Author: Wang Jiangyue
I have been involved in bitcoin mining for four years. In the bitcoin mining industry and the entire cryptocurrency community, four years often means several cycles of prosperity and decline. This industry is like a thorny rose, full of temptation and pitfalls. Externally, black swans and gray rhinos often remind us of the vulnerability of the cryptocurrency industry itself (yes, it is too easily influenced by macroeconomics and geopolitics). There is a widely circulated saying in “Game of Thrones”: chaos is a ladder. Some people take advantage of the chaos, while others are just getting burnt, making clothes for others. However, by enduring the clouds, we can see the moonlight. Before the arrival of a new cycle, I will document my four years of experience in the industry, to share with all practitioners who carry beliefs and strive forward.
The Cyclical Phenomenon of Cryptocurrencies and the Pseudo-“Decentralization” Phenomenon
When I first entered the industry, what impressed me the most was the constantly fluctuating curve of bitcoin. Fluctuation and cycles are the fundamental characteristics of the cryptocurrency industry. Countless small peaks and valleys depict the price fluctuations like an electrocardiogram (undoubtedly, this is thrilling). Fluctuations tell us about the immediate changes in supply and demand and investor confidence in bitcoin, while cycles provide a historical perspective, depicting repetitive patterns in the industry (LianGuaittern). Given that the price of cryptocurrencies has always been on a spiraling upward trend in each cycle, the cycle itself has become a relatively optimistic expectation. Here, I want to modify a quote from Keynes: in the long run, someone will always survive.
Assessing the value of bitcoin cannot be separated from the long-term narratives surrounding it. These narratives are derived from the white paper published by Satoshi Nakamoto in 2009. It can be seen that both the so-called “decentralization” (P2P technology practice) and bitcoin as a digital gold asset (bitcoin’s deflationary mechanism) are based on a belief in “technological determinism.” However, it precisely overlooks the role of human nature in technological diffusion.
From the development of bitcoin and its mining industry to the present, what I have seen is that “decentralization” is a false proposition. The reality today is that as upstream mining machine manufacturers undergo multiple rounds of technological innovation and evolution, they have become highly centralized. Bitmain, Canaan, and Whatsminer alone account for more than 90% of the market share. The distribution of mining pools is also highly concentrated, with the top 5 pools controlling 90% of the global hash power. The same goes for exchanges, which are highly concentrated in a few platforms such as Binance and Coinbase. The same goes for bitcoin holders, with Satoshi Nakamoto, Binance, and the US government ranking in the top three. Today, the cryptocurrency industry has undergone a transformation in the face of significant global economic and geopolitical conflicts. It requires each of us to reset ourselves, break ourselves, abandon historical experiences, and re-examine and learn with an open mind, like newcomers.
1. Mining Machine Products and Development Trends Under the Great Changes
With the clash of Eastern and Western civilizations, the geopolitical influence, the rise of OPEC+, the pressure from green and environmental extremists, the continuous domestic economic inflation in the United States and the spread of the new cold war of deglobalization, it is an indisputable fact that global traditional energy prices continue to rise, and it will continue for a long time in the future. Therefore, high-efficiency machines are the best choice for future miners. In addition, on the one hand, there are increasing criticisms of the environmental pollution caused by Bitcoin mining, and on the other hand, extreme climate regions limit the physical boundaries of mining activities. The industry urgently needs new technologies and products to cope with these potential challenges. In addition to traditional air-cooled machines, immersion liquid cooling is one of the choices for the next generation of technological breakthroughs and iterations.
In general, there are several factors to consider when measuring the development trends of mining machine products:
1. ASIC Process: The chip determines the performance of the mining machine. Currently, the 5nm process for mining machine chips is mature, and the 3nm advanced process is being improved. With the technological iteration and design progress of mining machine manufacturers, mining machine chips have matured in both design and production processes. Today, almost all major mining machine manufacturers can easily complete the design of high-efficiency mining machine chips on TSMC’s advanced processes (5nm and 3nm), Samsung’s (5nm and 3nm), and SMIC’s N+1 and N+3. Among the machines produced by these three chip foundries, TSMC is undoubtedly the best in terms of both yield and performance, followed by Samsung, and then SMIC. These wafer foundries rely on “harvesting” the R&D investment of mining machine manufacturers to complete their own path of advanced processes in terms of technology and processes. This is a “love-hate relationship” that neither side can do without, and I even think it is a “love-hate relationship that cannot be openly revealed”. Because the public face of wafer manufacturers has always been high-end consumer electronics and artificial intelligence (think about the public relations crisis when gamers protested against Nvidia’s “mining cards” and Intel’s repeated attempts to develop mining machine chips but failed). Some wafer manufacturers are unwilling to admit that it is the mining machine business of cryptocurrencies that gave them the blood transfusion in the early stages of their research and development, allowing them to achieve breakthroughs in advanced processes through a large amount of US dollars.
2. Energy Efficiency Ratio (PE) will be the only competitive indicator: Looking back at the 14 years of Bitcoin’s existence, during the cyclical bull and bear markets, every bear market and the corresponding sharp drop in coin prices also led to a drop in electricity prices due to the shutdown of a large number of mining machines. However, this round of bear market starting in the middle of 2022 is the first time in history that there has been a reverse development of falling coin prices and rising electricity prices. Coupled with the upcoming fourth round of block reward halving, in a sense, there has been a “omen” of “strangling” the mining industry. Of course, the development of mining machine chip processes and the launch of high-efficiency machines have somewhat mitigated the “pronouncement of the mining doomsday”. Therefore, in the future market, mining machine manufacturers will inevitably compete in a market with low coin prices and high electricity costs, and the PE of mining machines will become the only important performance indicator. Miners (as long as they have money) will choose high-efficiency mining machines. In today’s market environment, 25 J/T is considered entry-level, and in order to have a competitive advantage in the market, it is necessary to research and develop and produce mining machines that consume around or below 20 J/T. In terms of machine form, in addition to traditional air-cooled machines, efforts should also be made to promote the development and mass production of immersion liquid-cooled mining machines in order to better adapt to extreme climatic conditions and be more friendly to human habitation.
3. Competitive product parameters in the next 6-12 months (before and after halving):
· Competitive products:
Power Efficiency (PE): 20 J/T +-3%
Hashrate: 160 TH/s +-3%
Power Consumption: 3200W +-3%
· Entry-level products in the market:
PE: 25 J/T +-3%
Hashrate: 130 TH/s +-3%
Power Consumption: 3250W +-3%
· Other less energy-efficient products with an energy efficiency ratio above 30 J/T will face shutdown and elimination. Even selling to customers with low electricity costs or stealing electricity, it lacks competitiveness. Moreover, this market for stealing electricity or “ultra-cheap electricity” is very niche, extremely unstable, and also suspected of illegal activities, so do not invest manpower and resources in such a market.
4. Why immersion cooling is the future form and infrastructure of mining machine products:
The mining machine industry faces two main contradictions. One is that the investment in advanced process chip development is getting higher, often reaching hundreds of millions, while the performance improvement obtained is getting smaller. For mining machine manufacturers, this is a process of diminishing marginal returns on investment. For mining machine manufacturers, they need to achieve better energy efficiency through low-cost improvements. Immersion cooling is the most efficient cooling technology. In this environment, it allows machines to run at overclocking to improve performance without the need for chip upgrades. The combination of immersion cooling and containers has a smaller footprint, higher modularity, lower noise, and can overcome the impact of extreme weather conditions and sandstorms. It is expected to become the infrastructure for the next generation of mining.
Another contradiction in the mining industry is that the total network computing power and mining difficulty continue to reach new highs, while block rewards continue to halve. Therefore, for miners, this is also a process of diminishing returns on investment, and only large miners are likely to succeed. It can be seen that the integration of the industry in the future will further intensify. In turn, the integrated mining machine industry has more abundant funds and motivation to drive product iterations and mine construction, providing prerequisites for the large-scale application of immersion cooling technology.
II. Market and sales forecasts: The relationship between supply chain, spare parts inventory, and sales
Wafers and contract manufacturing: In general, the mass production cycle of wafers is 4-6 months. Due to the historical dominant position of wafer manufacturers, mining machine manufacturers usually need to make full payment or at least 50% advance payment to secure wafer manufacturing. This puts considerable cash flow pressure on mining machine manufacturers, and combined with the unpredictable bull and bear cycles of Bitcoin, it also increases the uncertainty of future sales shipments for mining machine manufacturers. To solve this dilemma for mining machine manufacturers, it is necessary to make accurate market forecasts and sales strategies to successfully avoid risks. In my opinion, based on market conditions and supply chain situations, it is necessary to control the proportion of spot sales, increase the proportion of futures sales, and continuously optimize the customer structure to reduce risks. The specific strategies are as follows:
1. Futures Sales Strategy: 80% of the output is used for futures sales, with delivery scheduled 6 months later in monthly batches to ensure a balanced and efficient operation of production and supply chain. This strategy can effectively reduce cash pressure for wafer (chip) inventory, lower procurement costs for auxiliary materials and other accessories, and improve supply chain efficiency.
2. 50% Prepayment Strategy: Customers need to pay 50% of the total contract amount as a prepayment within one week after signing the contract, which is used to lock in unit price and production capacity, and also ensures a large amount of cash flow for the mining machine manufacturers to purchase wafers. This strategy guarantees two things: first, it guarantees the normal cash flow needed for mining machine manufacturers’ research and development, production, and procurement; second, it spreads the risks that may arise from a bear market, as the 50% prepayment almost covers the cost of the machines.
3. 2:8 Principle for Key Clients Strategy: As mentioned at the beginning, the decentralization of this industry is a false proposition. In fact, it is a highly centralized industry, especially the mining business, which requires a large amount of capital and technical support. Those who can survive the ups and downs are generally “big miners” who have technology, capital, and teams. For them, mining is more about long-term strategy and business layout, rather than short-term speculation like retail investors. Therefore, key clients often have a strategic coexistence, win-win, and prosperous partnership with mining machine manufacturers. They are the backbone of the cryptocurrency industry, while retail investors at best fill in the gaps, because the lifespan of retail customers is too short and their liquidity is too strong to maintain long-term cooperation. Based on the author’s observations, very few retail investors have survived for more than a quarter in the past 5 years. In the early days of the industry, apart from Bitmain, most of the clients in the mining machine industry were domestic mines and domestic miner retail investors, with almost no international key clients. In the past 4 years, the author has seen various mining machine companies gradually establish strategic key client systems based on international key clients, including well-known mining enterprises and emerging US-listed mining companies, such as Genesis, Hut8, CoreScientific, Bitfarm, Bitfury; as well as emerging listed companies such as HiveBlockchain, Mawson, IrisEnergy, Marathon, Riot, etc. The sales revenue from key clients accounts for an average of over 80%, providing a stable revenue base.
III. Sales Operations and Sales Management
1. Market Forecast: Generally, sales operations need to make a rolling forecast every three months for the next 12 months. However, it is not easy for the Bitcoin mining machine industry to make such sales forecasts due to its irregularity. Absolute prediction is not possible, but basic forecasting is still achievable. For example, it is possible to predict a rolling sales every three months by combining the company’s own futures orders with market trends. Since mining machine production involves a long supply chain from wafers to products, sales operations need to have professionalism and market insight to achieve as accurate forecasting as possible and reduce stockouts or inventory.
2. Sales Price: The price of mining machines is very transparent. The market is not large and there are not many players. In addition to pricing based on experience and cost, mining machine manufacturers should also consider channel inventory, future 3-6 months of mining farm capacity and power supply, coin price, electricity price, and network-wide computing power. In terms of pricing, generally speaking, the pricing with a competitive advantage is the one with an investment payback period of 12-18 months. The pricing for 18-24 months is average, and it is basically difficult to sell for 24-30 months. Most miners have a speculative mentality. On the one hand, they only want to make quick money, and on the other hand, they do not have the ability to predict the medium and long-term trend of BTC.
3. After-sales Service: The working environment of mining machines is very poor, so stability, ruggedness, ease of maintenance, and ease of replacement are important indicators. In addition, timely after-sales service is of paramount importance. In a normal mining environment, time is BTC, so stable and rugged machines and timely after-sales service are also important options for miners to consider when purchasing.
4. Sales Reports and CRM: This industry is different from traditional fast-moving consumer goods or traditional IT industries. It is more like a speculative industry similar to finance. Therefore, sales analysis can only reflect the current data, and it should not have much reference value for history and the future. On the contrary, coin price, mining farm capacity, electricity price, network-wide computing power, difficulty coefficient, and other data have more realistic guiding significance for sales. Customer data in the CRM is also periodically eliminated, with a low retention rate. The main long-term customers are a dozen or so key accounts, and most of the small and medium-sized retail investors die “before the dawn of the bull market”.
Four, Channels: Opportunities and Risks Coexist
In any industry, whether it is 2B or 2C business, “channels” are essential. Taking the fast-moving consumer goods industry as an example, some people once believed that “channels are king”, mistakenly thinking that with channels, they have everything. Distributors and agents often end their dreams at a self-satisfied pace. Brand manufacturers firmly stick consumers to their products, brands, and services, and also give the channel operators a hard lesson. In the fast-moving consumer goods field, channel operators have matured. After nearly 20 or 30 years of development and management, they have abandoned the arrogance of considering channels as king in the early days. Today, they have become “willing” green leaves under the banner of brand manufacturers, silently making money. This low posture has become their norm and three-view cognition, conforming to the old saying: quietly making a fortune. However, looking at the development of the 2B industry, channel operators are moving towards a more professional direction. They not only need to expand channels, provide pre-sales, mid-sales, and after-sales technical support, improve solutions, but also have strong financial support for inventory. Undoubtedly, such channel operators also have more say and decision-making power. It is precisely this “desire for power” that has achieved their ambitious “cloud and rain”, often inadvertently disrupting the brand’s channel strategy, pricing strategy, inventory strategy, and customer management strategy, and unintentionally standing against the brand manufacturers.
1. The channel is like water, it can carry a boat or sink it
Channel management is a complex art of management. It is not just a cold and rigid channel, but more about understanding human nature. It is a game between brand owners and channel partners, as well as a touchstone for the human nature of sales personnel. When brand owners are in a weak position, channel partners will maximize their own interests regardless of the interests of the brand and customers, quickly harvesting all possible benefits, with clear short-term speculative motives. In this situation, there is often mutual dumping between regions/channel partners, competition for customers, price-cutting, resulting in the brand owners unable to ship normally, with high inventory pressure and chaotic market prices. There are constant customer complaints and internal competition among sales personnel. The brand owners are held hostage by the channel partners, not only losing profits but also offending customers. When channel partners are in a weak position, brand owners often blame them for not expanding effectively and missing business opportunities. Looking at the development and routines of channel partners in the mining industry in recent years, they use very skillful strategies, such as closing the market during a bull market, playing cards and drinking, and manipulating the market during a bear market, taking advantage of mining machine manufacturers.
(1) Bull market: They do not participate in the relatively high-priced mining machine purchases at this time, but watch from the sidelines and have fun with friends. If there is an opportunity, they will quickly make a move and sell at a higher price.
(2) Bear market: They occasionally provoke mining machine manufacturers who are under pressure from inventory and cash flow, set up traps and deceive them by signing a “so-called mortgage installment payment contract” with a very low down payment ratio, which locks the price and production capacity of the mining machine manufacturers. Then, they turn around and make announcements in the market, increase the price slightly (their offer is even lower than the official price of the mining machine manufacturers), and sell the machines or even resell the contracts. The result is a chaotic market price. As long as the channel partners’ inventory machines or machines on the contract are not sold out, the mining machine manufacturers cannot sell their inventory because the price and shipment are completely controlled and held hostage by the channel partners. The channel partners make money, while the mining machine manufacturers are being exploited.
2. The chaos of channel management in the mining machine industry from the perspective of several leading manufacturers
(1) During a bull market, mining machines are in short supply, and it is difficult for miners and agents to get their hands on one. On the one hand, leading manufacturers retain the maximum sales profits in their exclusive sales companies. On the other hand, sales or agent layers add markups, often fostering bottom-level kickbacks. From the market’s perspective, the prices are not transparent, there are layers of markups, and the sales experience for customers is very poor, leading to a poor reputation for integrity and the loss of major customers.
(2) In a bear market, due to the previous squeeze on channels for hoarding, once the bear market arrives, agents panic and choose the strategy of dumping goods to “walk away”, leading to instant market price chaos. Miners and channel traders desperate to recover their losses demand refunds, returns, and vouchers from mining machine manufacturers. If the manufacturers have sufficient cash, they can accept refunds to make up for the difference. But the problem is, in a bear market, who has extra cash? Who doesn’t want to reserve some cash for the winter? Moreover, the initial receiving price for miners and channel traders may not necessarily be the original factory price. Since the bear market this year, channel traders have collectively turned against the manufacturers, repeatedly staging lawsuits.
(3) A large amount of channel inventory is accumulating, and price-cutting sales are imminent: According to incomplete statistics, there are currently about one million units of channel inventory in the market, including inventory from agents and mining companies that have not been put online. With the continuation of the bear market and the upcoming halving, the new generation of mining machines will be completed, and the current channel inventory machines will become scrap metal. In order to minimize losses, leading manufacturers will inevitably cut prices and sell off their inventory in a timely manner. In this round, if individual leading manufacturers can cut prices and sell off their inventory in a timely manner, they can achieve two goals with one stone. On one hand, they can solve the pressure of inventory, and on the other hand, they can crush other manufacturers before the dawn of the bull market. Other manufacturers who want to survive need to adopt a faster and more aggressive sales and pricing strategy, a precise price-sniping strategy.
3. 2B Business Model: B2B Model vs Retail Customers and Online Retailers:
(1) Mining machine sales is a simple 2B business. Large customers bring large sales volume, and customer professionalism is the foundation. Retail customers and online retailers are just filling in the gaps. Some mining machine manufacturers have an unrealistic expectation of retail customers and online retailers, thinking that they can sustain the company. In fact, whether it’s Bitmain, Canaan, or Avalon, 80% of sales come from less than 20% of large customers.
(2) Communication and service costs between large customers and retail customers: Large customers have professional operation and engineering teams, dedicated personnel for after-sales service and updates, which is efficient and labor-saving. Retail customers lack teams, often a small firmware update or a power cycle requires a bunch of after-sales engineers from the mining machine manufacturer. It is often their own lack of understanding that leads to complaints against the manufacturer. For the manufacturer, it is a thankless task, and the business is not big enough to afford missing any service.
Five, Smokeless War of Miners and Mining
1. In the early days, miners were mainly located in mining farms in China’s Yunnan, Sichuan, Xinjiang, and other regions, relying on thermal power and abundant water resources during the wet season. The electricity and maintenance costs of mining were very low. Deploying 10,000 machines and hiring 3-5 rural high school graduates who could be trained quickly to keep the mining farm running. Therefore, China’s mining industry has a significant competitive advantage, and for a time, China occupied 70% of the global network computing power. The miners during this period were basically the first batch of Chinese Bitcoin pioneers and early adopters. They were either speculators with some spare money and sharp vision, or tech-savvy individuals involved in blockchain and BTC. After several cycles of bull and bear markets, this group of miners gradually stabilized. There are only a few major miners in China, quite concentrated, just like mining pools and exchanges. The nature of mining determines that miners must obtain the most bitcoins at the lowest cost, so stealing electricity and accessing low-cost electricity is their preferred choice. Therefore, their relationship with local officials also becomes an important factor related to their interests. Often, they collude with each other, to the point that the Chinese government later introduced measures to combat corruption and promote green carbon neutrality, hitting two birds with one stone by cracking down on mining activities across the country.
2. On September 3, 2021, the State Development and Reform Commission and eleven other departments jointly issued a document to crack down on “mining” of virtual currencies. Then, on September 24 of the same year, the People’s Bank of China and ten other departments issued a notice on further preventing and disposing of the risks of speculation in virtual currency trading, directly causing chaos in the Chinese cryptocurrency and mining circles. Their first move after realizing the situation was to “migrate platforms and employees overseas” and “transport mining machines to Kazakhstan, a friendly Central Asian country near Xinjiang”.
(1) Kazakhstan not only has cheap electricity, but also has clear laws that make mining legal and exempt from taxes. Overnight, it became a paradise sought after by Chinese miners. In just three months, from October to December, the Bitcoin hash rate in Kazakhstan increased to 30% of the global hash rate, transforming from an unknown player to the world’s second largest contributor to hash power. The structure of miners also changed during this period, with the addition of energy participants from Kazakhstan in addition to Chinese miners. However, the dream didn’t last long. On January 6, 2022, riots broke out in Kazakhstan, shattering the dreams of all Chinese miners and also ruining the short-lived dreams of wealth of Kazakhstan miners. Since then, Kazakhstan’s mining policies, tax policies, and electricity prices have embarked on a “self-destructive road to hell”. Large numbers of Chinese miners fled to Kazakhstan, carrying their machines and bitcoins, rushing day and night towards what they believed to be the next golden land – the United States.
(2) The American market and American miners, who have always been overwhelmed by Chinese mining machines and miners, saw hope and took advantage of the situation to seize mining resources. In the United States, especially in Texas, they made large-scale investments, increased leverage for Bitcoin financing, built mining farms, and bought mining machines. During this period, a large number of Chinese miners also flocked to the United States, and within a few months, the hash power in the United States surged to the top of the global ranking. The structure of miners during this period also added institutional investors with Wall Street backgrounds and a group of listed mining companies. At this point, the United States completed the entire strategic takeover from mining Bitcoin at the bottom to operating exchanges at the top. It became the kingdom of Bitcoin that dominated the world with its global hash power, global exchanges, and global mining pools. The only missing piece is that mining machine manufacturers have not been “tricked/forced” into the tiny final link in the United States, but it seems that it’s only a matter of time to complete this step as well.
(3) Looking at the miners who are still alive, they can basically be divided into: energy miners, institutional investment miners, traditional old-school mining companies, and emerging NASDAQ-listed mining companies. Among them, the most adept at operating are the old-school mining companies, who have weathered storms and remain strong. The main reason for their resilience lies in their understanding of the industry, control of risks, and timely anticipation of market ups and downs.
Sixth, Mining Business and Strategy
1. Three Major Risks of Mining Business
(1) Policy and Regulatory Risks: Mining business is a high-risk business both domestically and internationally. Uncertainty risks at the policy level can arise anytime and cannot be predicted or avoided. Issues such as legality, tax compliance, compliance of fiat currency and BTC transactions, and how to avoid the risk of dirty coins.
(2) Risks of Electricity Prices and Power Supply: Electricity prices are the most basic factor determining the profitability and quick return on investment of mining. Maintaining stable low electricity prices is the key to the profitability of mining business. In addition, stable power supply and 24/7 electricity supply are also crucial factors for stable profitability.
(3) Risks of Partners: The high profitability of this industry often triggers human greed. To avoid the risk of partners “backstabbing each other” or “closing the door and beating the dog,” it is necessary to avoid cooperating with short-term opportunists, speculators, and unfamiliar customers in mining business.
2. Selection of Mining Business Partners: Three Types of Partners
(1) Resource-based customers: These are well-known local companies and entrepreneurs who have energy resources, social status, and honor. Such customers are not willing to engage in illegal activities or violate regulations, nor will they engage in shady practices for a small profit. Often, such customers can also help mining machine manufacturers manage local government relations, which is beneficial for the expansion and sustainable development of mining business.
(2) Emerging Listed Companies (Customers): North American mining listed companies are standardized, professional, technologically mature, operationally efficient, financially compliant, and backed by institutional investments with abundant funds. They value reputation and long-term development, have long-term plans, and are good strategic partners for mining business.
(3) Established Mining Companies: They are evergreen trees in this industry, operating in the mining and cryptocurrency circles for many years. They are highly professional, knowledgeable about the industry, proficient in technology and operations, and are experienced partners. However, they are also penny-pinchers and pay attention to small details, which may lead to inadequate industry competitiveness. Collaborating with them may be advantageous for them, but it can also enhance the mining machine manufacturer’s self-operated mining operation and management capabilities.
3. Why Engage in Mining Business?
(1) In a bull market, mining business can bring cash (BTC) to mining machine manufacturers every minute and every second, like printing machines, which can rapidly increase the company’s revenue, market value, and the value of diversified operations.
(2) In a bear market, machine prices may fall below production costs, and it may be more profitable to put the machines into self-operated mining in mining farms rather than selling them. On one hand, this cushions the supply chain, maintaining normal production and supply chain operations. On the other hand, it reduces inventory and maintains low-level operational income. Once the bull market approaches, the machines and mining business can be sold together to capture greater profits, or mining can continue to gain huge value from BTC. Both options can be freely switched.
(3) Hashrate and Hashrate Business: Build a hashrate platform and hashrate sales business, seamlessly evolving from simple miner manufacturer business to advanced business models such as hashrate sales and hashrate securitization.
4. Where are the future mining farms located?
(1) Current indications suggest that the US government is stifling cryptocurrencies. In order to maintain the dominance of the US dollar, they are systematically eliminating Bitcoin trading platforms (FTX, Coinbase, and Binance are recent examples). In addition, in the past year, many unfriendly policies towards mining have been introduced in various states in the US (such as environmental impact assessment requirements, electricity prices, taxes, etc.). I believe that in the near future, the US government will “shut down” mining companies like killing dogs. Overnight, the current 3000 MW mining farms in the US will be wiped out, and there will be no more Bitcoin mining in the US. In short, the US market will no longer exist. Continuing to invest in the US market will be extremely dangerous, and building mining farms in the US is an unwise and high-risk decision.
(2) Kazakhstan: A typical Central Asian government management model, corrupt bureaucrats who pretend to understand but actually don’t, and end up causing their own downfall. Since the turmoil in January 2022, the government has successively introduced a series of unfriendly policies towards mining and trading, directly destroying the once thriving mining industry in Kazakhstan. From being ranked second globally, accounting for 30% of the total network hashrate, it was reduced to less than 5%. I am curious, is this the outcome that Kazakhstan wanted, or is it the result of the US government encouraging Kazakhstan to do so?
(3) South America is the next mining choice: abundant hydroelectric power, cheap electricity prices, and inexpensive land. Currently, the policies are relatively friendly. For example, Uruguay, Paraguay, Mexico, etc. The downside is low political stability, low transparency, and poor policy continuity.
(4) Middle Eastern Arab countries: cheap electricity prices, inexpensive land, and friendly policies. Liquid cooling machines can adapt more efficiently to extreme climates. The downside is that the annual power supply efficiency is less than 70%, various resources are highly monopolized, and “Arab traditional business etiquette is lengthy”.
(5) North African countries: abundant power resources, lack of industry, and mining is the best industry for rapid development of the local economy, receiving strong support from the current government. The risk is political instability and poor security. Recently, countries with abundant hydroelectric resources and cheap electricity prices include Ethiopia.
(6) Russia: abundant power resources, early development of the mining industry, and a large number of highly skilled practitioners. The downside is that Russia is subject to US sanctions, the business environment is not good, and the contractual spirit is lacking.
(7) Iran: Let’s talk about Iran separately because they have been mining with second-hand machines from the market, secretly mining as if they have never stopped, and it is controlled by the Revolutionary Guards.
7. Mining Machine Manufacturers Going Global: Grasp Both Globalization and Local Strategy
The global economy has flourished under the development of globalization in the past 30 years, especially developing countries led by China have benefited greatly and have experienced rapid economic and technological growth, becoming beneficiaries of globalization. Since China banned the mining industry in 2021, regions such as North America and Central Asia have increased their support for the mining industry, and the “mining capital” Sichuan, which was prevalent in the Chinese internet, has also given way to Texas, USA. Various mining machine manufacturers are seeking overseas paths. In my opinion, from the perspective of company business, it is completely correct for mining machine manufacturers to adhere to a global strategy. The key is how to implement the globalization strategy and how to choose the path of globalization.
1. Grasp Both Globalization and Local Strategy: Local talents and local economic foundations need to be strong. Only with a strong local foundation can there be the ability to go out, go solidly, and have talent reserves, economic support, and material foundations for globalization. Otherwise, even if they reluctantly go global, it will be short-lived and at best a flash in the pan.
2. The Path of Globalization: Looking at China’s economic development in the past 30 years, in traditional physical sectors, except for the photovoltaic industry, Chinese companies have mostly been limited to cheap labor and commodity exports. It is rare to see original technological products and companies going global. In the fields of the internet and communication equipment, there have been successful examples of going global in recent years, such as Huawei, Transsion Holdings, and entertainment companies represented by ByteDance and miHoYo. The uniqueness of the mining machine industry lies in the fact that, regardless of how much doubt it has faced, it represents the combination of high-end manufacturing and emerging finance to a certain extent. In the past few years, due to the highly monopolistic nature of the industry, the overseas expansion of mining machine manufacturers has been limited to product exports, and their service capabilities have lagged behind. At the same time, the cyclical switching between a strong seller’s market and a strong buyer’s market has not given mining machine manufacturers sufficient motivation to build service capabilities. However, since 2021, mining machine manufacturers have gradually realized the importance of services with the rise of institutional customers.
Currently, some mining machine manufacturers have started to establish service stations and subsidiaries in overseas markets, which is a good thing. However, at the same time, it is necessary to pay attention to the perspective of the local area in globalization, adapt to local regulations, work habits, and culture to maintain long-term customer relationships, in order to gradually build a moat of service capabilities. These are not achievements that can be accomplished overnight but require gradual progress in order to replicate successful management and business models. Rome wasn’t built in a day, and there is often only one path to success, while there are various pitfalls on the path to failure. What I have seen firsthand is that some companies bloom everywhere, adopting a nomadic mode of occupying land, will eventually deplete resources and end up in failure.
3. The US Government and Cryptocurrency: The relationship between the US government and cryptocurrency is complex. The US government obtained a large amount of Bitcoin by shutting down the Silk Road. The anonymity of cryptocurrency and its use in illicit transactions, as well as its provision of funding channels for sanctioned countries such as Iran and Russia, are not tolerated by the US government. They will not tolerate any challenge to the supremacy of the US dollar, just as they are unwilling to accept China’s peaceful rise. The lawsuits filed by the SEC against Coinbase, Binance, and Tether following a series of scandals involving companies like Three Arrows Capital and FTX demonstrate the determination of the US Democratic government to take down cryptocurrencies.
4. Tether and Its Strategy: As the largest stablecoin in the world, it is crucial to maintain the stable development of the BTC market. According to a senior industry insider, a Tether executive recently revealed that they plan to allocate a fixed percentage of their $4 billion annual profit to purchase BTC. At the same time, they will expand their mining operations and invest hundreds of millions of dollars each year to support computing power and mining machine manufacturers. In this regard, Tether has become a rare “Don Quixote” in the industry. Here, the author boldly imagines that, against the backdrop of a run on crypto-friendly banks, Tether’s ambition may be to play the role of “Tether Reserve” in the crypto industry and secure its position as the leader in the market through a crucial market rescue.
8. Speculation on the Near Future
The development of Bitcoin cannot be controlled by a single government or institution, especially in the context of conflicts between Eastern and Western civilizations, geopolitical conflicts, currency hegemony, energy shortages, and the new Cold War under deglobalization. The world may need cryptocurrencies, especially Bitcoin, more than ever.
“Institutional Bull” Cyclically Resurfaces
From 2010 until now, Bitcoin has been declared “dead” 474 times (see 99Bitcoins), which is enough to prove that Bitcoin is like an unbeatable cockroach. What the author has observed is that after a series of scandals, Bitcoin has shown signs of resurgence, with the US government and institutional investors often doing their own thing when it comes to Bitcoin. In the eyes of the US government, the supremacy of the US dollar is paramount, and Bitcoin is at most a black glove that cannot be laundered. However, institutions see the opportunity to profit. BlackRock, the world’s largest asset management company, is personally promoting a Bitcoin spot ETF, and its application for an ETF has had both successes and failures. If successful, in the near future, it is highly likely that we will witness the glory of the institutional bull in 2021.
The entry of institutions will further drive changes in the capital structure of the Bitcoin industry. In the early years, the cryptocurrency and mining industries were mostly dominated by speculative investors who were often either extremely profitable or ended up losing everything in the short term. Therefore, the industry has always been about a few people quietly making a fortune. In the later part of 2018 and early 2019, institutional investors from traditional Wall Street financial funds, family funds (old money), and companies with traditional energy backgrounds began to enter the market, gradually changing the composition of the industry. With the entry of old money, the price of Bitcoin also started to dance with Wall Street. Of course, this also means that the volatility of Bitcoin will be reduced.
Bitcoin’s “Last Name” is Not Important, Making Money is Important
As for the legalization of cryptocurrencies, it has always been volatile, with the SEC and CFTC quarreling on a daily basis. In the past few days, U.S. senators will introduce a new revised version of cryptocurrency regulation to expand the power of the CFTC. It stipulates that even decentralized assets can be regulated as commodities as long as they do not involve corporate debt and equity. It seems that Americans also understand the “wisdom of the future,” and the debate over what Bitcoin’s last name is can be temporarily set aside. Currently, with high inflation and a lack of buyers for U.S. debt, the credibility of the U.S. dollar is further eroded. Quietly dumping coins is also one of the measures taken by the U.S. government to recover dollars and boost confidence. Therefore, in this context, whether the legalization of cryptocurrencies is truly compliant or just old wine in a new bottle remains to be seen. However, as long as liquidity remains, the music and dance can continue.
Asia Should Not Be Ignored
In 2021, China dealt a heavy blow to Bitcoin, and two years later, the United States sued major exchanges such as Binance and Coinbase. Now China has tacitly approved support for Web3.0 and cryptocurrencies in Hong Kong, indicating that governments’ attitudes toward cryptocurrencies are ambiguous. In these two years, funds have started to flow back to Asia, with Singapore booming and Hong Kong not willing to give up its position as the financial leader in Asia. Singapore and Hong Kong are competing for funds, and the biggest winners are definitely cryptocurrencies. It is worth noting that in June 2023, Japan’s “Funds Settlement Law Amendment Bill” was passed in the Upper House, becoming the world’s first country to enact a stablecoin law. In the foreseeable future, Asia will still be an important player in the cryptocurrency industry. In addition, in the context of the global economic downturn, more and more governments in Africa and South America are adopting an open attitude.
In the new Cold War landscape, the results of the U.S. government’s regulation of Binance and Coinbase are different. Binance’s market share in the U.S. is only 0.9%, while Coinbase’s market share in the U.S. jumped from 48.4% in June to 55%. In the covert battle of cryptocurrencies, both China and the United States may support their respective centralized exchanges to attract overseas funds and take measures to prevent massive capital outflows when necessary.
In Central Asia, Kazakhstan has always attracted the most attention. In 2021, it became the region with the fastest-growing hash power, but then it fell sharply due to power outages and policy reasons. The Kazakhstani government collected $7 million in taxes from cryptocurrency mining entities in the past year, and as of April this year, the government’s tax revenue from crypto mining was $541,000. If this standard continues, the estimated annual tax revenue for 2023 will be only about $1.62 million. This is mainly due to the country’s cryptocurrency mining industry being hit by policies. As a resource-based country, it is not unreasonable to use surplus electricity to generate income. The previous round of policies was mainly a response to illegal mining and low electricity taxes for cryptocurrency mining. The cryptocurrency mining industry, as one of the sources of tax revenue, will not be completely banned, and the extent of policy crackdown depends mainly on how much benefit the government can derive from it. What I see is that the country plans to introduce new regulations, including miner licenses, the use of licensed exchanges and mining pools, etc. These measures will further reduce tax evasion and improve industry transparency, rather than expelling the mining industry from the country. The sharp decline in mining tax revenue also indicates that the country’s mining industry needs time to recover and rebuild confidence in capital. In addition, improving the efficiency of electricity use requires the introduction of more advanced machines and equipment, so in the coming period, it is possible to see the Kazakhstani government relax import VAT and digital mining tax fees related to mining machines.
Green Mining: The “Pledge” Bitcoin Mining Must Make
After the previous “crypto winter”, the Bitcoin mining industry has entered a consolidation period. The current situation facing the Bitcoin mining industry includes: 1) Political correctness: sustainability issues of the Bitcoin mining industry under the carbon reduction framework; 2) Source of funds: Bitcoin ETF is a double-edged sword for the mining industry. The launch of ETFs will undoubtedly boost the price of the currency and help miners’ income. However, ETFs also provide institutional investors with zero-threshold deposit channels. In that case, who would bother to invest in large-scale mining farm infrastructure and equipment procurement? 3) Listed mining stocks have begun to seek new narratives of “diversified income”, using mining graphics cards for AI.
Today, faced with the powerful US government, the Bitcoin mining industry cannot “enclose itself”. In order to survive, it must have a touch of “green”. First, regarding the sustainability of mining. In the framework of global carbon reduction, green mining is the only way for the industry to comply in the long run. This also means that only companies with strong funding and deep government relations can survive. Currently, listed companies in the industry have taken action and established the BMC Mining Association to disclose operational data regularly. These companies also need to form professional lobbying teams to clarify the continuous optimization of the power structure of the crypto mining industry and the role as a source of subsidies for new energy power. Secondly, mining companies are also seeking cheap hydroelectric power in regions outside of North America, such as Northern Europe, and increasing their ties with energy companies, especially new energy companies. Finally, ESG will undoubtedly become a standard narrative for future listed companies, and Bitcoin mining companies are no exception. It would be a good idea to establish organizations similar to green foundations, allocate some money each year as a “pledge” to US decision elites, and seek greater discourse power in legal and public spheres.