took place on November 28, 2012, when the total network computing power was 27.6TH/s and the price was $12.27. After the production cut, the total network computing power and the currency price did not rise directly, but remained the same for a period of time. The Bitcoin price remained the same for more than a month, and the network computing power remained the same for 80 days. It did not break through 30T until February 16, 2013, and then gradually increased.

The second Bitcoin halving occurred on July 10, 2016, when the total network computing power was 1.64EH/s and the price was $645.32. After that, these two figures remained until the end of October, and then began to rise slowly.

Bitcoin price changes and the timing of previous production cuts

If this production cut still follows the rules of the previous two production cuts, then after the production cut, the coin price will remain the same for a period of time, and the 16nm mining machine will indeed suffer a "catastrophe".

If production is reduced while market prices remain unchanged, daily revenue will plummet. For Ant S9, whose comprehensive electricity costs for mining currently account for 92%, this is an unbearable burden on life.

The weight of such life can be illustrated by a set of data.

In the year before the 2012 production cut, miners' income was about 3.8Kusdt/T. After the production cut, it dropped directly to about 1.66Kusdt/T, and it lasted until February 16, 80 days later, before recovering. The second production cut lasted a little longer, and it took 10 months to recover to the income level of half a year before the production cut.

Faced with such a severe situation, what should 16nm mining machines represented by Ant S9 do?

3 Mining machine export may be a good solution

Exporting old mining machines in search of cheap electricity may be a good solution.

In early February this year, Barry Silbert, founder of Grayscale Investments, the world’s largest cryptocurrency asset management company, said,

“What I’ve seen recently, maybe in the last three to six months, is a real shift that’s happening is that a lot of the bitcoin mining activity is trying to move outside of China to the U.S. and Canada.”

There are abundant hydropower resources near the Great Lakes

Although Barry did not reveal the reason why miners went overseas, it must be for cheap electricity. This is especially true for second-hand mining machine vendors who are about to be eliminated.

This is because mining costs are mainly composed of mining machine costs, electricity costs, mining site rental fees, and operation and maintenance costs. Among them, mining machine costs and electricity costs account for the majority, and the cost of second-hand mining machines that are about to be eliminated is almost negligible. Therefore, the majority of mining expenses is electricity costs, so finding cheap electricity is the best way to increase profits.

Taking the latest generation of Antminer S17 pro on the market as an example, when the electricity fee is 0.4 yuan/kWh, the daily gross profit of this mining machine is 37.85 yuan, and when the electricity fee is 0.19 yuan/kWh, the daily gross profit of this mining machine is 47.81 yuan. It can be seen that the gross profit at this time increases by 26%.

Similarly, taking the S9, which is about to face the risk of being eliminated, as an example, when the electricity price is 0.40 yuan/kWh, the electricity expenditure will account for more than 92% of the mining income, while when the electricity cost is 0.2 yuan/kWh, the profitability will be very different.

Previously, OKEx Intelligence Bureau interviewed Wu Zheng, a miner in Central Asia. Regarding the foreign mining situation, he said:

"The electricity cost is less than 0.2 cents, and those mining machines that cannot be operated in the country can now make money."

Wu Zheng arrived in Kazakhstan in the first half of 2019 and was one of the earliest miners to go to Kazakhstan to mine.

For Wu Zheng, compared with the domestic thermal power price which generally exceeds 0.4 yuan, Kazakhstan's electricity price of less than 0.2 yuan is extremely attractive to him.

"Generally, the mining machines sent to the Middle East for mining are of the previous generation. The latest generation of mining machines are basically still used for mining in China. The ones that come here are generally Bitmain's Ant S9, Ebang International's Ebit E10, Shenma M3 and other mining machines. Our mine uses a certain model of Ebit mining machine, with a computing power of 18T and a power consumption of about 1800W."

So, can you make money with two cents of electricity bill?

Let's take a certain model of mining machine in Wu Zheng's mine Yibit as an example. When the electricity fee is 0.4 yuan/kWh, the daily gross profit of this mining machine is 3.17 yuan. If the electricity fee is reduced from 0.4 yuan/kWh to 0.19 yuan/kWh, the daily gross profit of this mining machine will be 12.24 yuan, an increase of 286%.

Compared with the mining income of Ant S17Pro mining machine under different electricity price environments, we can also draw such a conclusion: the older the mining machine, the higher the income from overseas mining.

"If you use the Antminer S9 with slightly higher performance, you can get your investment back in one month, but these data are changing as the market changes," Wu Zheng told OKEx Intelligence Bureau.

As the mining industry enters an era of low profits, the mining process itself is a process of competing for capital and energy, and sometimes even luck and courage.

As 16nm mining machines are about to enter their twilight stage, all miners can do is to maximize their investment returns. During this process, some people choose to sell their mining machines by pound to scrap recycling stations, some choose to go overseas and some choose to wait. What choice will you make?