Author: Wang Jiangyue, Wu Shuo Real
Foreword
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 temptations and traps. Outside the industry, black swans and gray rhinos often remind us of the vulnerability of the cryptocurrency industry (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 chaos, while others are just getting burned, making clothes for others. However, before the arrival of the new cycle, I will record in writing what I have seen in the industry for four years, to inspire all practitioners who have faith and are determined to move forward.
The cyclical phenomenon of cryptocurrencies and the pseudo-“decentralization” phenomenon
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When I first entered the industry, what impressed me the most was the constantly fluctuating curve of Bitcoin. Fluctuation and cycles are the basic characteristics of the cryptocurrency industry, and countless small peaks and valleys depict the price fluctuations like an electrocardiogram (undoubtedly, this is exciting). Fluctuations tell us about the instant changes in supply and demand and investor confidence in Bitcoin, while cycles provide a historical perspective and depict repetitive patterns in the industry (LianGuaittern). Since the price of the currency spirals upward in each cycle, the cycle itself has become a relatively optimistic expectation. Here, I want to change a sentence 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. The origins of these narratives are derived from the white paper released by Satoshi Nakamoto in 2009. It can be seen that both the so-called “decentralization” (P2P technology practice) and the digital gold as a safe-haven asset (Bitcoin’s deflationary mechanism) are based on a “technological” belief. However, it ignores the role of human nature in the diffusion of technology.
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 multiple rounds of technological innovations and evolution, they have become highly centralized. The market share of Bitmain, Canaan, and Whatsminer 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, highly concentrated in a few 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 tremendous changes in the global economy and geopolitical conflicts. Itrequires each of us to reset ourselves, break ourselves, abandon historical experience, and re-examine and learn humbly like newcomers.
1. Mining Machine Products and Development Trends in the Era of Great Changes
With the clash of Eastern and Western civilizations, the influence of geopolitical factors, the rise of OPEC+, pressure from extreme environmentalists advocating for green and sustainable practices, the ongoing domestic economic inflation in the United States, and the spread of the new cold war of deglobalization, it is an undeniable fact that global traditional energy prices are continuously rising and will continue to do so for a long time. Therefore, high-efficiency machines are the preferred choice for future miners. Furthermore, on one hand, criticism of the environmental impact of Bitcoin mining is mounting, and on the other hand, extreme climate conditions impose 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 options for the next generation of technological breakthroughs and iterations.
Overall, several factors determine the development trends of mining machine products:
1. ASIC Process: The performance of mining machines is primarily determined by the chips. Currently, mining machine chips using the 5nm process are mature, and the development of the advanced 3nm process is underway. With the technological iteration and design progress of mining machine manufacturers, mining machine chips have matured in both design and production processes. Today, 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 is undoubtedly the best in terms of yield and performance, followed by Samsung, and then SMIC. These wafer foundries rely on the research and development investment from mining machine manufacturers to advance their technology and processes. This is a “love-hate relationship that neither can do without,” and the author even regards it as a “love-hate relationship that cannot be openly acknowledged.” This is because wafer manufacturers always present themselves as serving the high-end consumer electronics and artificial intelligence industries (think about the public relations crisis when gamers protested against NVIDIA’s “mining cards” and Intel’s multiple failed attempts to produce mining machine chips). Certain wafer foundries are unwilling to admit that it was the mining machine business of cryptocurrencies that provided the initial funding for 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 Sole Competitive Indicator: Looking back at Bitcoin’s fourteen years of existence, through bull and bear cycles, every bear market and subsequent significant drop in coin prices would also lead to a decrease in electricity prices due to the shutdown of a large number of mining machines. However, the current bear market starting in mid-2022 is the first time in history where there is a reverse development of falling coin prices and rising electricity prices. Coupled with the upcoming fourth round of block reward halving, to some extent, there is 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 mining. Therefore, in the future market, mining machine manufacturers will inevitably compete in a market with low coin prices and high electricity costs. The PE of mining machines will become the only important performance indicator, and 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, it is necessary to research, develop, and produce mining machines that achieve around 20 J/T or even lower. 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 to better adapt to extreme climate conditions and be more environmentally friendly.
3. Competitive product parameters in the next 6-12 months (before and after 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 mining machines with higher energy efficiency ratios above 30 J/T will face shutdown and elimination. Even selling to customers with very low electricity fees or stealing electricity, it lacks competitiveness. Moreover, this market of stealing electricity or “ultra-cheap electricity” is very niche, highly unstable, and also involves illegal activities. Therefore, do not invest time and effort 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 the research and development of advanced process chips is getting higher, often reaching hundreds of millions of yuan, while the performance improvement obtained is getting smaller. For mining machine manufacturers, this is a process of diminishing 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 by overclocking without the need for chip upgrades. The combination of immersion cooling and containers occupies a smaller area, has a higher degree of modularity, low noise, and can overcome the impact of extreme weather and sandstorms, and 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 the block rewards are constantly halving. 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 future industry integration will be further intensified. In turn, the integrated mining machine industry will have more abundant funds and motivation to promote product iterations and mine construction, which provides 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
Wafer and foundry: In general, the 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% prepayment to secure wafer foundry. This puts considerable cash flow pressure on mining machine manufacturers, coupled with the unpredictable bull and bear cycles of Bitcoin, which adds uncertainty to the future sales shipments of mining machines. 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 and batches delivered monthly, with an average monthly shipment volume. This strategy ensures the balanced and efficient operation of production and the supply chain. It can effectively reduce the cash pressure for wafer (chip) inventory, reduce the procurement cost of auxiliary materials and other accessories, and improve supply chain efficiency.
2. 50% Prepayment Strategy: Within one week after signing the contract, customers need to pay 50% of the total contract amount as a prepayment, which is used to lock in the unit price and production capacity, while also ensuring a large amount of cash flow for chip procurement by the mining machine manufacturer. This strategy ensures two things: first, it guarantees the normal cash flow required for research and development, production, and procurement by the mining machine manufacturer; second, it shares the risks that may arise from a bear market. Because the 50% prepayment almost covers the cost of the machine.
3. 2:8 Principle for Major 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. They view mining more as a long-term strategic and business layout rather than short-term speculation, so major customers often have a strategic coexistence, win-win, and prosperous partnership with mining machine manufacturers. They are the cornerstone of the cryptocurrency industry, while retail customers at best fill in the gaps in the layout of mining machine manufacturers because their lifecycle is too short and their liquidity is too strong to maintain long-term cooperation. Based on my observation, very few retail customers have survived for more than a quarter in the past 5 years. In the early days of the industry, except for Bitmain, most of the customers in the mining machine industry were domestic mines and domestic miner retail customers, with hardly any international major customers. In the past 4 years, I have seen that various mining machine companies have gradually established a strategic major customer system based on international major customers, including 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. Major customer sales revenue accounts for an average of more than 80%, providing a stable revenue base.
III. Sales Operations and Sales Management
1. Market Forecast: Generally speaking, sales operations need to make rolling forecasts every three months for the next 12 months. However, it is not easy to make such sales forecasts in the Bitcoin mining machine industry, as it lacks regularity. Absolute prediction is not possible, but basic forecasting can still be done. For example, by combining their own futures orders with market trends, it is possible to forecast a rolling sales every three months. Since mining machine production involves a long supply chain from wafer to product, sales operations need to have professionalism and market insight to make predictions as accurately 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 mining farm capacity and power supply, coin price, electricity price, and total network computing power. In terms of pricing, generally speaking, the pricing with a miner’s investment payback period of 12-18 months has a competitive advantage. 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 have no 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 operation and 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 also important options to consider when miners make 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 truthfully and should not have too much reference value for history and the future. On the contrary, data such as coin price, mining farm capacity, electricity price, total network computing power, and difficulty coefficient have more practical guidance for sales. The customer data in CRM is periodically eliminated with low retention rates. The majority of long-term customers are a dozen key account customers, and most small and medium-sized individual customers 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 indispensable. Taking the fast-moving consumer goods industry as an example, some people once believed that channels are everything and mistakenly thought that having channels means having everything. Distributors and agents often end their dreams at a rapid pace, and brand owners firmly stick consumers with their products, brands, and services, and also give the channel operators a strong lesson. In the fast-moving consumer goods field, channel operators have become mature. In the past twenty or thirty years of development and management, channel operators have abandoned the arrogance of thinking that channels are everything. Today, they have become “willing” green leaves under the brand’s banner, silently making money has become their normal state and three-view cognition, fulfilling the saying, “Silent prosperity.” 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, in-sales, and after-sales technical support, and improve solutions, but also need strong financial support for stocking. Indeed, such channel operators also have more say and decision-making power. It is precisely this “desire for power” that has made their ambitious “clouds and rains,” often unintentionally disrupting the brand’s channel strategy, price strategy, inventory strategy, and customer management strategy, and inadvertently standing against the brand owners.
1. The channel is like water, it can carry a boat but also overturn it
Channel management is a complex art of management. It is not just a channel, but more about understanding human nature. It is a game between brand owners and channel partners in terms of desire and expectation, and it is also a touchstone for the human nature of salespeople. When brand owners are in a weak position, channel partners will maximize their own interests regardless of the interests of the brand and customers. They quickly harvest all the benefits that can be harvested, and their short-term speculation is very clear. In this case, there is often mutual dumping between regions/channel partners, competing for customers, lowering prices, and causing the brand owners themselves to be unable to ship normally, resulting in high inventory pressure and market price chaos. There are constant complaints from external customers and internal competition among salespeople. Brand owners are being held hostage by channel partners, not only losing profits but also offending customers. When channel partners are in a weak position, brand owners often accuse them of not expanding effectively and delaying business opportunities. Looking at the development and tricks of channel partners in the mining industry in recent years, they have skillfully used the strategy of closing the market during a bull market, playing cards and drinking, and making moves to explore the bottom during a bear market, cutting the leek of mining machine manufacturers.
(1) Bull market: Not participating in the relatively high-priced mining machine purchase at this time, watching from the sidelines, friends eating, drinking, and playing cards. If there is an opportunity, seize it and quickly sell it for a profit.
(2) Bear market: Occasionally stir up mining machine manufacturers who are under pressure from both inventory and cash, setting up a scheme, deceiving the mining machine manufacturers to sign a “so-called mortgage installment payment contract”, but 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 a market call, adding a little price (their offer is even lower than the official price of the mining machine manufacturers), selling machines or even reselling contracts. The result is market price chaos. As long as the channel partners’ inventory machines or the 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, and the mining machine manufacturers are being cut.
2. Chaos in the channel management of 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 find machines. On the one hand, leading manufacturers retain the maximum sales profit in their exclusive sales companies. On the other hand, sales or agents add layers of markup, and occasionally even encourage bottom-level kickbacks. From the market perspective, the prices are not transparent, there are layers of markups, and the sales experience for customers is very poor. The credibility and reputation are very poor, leading to the loss of major customers.
(2) In a bear market, due to the previous pressure on the channel inventory, once the bear market arrives, agent panic and choose the “best strategy” of dumping the goods, causing instant market price chaos. Miners and channel distributors desperately demand refunds and returns 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 difference. However, the problem is that in a bear market, who has extra cash? Who doesn’t want to reserve some cash for the winter? Moreover, the initial receiving prices of miners and channel distributors may not all be from the original manufacturers. Since this bear market began, channel distributors have collectively backtracked, repeatedly staging lawsuits.
(3) A large amount of channel inventory is backlog, and price-cutting dumping is imminent: According to incomplete statistics, there are currently about one million units of channel inventory on 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 soon become scrap iron. In order to minimize losses, top manufacturers will inevitably cut prices and dump their inventory in a timely manner. In this round, if a few top manufacturers can cut prices and dump their inventory in a timely manner, they can kill two birds with one stone. On the one hand, they can solve the inventory pressure, and on the other hand, they can crush other manufacturers before the bull market arrives. Other manufacturers who want to survive need to adopt a faster and more aggressive sales and pricing strategy, a precise price-sniping strategy.
3. B2B business model: Large customer model vs retail and individual e-commerce:
(1) Mining machine sales are a simple B2B business. Large customers bring large sales, and the professionalism of customers is the foundation. Retail and individual e-commerce are just supplementary. Some mining machine manufacturers are wishful thinking about retail and individual e-commerce, thinking that they can sustain the company with them. 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 and individual e-commerce: Large customers have professional operation and engineering teams, dedicated personnel for after-sales service and updates, and they are efficient and labor-saving. Individual customers lack a team, often a small firmware update or a power outage requires a bunch of after-sales engineers from the mining machine manufacturer to be involved, often it’s their own lack of understanding, and they end up complaining to the manufacturer. For manufacturers, it’s a thankless task. The business is not significant, and no service can be neglected.
Five, the smokeless war between miners and mining
1. Early miners primarily operated mining farms in China’s Yunnan, Sichuan, Xinjiang, and other regions, relying on thermal power and hydroelectric power during the abundant water period. The electricity and operation costs for mining were low. Deploying 10,000 machines and hiring 3-5 rural high school graduates who received some training could maintain the operation of the mining farm. Therefore, China’s mining industry had a significant competitive advantage, occupying 70% of the global network computing power for a time. The miners during this period were basically the first group of Bitcoin adventurers and risk takers in China. They either had some spare money and a sharp vision for speculation, or they were tech-savvy individuals involved in blockchain and BTC. After several rounds of bull and bear cycles, this group of miners gradually stabilized. There are only a few major miners in the country, quite concentrated, just like mining pools and exchanges. The nature of mining determines that miners must obtain the most bitcoins at the lowest cost. Therefore, stealing electricity and using low-cost electricity are their first choices. As a result, their relationship with local officials has become an important factor related to their interests, often leading to collusion. Later, the Chinese government successively introduced policies to crack down on corruption and achieve green carbon neutrality, which disrupted mining activities in various regions.
2. On September 3, 2021, the “Joint Announcement by the National Development and Reform Commission and Eleven Other Departments to Rectify the “Mining” of Virtual Currencies” was issued. Subsequently, on September 24 of the same year, the People’s Bank of China and ten other departments issued the “Notice on Further Preventing and Handling Risks of Speculation in Virtual Currency Trading,” which directly confused the cryptocurrency and mining circles in China. Their first reaction after realizing this was to “move platforms and employees overseas” and “transport mining machines to Kazakhstan, a friendly Central Asian country near Xinjiang.”
(1) Not only is electricity cheap in Kazakhstan, but mining is also explicitly legal and mining machines are exempt from taxes. Overnight, it became a paradise sought after by Chinese miners. In just three months, from October to December, Kazakhstan’s Bitcoin hash rate increased to 30% of the global hash rate, transforming from an unknown player to the world’s second-largest contributor to hash rate. The composition of miners also changed during this period. In addition to Chinese miners, there were now energy participants from Kazakhstan. 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 ending the short-lived dream of wealth for Kazakhstan miners. Since then, Kazakhstan’s mining policies, tax policies, and electricity prices have taken a path of “self-inflicted damnation.” Large numbers of Chinese miners immediately 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 had always been dominated by Chinese mining machines and miners, saw a glimmer of hope and took advantage of the situation to seize mining resources. In the US, especially in Texas, they made large-scale investments, increased leveraged Bitcoin financing, built mining farms, and bought mining machines. In a short period of time, US mining companies sprouted up like mushrooms after the rain, accompanied by the influx of a large number of Chinese miners. Within a few months, the US hash rate surged to the top globally. During this period, the composition of miners also included institutional investors with Wall Street backgrounds and a multitude of listed mining companies. At this point, the US completed its strategy of devouring the entire process from mining at the bottom of Bitcoin to operating exchanges at the top. It became the dominant Bitcoin kingdom that combines global hash rate, global exchanges, and global mining pools. The only missing piece is that mining machine manufacturers have not yet been “deceived/forced” to the small final link in the United States, but it seems that it is only a matter of time to complete this step as well.
(3) Looking at the surviving miners now, they can be basically divided into: energy-based miners, institutional investment-based miners, traditional old mining companies, and emerging NASDAQ-listed mining companies. Among them, the most skilled in operations are the old mining companies. They have weathered the storms and stood strong, mainly because of their understanding of the industry, control of risks, and timely anticipation of bull and bear cycles.
Sixth, Mining Business and Strategy
1. Three Risks of Mining Business
(1) Risk of policy and regulatory transactions: Mining business is a high-risk business both domestically and internationally. The uncertainty risk at the policy level is everywhere, coming at any time, unpredictable, and unavoidable. Legitimacy, tax compliance, compliance of fiat currency and BTC transactions, and how to avoid the risk of dirty coins, etc.
(2) Risk of electricity price and power supply: Electricity price is the most basic element for mining profitability and quick investment recovery. Maintaining stable and low electricity prices is the magic weapon for mining business profitability. In addition, stable power supply and 24/7 power supply are also key factors for stable profitability.
(3) Risk of partners: The high profitability of this industry often arouses human greed. To avoid the risk of partners “double-crossing and closing the door,” it is necessary to avoid cooperating with short-term opportunists, speculators, and unfamiliar clients 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 with energy resources, social status, and honor. Such customers are unwilling to violate laws and regulations, nor will they engage in double-crossing for a little bit of profit. Often, such customers can also help mining machine manufacturers deal with some local government relations, which is conducive to the extension and sustainable development of mining business.
(2) Emerging listed companies (customers): North American mining listed companies, they are standardized, professional, technologically mature, operationally efficient, financially compliant, and have institutional investment and 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 cryptocurrency circles for many years. They are very professional, knowledgeable about the industry, have technical expertise, and can handle operations. They are knowledgeable partners. However, they are also calculating, specifically focusing on small accounts, and are experienced players in this industry. Working with them is easy to be taken advantage of by them, but it can also train the team and improve the mining machine manufacturer’s self-operated mining, operation, and management capabilities.
3. Why engage in mining business?
(1) During a bull market, mining business can continuously bring cash (BTC) to mining machine manufacturers every minute and every second, like printing machines, which can quickly increase the company’s revenue, enhance the company’s market value, and diversify its operations.
(2) During a bear market, machine prices may fall below production costs, and selling machines is not as profitable as deploying them to self-operated mining farms. On the one hand, it serves as a shock absorber for the supply chain, maintaining normal production and supply chain operations. On the other hand, it reduces inventory and maintains low-level operating income. Once the bull market approaches, machines and mining business can be sold together to extract greater profits, or mining can continue to obtain the huge value brought by BTC. Both hands can switch freely.
(3) Computing Power and Computing Power Business: Build computing power platforms and engage in computing power sales business, evolving from simple mining machine manufacturers to advanced business models such as computing power sales and securitization.
4. Where are the future mining farms?
(1) Based on current indications, the US government is suppressing cryptocurrencies and systematically shutting down Bitcoin trading platforms (FTX, Coinbase, and Binance are recent examples) in order to maintain the dominance of the US dollar. In addition, over the past year, many US states have implemented unfriendly policies towards mining (environmental assessment requirements, electricity prices, taxes, etc.). The author believes that in the near future, the US government will completely shut down mining companies. They will eliminate the approximately 3,000 MW of mining farms in the US overnight, and there will be no more Bitcoin mining in the US. In other words, the US market will no longer exist. Continuing to invest in the US market is extremely dangerous, and it is an unwise decision to build mining farms in the US.
(2) Kazakhstan: A typical Central Asian government management model, corrupt bureaucrats who pretend to understand but actually don’t, and creating their own troubles. Since the turmoil in January 2022, the government has successively implemented a series of unfriendly policies towards mining and trading, directly destroying the once prosperous mining industry in Kazakhstan. It used to rank second globally, accounting for 30% of the global computing power, but now it has been reduced to less than 5%. The author is curious whether this is what Kazakhstan wanted or if it was instigated by the US government.
(3) South America is the next mining choice: abundant hydroelectric power, cheap electricity prices, and affordable venues. Currently, the policies are relatively friendly. For example, Uruguay, Paraguay, Mexico, etc. The downside is the low political stability, low transparency, and poor policy continuity.
(4) Middle Eastern Arab countries: Cheap electricity prices, affordable venues, 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 there are “lengthy traditional Arab business etiquette procedures”.
(5) North African countries: abundant electricity resources, lack of industry, mining is the best industry for rapid development of the local economy and can receive 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 experienced practitioners. The downside is that Russia is subject to US sanctions, the business environment is poor, and the spirit of contracts is lacking.
(7) Iran: Let’s talk about Iran separately because they have been mining with second-hand machines on the market, controlled by the Islamic Revolutionary Guard Corps, quietly mining as if they have never stopped.
7. Mining machine manufacturers going global: Need to focus on both globalization and local strategies
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 rapidly developed in terms of economy and technology, becoming beneficiaries of globalization. Since China banned the mining industry in 2021, North America, Central Asia, and other regions have increased their support for the mining industry, and the “mining capital” Sichuan, which was prevalent in the Chinese internet, has been replaced by Texas, USA. Various mining machine manufacturers are seeking overseas paths. In my opinion, it is completely correct for mining machine manufacturers to adhere to a globalization strategy in terms of company business. The key is how to implement the globalization strategy and which path to take for globalization?
1. Focus on both globalization and local strategies: Local talents and local economic foundations need to be solid. Only with a strong local foundation can there be the ability to go out, to go solidly, and to 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, resembling a “flash in the pan”.
2. The path of globalization: Looking back at China’s economic development in the past thirty years, in the traditional physical sector, besides the photovoltaic industry, Chinese companies have mostly been limited to cheap labor and commodity exports, with few instances of original technological products and companies going global. In the internet and communication equipment sectors, prominent successful examples of going global in recent years include Huawei, Transsion Holdings, as well as entertainment companies represented by ByteDance and miHoYo. The uniqueness of the mining machine industry lies in the fact that, regardless of how much it is questioned, it represents to some extent the combination of high-end manufacturing and emerging finance. In the past few years, due to the high degree of industry monopoly, the overseas expansion of mining machine manufacturers has been limited to product exports, with lagging supporting service capabilities. At the same time, the cyclical switch between a strong seller’s market and a strong buyer’s market has not provided sufficient motivation for mining machine manufacturers to develop service capabilities. However, since 2021, with the rise of institutional clients, mining machine manufacturers have gradually realized the importance of services.
Currently, some mining machine manufacturers have started to establish service sites and branches in overseas markets, which is a good thing. However, it is also important to note that globalization still requires a local perspective. It is necessary to adapt to local regulations, practices, and culture to maintain long-term customer relationships and gradually build a moat of service capabilities. These achievements cannot be accomplished overnight and 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 traps on the road to failure. From what I have personally witnessed, some companies that are expanding everywhere and adopting a nomadic model 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. The US government obtained a large amount of Bitcoin by cracking down on the Silk Road. The anonymity and illicit transactions associated with cryptocurrencies, as well as providing funding channels for sanctioned countries such as Iran and Russia, are not allowed by the US government. They will not tolerate any challenge to the dominance of the US dollar, just as they are reluctant 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 world’s largest stablecoin, it is crucial to maintain the stable development of the Bitcoin market. According to a senior industry insider, a Tether executive recently revealed that they plan to allocate a fixed percentage of their annual $4 billion profit to purchase Bitcoin. At the same time, they will also expand their mining business and invest hundreds of millions of dollars each year to support computing power and mining equipment manufacturers. In this regard, Tether has become a rare Don Quixote in this industry. Here, the author dares to imagine that in the context of a run on crypto-friendly banks, Tether’s ambition may be to play the role of “Crypto Fed” in the industry, solidifying its position as the leader of the market with a key market rescue.
8. A Little 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 monopolies, energy shortages, and the new Cold War under deglobalization. The world may need cryptocurrencies, especially Bitcoin, even more.
“Institutional Bull” Periodic Recurrence
From 2010 to the present, Bitcoin has been declared “dead” 474 times (see 99Bitcoins), which is enough to show that Bitcoin is a resilient force. What the author observes is that after a series of scandals, Bitcoin shows signs of resurgence, with the US government and institutional investors often having their own opinions on Bitcoin. In the eyes of the US government, the dominance of the US dollar is key, and Bitcoin is at most a black glove that cannot be whitewashed. However, institutions see the opportunity to profit. The world’s largest asset management company, BlackRock, is personally pushing for a Bitcoin spot ETF, and its application records for ETFs have had both successes and failures. If successful, it is highly likely that we will see the glory of the institutional bull market in 2021.
Institutional involvement will further drive changes in the capital structure of the Bitcoin industry. In the early years, the cryptocurrency and mining communities were largely dominated by speculative investors who were often either highly profitable or lost everything in the short term. Therefore, the industry has always been a place for a few people to quietly make a fortune. In late 2018 and early 2019, institutional investors from traditional Wall Street financial funds, old money from family funds, and companies with traditional energy backgrounds gradually entered the scene, gradually changing the composition of the industry. With the entry of old money, the price of Bitcoin also began to dance with Wall Street. Of course, this also means that the volatility of Bitcoin will be reduced.
Bitcoin “What’s in a Name” is Not Important, Making Money is
As for the regulation of cryptocurrencies, it has always been volatile, with the SEC and CFTC constantly at odds. In the past few days, US senators will introduce a new version of the cryptocurrency regulatory law 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 understand the “wisdom of hindsight”, and the debate over what Bitcoin should be called is temporarily put on hold. Currently, inflation in the United States is high, there is a lack of buyers for US bonds, and the credibility of the US dollar is further eroded. Quietly selling off coins is also one of the measures taken by the US government to recover the US dollar and boost confidence. Therefore, in this context, whether the regulation 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 Hong Kong’s support for Web3.0 and cryptocurrencies, indicating that the attitudes of governments towards cryptocurrencies are ambiguous. In the past two years, funds have started to flow back to Asia, with Singapore flourishing 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 winner is definitely cryptocurrencies. It is worth noting that in June 2023, Japan’s “Funds Settlement Law Amendment” was passed in the Upper House, making it the first country in the world to enact a stablecoin law. In the foreseeable future, Asia will remain an important player in the cryptocurrency industry. In addition, in the backdrop of the global economic downturn, an increasing number of governments in small countries in Africa and South America are also adopting an open attitude.
In the new Cold War scenario, the results of the US government’s regulation of Binance and Coinbase are different. Binance’s market share in the US is now only 0.9%, while Coinbase’s market share in the US has increased from 48.4% in June to 55%. In the covert battle of cryptocurrencies, both China and the US may support their own centralized exchanges to attract overseas funds and take measures to prevent large-scale 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 rate, but it then experienced a sharp decline 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 around $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 understandable to generate income using surplus electricity. The previous policy was mainly a response to illegal mining and low electricity taxes for crypto mining. The cryptocurrency mining industry, as one of the sources of tax revenue, will not be completely banned, and the intensity of policy measures mainly depends 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 expel the mining industry from the country. The sharp decline in mining tax revenue 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 usage requires the introduction of more advanced machinery and equipment, so in the near future, we may 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 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 ETF will undoubtedly drive up the coin price and help miners’ earnings. However, ETF provides institutional investors with a zero-threshold channel for capital inflow. In that case, who would bother to invest in large-scale mining farm construction and equipment procurement? 3) Listed mining stocks have begun to seek new narratives of “diversified income”, using mining graphics cards for AI.
Today, facing the powerful US government, the Bitcoin mining industry cannot “go it alone” and must be a little “green” to survive. Firstly, there is the issue of sustainability in mining. Green mining is the inevitable path for industry compliance under the global carbon reduction framework. This means that in the long run, only companies with strong capital and deep government relations can survive. Currently, listed companies in the industry have taken action by establishing the BMC Mining Association to regularly disclose operational data. These companies also need to form professional lobbying teams to clarify the continuous optimization of the power structure in 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 the Nordic countries, and increasing their ties with energy companies, especially new energy companies. Finally, ESG will undoubtedly be a standard narrative for future listed companies, and Bitcoin mining companies should not be an exception. It may be worthwhile to establish an organization similar to a green foundation and allocate funds annually as a “letter of commitment” to decision-makers in the United States in order to seek greater influence in legal and public spheres.
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