Author | Wang Jiangyue
Foreword
I have been involved in Bitcoin mining for four years. In the Bitcoin mining industry, and even in the entire cryptocurrency circle, four years often means several cycles of prosperity and decline. This industry is like a thorny rose, full of temptations and traps. Outside the industry, black swans and gray rhinos often remind us of the vulnerability of the cryptocurrency industry itself (yes, it is too easily affected by macroeconomics and geopolitics). There is a widely circulated saying in the TV series “Game of Thrones”: chaos is a ladder. Some people profit from chaos, while others are just pawns in the game. However, with the hope of a new cycle on the horizon, I will record my four years of experience in the industry in writing, to share with all the practitioners who carry their faith and move forward.
The cyclical phenomenon of cryptocurrencies and the pseudo-“decentralization” phenomenon
- Quick look at Binance’s newly launched FDUSD a US dollar stablecoin with a Hong Kong label.
- In-depth Perspective Survival Considerations for Mining Machine Manufacturers in the New Cold War Environment.
- Understanding TapiocaDAO in One Article Solving the Fragmentation of DeFi Liquidity on LayerZero
When I first entered the industry, the most impressive thing for me was the constantly fluctuating curve of Bitcoin. Fluctuation and cycles are the basic characteristics of the cryptocurrency industry. Countless small peaks and valleys depict the fluctuation of prices like an electrocardiogram (undoubtedly, it is exciting). Fluctuations tell us the instantaneous changes in supply and demand and investors’ confidence in Bitcoin, while cycles provide a historical perspective, depicting the repetitive patterns of the industry (LianGuaittern). As the price of Bitcoin has been spiraling upward in each cycle, the cycle itself has become a relatively optimistic expectation. Here, I have to modify a famous quote from Keynes, in the long run, some people will survive.
Estimating the value of Bitcoin cannot be separated from the long-term narratives surrounding it. These narratives all stem 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 as a safe haven asset (Bitcoin’s deflationary mechanism) are based on a “technological determinism” belief. 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 fact today is that as upstream mining machine manufacturers, after experiencing multiple rounds of technological innovations and evolutions, they have become highly centralized. The market share of Bitmain, Canaan, and Ebang alone exceeds 90%. The distribution of mining pools is also highly concentrated, with the top 5 pools controlling 90% of the global computing power. The same goes for exchanges, which are highly concentrated in a few platforms such as Binance and Coinbase. The same is true for Bitcoin holders, with Satoshi Nakamoto, Binance, and the US government ranking among the top three. Today, the cryptocurrency industry has undergone tremendous changes in the global economy and geopolitical conflicts. It requires each of us to reset ourselves, break our own biases, abandon historical experiences, and approach it with the mindset of a beginner, willing to learn humbly.
1. Mining Machine Products and Development Trends in the Era of Great Changes
With the conflicts between Eastern and Western civilizations, geopolitical influences, the rise of OPEC+, pressure from environmental extremists, sustained domestic economic inflation in the United States, and the spread of a new era of deglobalization and cold war, it has become an undeniable fact that global traditional energy prices continue to rise and will continue to do so for a long time in the future. Therefore, high-efficiency machines are the best choice for future miners. On one hand, there has been a growing criticism of the environmental pollution caused by Bitcoin mining, and on the other hand, extreme climates have placed physical limitations on mining activities. The industry urgently needs new technologies and products to address these potential challenges. In addition to traditional air-cooled machines, immersion liquid cooling is one of the next-generation technology breakthroughs and iterations.
In general, the main considerations for measuring the development trends of mining machine products are as follows:
1. ASIC Process: The performance of mining machines is mainly determined by their chips. Currently, 5nm process chips for mining machines are mature, and 3nm advanced process chips are being perfected. With the technological iteration and design progress of mining machine manufacturers, mining machine chips have matured in both design and production, and today’s 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 these three chip manufacturers, TSMC undoubtedly has the best performance in terms of yield and efficiency, followed by Samsung, and then SMIC. These wafer foundries rely on the research and development investment of mining machine manufacturers to complete their path to advanced processes in terms of technology and processes. This is a kind of “love-hate relationship that neither can do without,” and the author even thinks of it as a “love-hate relationship that cannot be openly revealed.” Because the public face of wafer manufacturers has always been in high-end consumer electronics and artificial intelligence (think of gamers protesting against NVIDIA’s “mining cards” and Intel’s repeated failures in producing mining machine chips). Some wafer manufacturers are unwilling to admit that it was the mining machine business of cryptocurrencies that provided them with the initial research and development funding, 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 Bitcoin’s 14 years, the market has experienced cycles of bull and bear markets. During each bear market, as the price of the currency drops significantly, the shutdown of a large number of mining machines also leads to a decrease in electricity prices. However, this round of bear market starting in mid-2022 is the first time in history that there has been a reverse development of falling currency prices and rising electricity prices. Coupled with the upcoming fourth round of block reward halving, in some sense, there has been an omen of “strangling” the mining industry. Of course, the development of mining machine chip processes and the launch of high-efficiency machines have somewhat delayed the “judgment day” for the mining industry. Therefore, in the future market, mining machine manufacturers will inevitably compete in a market with low currency prices and high electricity costs, and the PE of mining machines will become the only important performance indicator. Miners (as long as they have the money) will choose high-efficiency mining machines. In today’s market environment, 25 J/T is considered entry-level, and to have a competitive advantage in the market, it is necessary to research and develop mining machines that operate at around or below 20 J/T. From the perspective 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 to better adapt to extreme weather conditions and be more friendly to human habitation.
3. Competitive product parameters in the next 6-12 months (before and after the halving):
· Competitive products:
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 machines with poor energy efficiency, such as those with an energy ratio above 30 J/T, will face shutdown and elimination. Even if they are sold to customers with very low electricity costs or those who steal electricity, they lack competitiveness. Furthermore, the market for stolen electricity or “ultra-cheap electricity” is very niche, highly unstable, and even suspected of being illegal. Therefore, do not waste human and material 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. The first is that the investment in R&D for advanced process chip development is increasingly high, often reaching hundreds of millions of yuan, while the performance improvement obtained is diminishing. 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 improve performance through overclocking without the need for chip upgrades. The combination of immersion cooling and containers occupies less space, has a higher degree of modularity, low noise, and can overcome the impact of extreme weather and sandstorms. It is expected to become the infrastructure of the next generation of mining.
Another contradiction in the mining industry is that the total network hashrate 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 may succeed. It can be seen that the integration of the industry will further intensify in the future. In turn, the integrated mining machine industry will have more abundant funds and motivation to promote product iteration and mine construction, providing a prerequisite for the large-scale application of immersion cooling technology.
II. Market and sales forecast: The relationship between supply chain, spare parts inventory, and sales
Wafers and foundries: 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 a 50% prepayment to secure wafer foundries. This brings considerable cash flow pressure to mining machine manufacturers, and coupled with the unpredictable bull and bear cycles of Bitcoin, it also increases the uncertainty of future sales and 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 production is used for futures sales, with delivery after 6 months, and monthly deliveries in batches, with an average monthly shipment volume. This strategy ensures balanced and efficient operation of production and the supply chain. It can effectively reduce cash pressure for wafer (chip) inventory, reduce procurement costs for auxiliary materials and other accessories, and improve supply chain efficiency.
2. 50% Advance Payment Strategy: Within one week after the customer signs the contract, they need to pay 50% of the total contract amount as an advance payment, which is used to lock in unit price and production capacity, and also ensures a large amount of cash flow needed for chip procurement by mining machine manufacturers. This strategy guarantees two things: firstly, it ensures the normal cash flow needed for mining machine manufacturers’ research and development, production, and procurement; secondly, it shares the risks that may arise from bear markets. Because the 50% advance payment almost covers the cost of the machines.
3. 2:8 Principle for Key Customers Strategy: As mentioned at the beginning, the decentralization of this industry is a false proposition. It is actually a highly centralized industry, especially the mining business, which requires a large amount of funds and technical support. Those who can survive the bull and bear cycles are generally “big miners” who have technology, funds, and teams. For them, mining is more about long-term strategy and business layout, rather than short-term speculation like individual investors. Therefore, large customers often have a strategic coexistence, win-win, and prosperous partnership with mining machine manufacturers, and they are the backbone of the cryptocurrency industry. Individual investors, at best, fill in the gaps in the layout of mining machine manufacturers because the life cycle of retail customers is too short and their liquidity is too strong to maintain long-term cooperation. According to my observations, very few individual investors have survived for more than a season in the past 5 years. In the early stages of the industry, except for Bitmain, most of the customers in the mining machine industry were domestic mines and individual miners, with almost no international big customers. In the past 4 years, I have seen various mining machine companies gradually establish a strategic system based on international big customers, covering well-known old mining companies 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 large customers accounts for an average of more than 80%, providing a stable revenue base.
III. Sales Operations and Sales Management
1. Market Forecast: Generally, in sales operations, a rolling forecast is done every three months for the next 12 months. However, it is not easy to do such sales forecasts in the Bitcoin mining machine industry, as there is no predictable pattern. Absolute predictions cannot be achieved, but basic predictions can still be made. For example, by combining their own futures orders with market trends, a rolling sales forecast every three months can be achieved. Since mining machine production involves a long supply chain from wafer to product, sales operations require professionalism and market insight to achieve as accurate a forecast as possible and reduce stockouts or inventory.
2. Sales Price: The price of mining machines is very transparent. The market is not big 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 mine site and power supply, coin price, electricity price, and network-wide computing power. In terms of pricing, generally speaking, pricing with a mining investment payback period of 12-18 months has a competitive advantage. Pricing for 18-24 months is considered average, while it is difficult to sell machines with a payback period of 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 trends of BTC.
3. After-sales Service: The working environment of mining machines is very poor, so the stability, ruggedness, ease of maintenance, and ease of replacement of mining machines are important indicators. In addition, timely after-sales service is of utmost importance. In a normal mining environment, time is BTC, so stable and rugged machines and timely after-sales service are important considerations for mining machine purchases.
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 financial industry. Therefore, sales analysis can only reflect the current data accurately and does not have much reference value for history and the future. On the contrary, coin price, mine site, electricity price, network-wide computing power, difficulty coefficient, and other data have more practical guidance for sales. Customer data in CRM is periodically eliminated, with a low retention rate. The main long-term customers are a dozen or so key account customers, and most small and medium-sized retail investors die before the dawn of the bull market comes.
4. Channels: Opportunities and Risks Coexist
In any industry, whether it is a 2B or 2C business, “channels” are indispensable. Taking the fast-moving consumer goods industry as an example, some people once believed that “channels are king” and mistakenly believed that having channels meant having everything. Distributors and agents often end their glory at a self-satisfied pace. Brand owners firmly stick consumers with products, brands, and services and give a hard lesson to channel partners. In the fast-moving consumer goods field, channel partners have matured. In the past two or three decades, with the development and management, channel partners have abandoned the arrogance of thinking that channels are king. Today, they have become “willing” green leaves under the banner of brand owners. Silent wealth accumulation has become their normal state and cognitive belief. As the saying goes, “Silent and rich.” However, looking at the development of the 2B industry, channel partners are moving towards becoming more professional. They not only need to expand channels, provide pre-sales, in-sales, and after-sales technical support, improve solutions, but also need strong funding to support inventory. Indeed, such channel partners have more say and decision-making power. It is precisely this “desire for power” that has made their ambitious “clouds and rain”, often unintentionally disrupting the brand’s channel strategy, pricing strategy, inventory strategy, and customer management strategy, and inadvertently becoming the opposite of the brand owner.
1. Channels are like water, they can carry a boat or overturn it.
Channel management is a complex art of management. It is not just a cold channel, but more about understanding human nature. The game between brand owners and channel distributors in terms of desire and expectations is also a touchstone for the human nature of salespeople. When brand owners are in a weak position, channel distributors often maximize their own interests regardless of the interests of the brand and customers. They quickly reap all the benefits they can and have a clear short-term speculative nature. In this situation, there is often mutual dumping between regional/channel distributors, competing for customers, slashing prices, and causing the brand owners to be unable to ship goods normally, resulting in high inventory pressure and market price chaos. There are constant customer complaints and internal competition among salespeople. The brand owners are held hostage by the channel distributors, not only losing profits but also alienating customers. When channel distributors are in a weak position, brand owners often blame them for inadequate expansion and missed opportunities. Looking at the development and routines of channel distributors in the mining industry in recent years, they have used very skilled strategies, such as closing the market during a bull market and playing cards and drinking, and creating traps and bottoms during a bear market to exploit mining machine manufacturers.
(1) Bull Market: They do not participate in the relatively high-priced mining machine purchases at this time, but instead watch from the sidelines while their friends eat, drink, play, and have fun. If they see an opportunity, they quickly flip it and make a profit from the price difference.
(2) Bear Market: They occasionally tease mining machine manufacturers who are under pressure from inventory and cash flow, set traps, and deceive them by signing a “so-called mortgage installment payment contract” with a very low down payment ratio, which locks the prices and production capacity of the mining machine manufacturers. Then, they turn around and make public calls in the market, raising the price slightly (their price is even lower than the official price of the mining machine manufacturers), and sell machines or even resell contracts. The result is market price chaos. As long as the channel distributors’ inventory machines or the machines on the contract list are not sold out, the mining machine manufacturers’ inventory cannot be sold because the prices and shipments are completely controlled and held hostage by the channel distributors. The channel distributors make money, while the mining machine manufacturers are 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 miners and agents are struggling to get a machine. On one hand, leading manufacturers retain the maximum sales profit in their exclusive sales companies. On the other hand, sales or agents increase the price at each level, and occasionally even encourage bottom-level kickbacks. From the market’s perspective, the price is not transparent, there are layers of markups, and customers have a very poor sales experience and a very poor reputation for integrity, leading to the loss of major customers.
(2) In a bear market, due to the previous pressure on the channel to hoard goods, once the bear market arrives, agents panic and choose the strategy of “selling off” to dump goods, causing instant market price chaos. Miners and channel businesses, in despair, demand refunds, returns, and vouchers from the mining machine manufacturers to compensate for their losses. If the manufacturers have sufficient cash, they can actually accept refunds to make up for the price 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 purchase prices of miners and channel businesses may not all be the original manufacturers’ prices. Since the bear market this year, channel businesses have collectively turned against the manufacturers, frequently staging lawsuits.
(3) A large amount of channel inventory is piling up, 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 yet been put online. With the continuation of the bear market and the upcoming halving, as the new generation of mining machines completes iteration, the current channel inventory machines will soon become scrap metal. In order to minimize losses, top manufacturers will inevitably cut prices and sell off inventory in a timely manner. In this round, if individual top manufacturers can cut prices and sell off inventory in a timely manner, they can kill two birds with one stone. On the 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 implement a faster and more aggressive sales and pricing strategy, a precise price-sniping strategy.
3. 2B business model: B2B vs retail customers and online retailers:
(1) Mining machine sales is a simple B2B business. Large customers bring large sales volume, and the professionalism of customers is the foundation. Retail customers and online retailers are just picking up the leftovers. Some mining machine manufacturers have the wishful thinking that they can sustain the company by relying on retail customers and online retailers. In fact, whether it is Bitmain, Whatsminer, 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, and there are dedicated personnel for after-sales service and updates, which is efficient and labor-saving. Retail customers lack a team, often a small firmware update or a power cycle requires a bunch of after-sales engineers from the mining machine manufacturer to deal with. Often, it is their own lack of understanding that leads to complaints against the manufacturer. For the manufacturer, it is a thankless task. The business is not significant, and no service can be spared.
5. Miners and the Smokeless War of Mining
1. Early miners were mainly located in mining farms in China’s Yunnan, Sichuan, Xinjiang, and other regions. They relied on thermal power and hydropower during the flood season, and 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 operate the mining farm. Therefore, China’s mining industry had a significant competitive advantage, and for a time, China accounted for 70% of the total global network computing power. During this period, most miners in China were the first batch of Bitcoin adventurers and crab-eaters. They were either speculative investors with a little spare money and sharp insights or technical guys involved in blockchain and BTC. After several rounds of bull and bear cycles, this group of miners gradually became fixed, with only a few large miners in the country, relatively concentrated, just like mining pools and exchanges. The essence of mining determined that miners had to obtain as much Bitcoin as possible at the lowest cost, so stealing electricity and low-cost electricity were their first choices. Therefore, the relationship with local officials also became an important factor related to interests. It was often a mutually beneficial relationship, to the extent that the Chinese government later successively introduced policies to combat corruption and achieve green carbon neutrality, which disrupted mining activities in various regions.
2. On September 3, 2021, the National Development and Reform Commission and other eleven departments jointly issued the document “Rectifying the “Mining” of Virtual Currency”. Subsequently, on September 24 of the same year, the People’s Bank of China and other ten departments issued the notice “Further Preventing and Handling Risks of Speculation on Virtual Currency Trading”, which directly caused confusion in the cryptocurrency and mining circles in China. The first thing they did when they woke up was “platform and employee migration overseas” and “shipping mining machines to Kazakhstan, a friendly Central Asian country on the border of Xinjiang”.
(1) Not only is the electricity cost cheap in Kazakhstan, but the law clearly states that mining is legal and mining machines are tax-exempt. Overnight, it became a paradise sought after by Chinese miners. In just 3 months, from October to December, Kazakhstan’s Bitcoin hash rate increased to 30% of the global hash rate, rising from obscurity to become the world’s second-largest contributor to hash rate. The structure of miners also changed during this period, in addition to Chinese miners, there were also newly added energy-type participants from Kazakhstan. However, the dream did not last long. On January 6, 2022, riots broke out in Kazakhstan, shattering the dreams of all Chinese miners and the short dreams of wealth that Kazakhstan miners had just tasted. Since then, Kazakhstan’s mining policies, tax policies, and electricity prices have taken a path of “self-inflicted doom”. A large number of Chinese miners fled to Kazakhstan, carrying their machines and Bitcoin, rushing day and night, heading straight for what they believed to be the next golden land – the United States.
(2) The US market and US miners, who have always been crushed by Chinese mining machines and miners, saw hope and seized mining resources. In the United States, especially in the state of Texas, they made large-scale investments, increased leverage Bitcoin financing, built mining farms, and bought mining machines. For a while, mining enterprises in the United States sprouted like mushrooms after rain, with a large influx of Chinese miners. In just a few months, the US hash rate surged to become the first in the world. During this period, the structure of miners 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 engulfment from mining at the bottom of Bitcoin to the upper-level exchanges. The strategy of dominating the world with global hash rate, global exchanges, and global mining pools. The only thing missing now is that mining machine manufacturers have not been “deceived/forced” to the small final link in the United States, but it seems that completing this step is only a matter of time.
(3) Looking at it now, the miners who are still alive can basically be divided into: energy-type miners, institutional investment-type miners, traditional old mining companies, and emerging NASDAQ-listed mining companies. Among them, the most adept at operations are the old mining companies, which have weathered the storms and remain standing. The main reason for their survival is their understanding of the industry, their control of risks, and their timely anticipation of bull and bear cycles.
6. Mining Business and Strategy
1. Three Risks of Mining Business
(1) Risks of policy and regulatory transactions: Mining business is a high-risk business both domestically and internationally. The uncertainty risks at the policy level in various countries are everywhere and unpredictable. Legitimacy, tax compliance, compliance with fiat currency and BTC transactions, and how to avoid dirty coin risks, etc.
(2) Risks of electricity price and power supply: Electricity price is the most basic element that determines whether mining is profitable and whether the investment can be recovered quickly. Maintaining a stable and low electricity price 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 risks of “black eating black, closing the door and hitting the dog” with partners, 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: They are well-known local companies and entrepreneurs who have energy resources, social status, and honors. Such customers are unwilling to engage in illegal activities or violate regulations, nor would they engage in “black eating black” for a small profit. Often, such customers can also help mining machine manufacturers manage some local government relations, which is beneficial to the extension 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 investment 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 the evergreen trees in this industry, operating in the mining and coin circles for many years. They are very professional, understand the industry, have technical expertise, and can operate and maintain mining operations. They are knowledgeable partners. However, they are also calculative and focus on small profits. Collaborating with them may be taken advantage of, but it can also train the team and improve the self-operated mining operation and management capabilities of mining machine manufacturers.
3. Why Engage in Mining Business?
(1) During a bull market, mining business can continuously bring cash (BTC) to mining machine manufacturers, like printing machines, which can quickly increase the company’s revenue and enhance the company’s market value and the value of diversified operations.
(2) During a bear market, machine prices may fall below production costs. It is better to deploy machines to self-operated mining farms instead of selling them. On the one hand, this acts as a shock absorber for the supply chain, maintaining normal production and supply chain operations. On the other hand, it reduces inventory and maintains a low level of operating income. Once the bull market approaches, machines and mining business can be sold together to gain greater profits, or mining can continue to obtain the huge value brought by BTC. Both options can be freely switched.
(3) Computing power and computing power business: Build computing power platforms and engage in computing power sales business, promoting the evolution from simple mining equipment manufacturers to advanced business models of computing power sales and securitization.
4. Where are the future mining farms?
(1) Based on current signs, the US government is actively suppressing cryptocurrencies. In order to maintain the dominance of the US dollar, they are systematically shutting down bitcoin trading platforms (FTX, Coinbase, and Binance are recent examples). In addition, in the past year, many US states have implemented unfriendly policies towards mining (such as environmental assessments, electricity prices, taxes, etc.). I believe that in the near future, the US government will completely shut down mining companies in one fell swoop. The approximately 3,000 MW of mining farms currently in the US will be wiped out overnight, and there will no longer be bitcoin mining in the US. In short, the US market will cease to exist. Continuing to invest in the US market is extremely dangerous, and building mining farms in the US is an unwise decision with high risks.
(2) Kazakhstan: A typical Central Asian government management model with corrupt bureaucrats who pretend to understand but actually don’t. Since the turmoil in January 2022, the government has successively implemented a series of unfriendly policies towards mining and trading, completely destroying the once thriving mining industry in Kazakhstan. It went from being ranked second globally, accounting for 30% of the global computing power, to less than 5% overnight. I am curious whether this outcome is what Kazakhstan wanted or if the US government encouraged Kazakhstan to do so.
(3) South America is the next choice for mining: abundant hydroelectric power, cheap electricity prices, and inexpensive sites. Currently, the policies are relatively friendly. For example, Uruguay, Paraguay, Mexico, etc. The shortcomings are low political stability, low transparency, and poor policy continuity.
(4) Middle Eastern Arab countries: Cheap electricity prices, inexpensive sites, and friendly policies. Liquid-cooled 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 there are “lengthy traditional Arab business etiquette procedures”.
(5) North African countries: Abundant electricity resources, lack of industry, and mining is the best industry for rapid local economic development, which can receive strong support from the current government. The risks are political instability and poor security. Recently, countries with abundant hydroelectric resources and cheap electricity prices include Ethiopia.
(6) Russia: Abundant electricity resources, early development of the mining industry, and a large number of highly experienced professionals. The downside is that Russia is subject to US sanctions, the business environment is not good, and there is a lack of contract spirit.
(7) Iran: Let’s talk about Iran separately because they have been mining with second-hand machines on the market, controlled by the Revolutionary Guard, quietly mining as if they have never stopped.
7. Mining machine manufacturers going global: Both globalization and local strategies need to be pursued, and both need to be strong
The global economy has flourished under the development of globalization in the past 30 years, especially developing countries led by China, which have benefited greatly and experienced rapid economic and technological growth, becoming the beneficiaries of globalization. Since China banned the mining industry in 2021, countries such as North America and Central Asia have increased support for the mining industry, and the “mining capital” Sichuan, which was popular on the Chinese internet, has also been replaced by Texas, USA. Mining machine manufacturers have been seeking overseas paths one after another. In my opinion, from the perspective of company business, it is completely correct for mining machine manufacturers to adhere to a globalization strategy. The key lies in how to implement and follow the path of globalization.
1. Pursuing both globalization and local strategies: 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 “globalize” and go overseas, they will lack endurance and be short-lived. At best, they can be called “ephemeral beauties”.
2. The path of globalization: Looking at China’s economic development in the past 30 years, in the traditional physical field, except for the photovoltaic industry, Chinese companies have mostly been limited to cheap labor and commodity exports, with few original technological products and companies going global. In the Internet and communication equipment fields, successful examples of going global in recent years include 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 it has been questioned, to a certain extent, it represents the combination of high-end manufacturing and emerging finance. In the past few years, due to the high degree of monopoly in the industry, the overseas expansion of mining machine manufacturers has been limited to product exports, with lagging supporting service capabilities. At the same time, the periodic switch between a strong seller’s market and a strong buyer’s market has not provided sufficient motivation for mining machine manufacturers to build service capabilities. However, after 2021, with the rise of institutional customers, mining machine manufacturers have gradually realized the importance of services.
Currently, some mining machine manufacturers have started to establish service stations and subsidiaries in overseas markets, which is a good thing. However, it is also necessary to pay attention to the perspective of localization 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. It requires steady progress to replicate successful management and business models. Rome wasn’t built in a day, and there is often only one path to success, while the path to failure is full of traps. What I have witnessed is that some companies are blooming everywhere and engaging in a land-grabbing nomadic model, but they will eventually deplete their resources and end up in failure.
3. The US Government and Cryptocurrency: The relationship between the US government and cryptocurrency is complex. They obtained a large amount of Bitcoin by cracking down on the Silk Road. The anonymity of cryptocurrencies and their use in illicit transactions, as well as their role in providing funding channels for sanctioned countries such as Iran and Russia, are not tolerated by the US government. They will not allow the challenge to the dominance of the US dollar, just as they are unwilling to accept China’s peaceful rise. The lawsuits against Coinbase, Binance, and Tether by the US Democratic government, following a series of scandals involving Three Arrows Capital, FTX, and others, demonstrate their determination to deal a fatal blow to cryptocurrency.
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 practitioner, 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 business and invest hundreds of millions of dollars each year to support computational power and mining machine manufacturers. In this regard, Tether has become an invaluable Don Quixote in this industry. Here, the author dares to imagine 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 cryptocurrency industry, firmly establishing its position as the leader.
8. Speculation about the near future
The development of Bitcoin cannot be influenced by a single government or institution, especially in the context of conflicts between Eastern and Western civilizations, geopolitical conflicts, currency hegemony monopolies, energy shortages, and the new Cold War under deglobalization. The world may need cryptocurrency, especially Bitcoin.
“Institutional Bull” cyclically reappears
From 2010 to the present, Bitcoin has been declared “dead” 474 times (see 99Bitcoins). This is enough to show that Bitcoin is like a cockroach that cannot be killed. What I have observed is that after a series of scandals, Bitcoin shows signs of resurging. The US government and institutional investors often have their own opinions on Bitcoin. In the eyes of the US government, the dominance of the US dollar is the core, and Bitcoin is at most a black glove that cannot be whitewashed. However, institutions see the potential for profit. The world’s largest asset management company, BlackRock, personally promotes Bitcoin spot ETFs, and its record of ETF applications is a mix of successes and failures. If successful, in the near future, it is highly likely that we will witness the glory of institutional bulls in 2021.
Institutional entry will further drive changes in the financial structure of the Bitcoin industry. In the early years, the cryptocurrency and mining industries were mainly dominated by speculative investors who were willing to take risks, often making a fortune or losing everything in the short term. Therefore, the industry has always been a small group of people who quietly made a fortune. In the late 2018 and early 2019, institutional investors from traditional Wall Street financial funds, old money from family funds, 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 started to dance to the same rhythm as Wall Street. Of course, this also means that the volatility of Bitcoin will be reduced.
Bitcoin’s “surname” is not important, making money is important
As for the compliance of cryptocurrencies, it has always been volatile, with the SEC and CFTC quarreling daily. In the past few days, US senators will introduce a new version of the cryptocurrency regulatory law to expand the powers 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 future generations”, and the issue of what Bitcoin’s “surname” is can be temporarily set aside. Currently, the US is experiencing high inflation, unable to find a buyer for its high national debt, and further damaging the credibility of the US dollar. Quietly selling coins is also one of the measures taken by the US government to recover dollars and boost confidence. Therefore, in this context, whether the compliance of cryptocurrencies is truly compliant or just a new wine in an old bottle remains to be seen. However, as long as there is liquidity, the music and dance of cryptocurrencies can continue.
Asia is still significant
In 2021, China dealt a heavy blow to Bitcoin, and two years later, the United States sued major exchanges Binance and Coinbase. Now, China has tacitly allowed Hong Kong to support Web3.0 and cryptocurrencies, indicating that governments around the world have ambiguous attitudes towards cryptocurrencies. In the past two years, funds have started to flow back to Asia, with Singapore thriving and Hong Kong unwilling to give up its position as the financial leader in Asia. Singapore and Hong Kong are competing for funds, and the biggest winner is undoubtedly cryptocurrencies. It is worth noting that in June 2023, Japan’s “Funds Settlement Act Revision Bill” was passed by the House of Councillors, becoming the world’s first country to enact stablecoin legislation. In the foreseeable future, Asia will remain an important player in the cryptocurrency industry. In addition, in the context of global economic downturn, more and more governments in small countries in Africa and South America are adopting open attitudes.
In the new Cold War situation, the US government’s regulation of Binance and Coinbase has yielded different results. Binance’s market share in the US is only 0.9%, while Coinbase’s market share in the US has risen from 48.4% in June to 55%. In the hidden frontlines of cryptocurrencies, both China and the US may support their own 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, the country became the region with the fastest-growing hash power, but then experienced a significant decline due to power outages and policy reasons. In the past year, the Kazakhstan government collected $7 million in taxes from cryptocurrency mining entities, and as of April this year, the government’s tax revenue from mining is $541,000. If this standard continues, it is estimated that the total tax revenue for the whole year of 2023 will only be around $1.62 million. This is mainly due to the policy crackdown on the cryptocurrency mining industry in the country. As a resource-rich country, it is understandable to generate income from surplus electricity. The previous round of policies mainly responded 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. The intensity of policy crackdown depends mainly on how much benefit the government can gain from it. What the author sees 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 at present also indicates that it will take some time for the country’s mining industry 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 near future, it is possible to see some relaxation from the government in terms of value-added tax on mining machine imports and digital mining taxes.
Green Mining: The “Letter of Commitment” that Bitcoin Mining Must Submit
After the previous “crypto winter”, the Bitcoin mining industry has entered a consolidation phase. The current situation facing the Bitcoin mining industry is as follows: 1) Political correctness: the sustainability issue of the Bitcoin mining industry under the carbon reduction framework; 2) Funding source: Bitcoin ETF is a double-edged sword for the mining industry. The launch of ETF will undoubtedly drive up the coin price and help miners’ earnings. However, ETF provides institutional investors with zero-threshold funding channels. In this case, who would bother to invest in large-scale mining farm infrastructure and equipment procurement? 3) Listed mining stocks have begun to explore the narrative of so-called “diversified income”, which means using mining graphics cards for AI.
Today, in the face of the powerful US government, the Bitcoin mining industry cannot “self-grow in a fenced land”. In order to survive, it must be a little “green”. First of all, it is about the sustainability issue of mining. In the framework of global carbon reduction, green mining is the only way for the industry to comply with regulations in the future. This also means that in the long run, only companies with strong funding and deep government relations can survive. The listed companies in the industry have already taken action by establishing 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 in the crypto mining industry, as well as the role as a source of subsidies for new energy power. Secondly, mining companies are also seeking cheap hydroelectric power in regions outside North America, such as the Nordic countries, and increasing their ties with energy companies, especially new energy companies. Lastly, ESG will undoubtedly become a standard narrative for future listed companies, and Bitcoin mining companies are no exception. It would be helpful to establish organizations similar to green foundations and allocate some funds each year as a “letter of commitment” to decision-makers in the United States, in order to seek greater discourse power on legal and public levels.
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