What is the cost? "Sell coins" or "hoard coins"? Two soul-searching questions for miners in the bull market

Mining is an important part of the Bitcoin ecosystem. In the current Bitcoin bull market, what is the cost of mining? At this stage, are miners more inclined to "sell coins" or "hoard coins"?

Original by ChinaBlockchainNews (ID:ChinaBlockchainNews)

Author | Feng Ming

Mining is an important part of the Bitcoin ecosystem. In the current Bitcoin bull market, what is the cost of mining? At this stage, are miners more inclined to "sell coins" or "hoard coins"?

Faced with these two soul-searching questions, different miners have different strategies and choices. ChainNews conducted in-depth interviews on the front lines, trying to record the mining ecology under the current bull market.

Mining ledger in the bull market

"The cost of Bitcoin mining is a very difficult data to quantify, because it involves the purchase price of the mining machine, mining electricity costs, mining difficulty, and the selling price after the Bitcoin is mined. Each of these will greatly affect the final result. It can even be said that the cost of each batch of mining machines for each miner is different." Senior miner Wang Liang (pseudonym) told "Chain News".

To simplify, we use the traditional industry fixed equipment depreciation model to make a simple estimate.

Taking the mainstream mining machine Bitmain's S19 as an example, if the mining difficulty increases by 2% every cycle (14 days) (the actual value may vary greatly), a mining machine can mine about 0.3057 BTC in 2 years. The spot price of the mining machine is about 64,000 yuan, the unit price of electricity is 0.35 yuan/kWh, the electricity fee for two years is 20,097.63 yuan, and the total cost is 84,097.63 yuan. Assuming that the depreciation period of the mining machine is set to 2 years, the cost of this batch of BTC is about 275,098 yuan. The current price of BTC is around 300,000 yuan.

Mining machines from different manufacturers, whether spot mining machines or futures mining machines, have very large price differences even at the same time, sometimes even up to several times. If it is an older model of mining machine, such as Bitmain's T15, S17, or Shenma's M21s, the cost of mining may be lower.

Many miners pointed out that the return on investment and payback period are also affected by the many factors mentioned above and cannot be predicted. If the same method is used to estimate, the payback period of the S19 mining machine is about 549 days, which is more than one year.

Zheng Yi, a senior analyst at blockchain consulting firm PANONY, told ChainNews that due to the rapid rise in the current coin price, taking the S19 mining machine as an example, according to the official website's price of $2,200 per unit, the payback period is about four months. However, due to the tight market for mining machines, miners can only buy mining machine futures 7-8 months later, which takes a long time to wait and occupies the liquidity of miners' funds. Calculated in this way, the overall period from miners' payment to payback may be as long as 1 year.

"The mining costs of machines with different power consumption are different. The mining cost of machines with high computing power is about one-quarter to one-fifth of the current currency price. The cost of machines with high power consumption and low computing power will account for a larger proportion. Old miners have negative costs, and the return rate of new miners is okay based on the current currency price, but the risk is relatively large." Wang Yang, initiator of the One Person One Coin (BTC) consensus community, told "Chain News".

Liu Changyong, director of the Blockchain Economic Research Center of Chongqing Technology and Business University, analyzed to ChainNews that, in general, the price of Bitcoin determines the behavior of miners. The supply of Bitcoin is completely in line with expectations, and its price is mainly affected by market demand. Demand determines price, and price determines computing power. Global mining computing power is limited by computing power capacity and deployment cycle, and will not change much in the short term. Therefore, the mining cost is stable in the short term, and the fluctuation of Bitcoin price will directly translate into the fluctuation of mining profit. "At present, most of the mining machine models in operation are profitable."

According to data from blockchain analysis company Coin Metrics, Bitcoin miners earned more than $354 million in the second week of February, the highest ever on the Bitcoin blockchain, breaking the previous record of $340 million set in December 2017. In January this year, Bitcoin miners earned more than $1.09 billion, the highest point since December 2017, of which $977 million came from direct mining revenue.

In addition, due to the shortage of the latest mining equipment, the growth of Bitcoin mining difficulty has been relatively stable. Measured in terahash per second (TH/s), Bitcoin miners' daily revenue increased to $0.25 in January, the highest level since mid-2019.

“Sell coins” or “hoard coins”?

Many people believe that the main income of miners comes from hoarding coins. Mining is like fixed investment, which is equivalent to buying a call option of Bitcoin. Some people also believe that selling coins after mining is a way for miners to transfer risks in advance. Because hoarding coins without selling them cannot generate compound interest, it will also cause miners to lose some opportunities to update their machines.

So in a bull market, are miners more inclined to "sell coins" or "hoard coins"?

“Both are reasonable. Mining and hoarding coins are two different things. Hoarding coins is a belief, while mining and selling coins for hedging is for better future planning. You still need to have legal currency on hand as an investment preparation.” Wang Yang’s approach is: keep mining and hoarding coins and never get off, hedge asset risks appropriately with hedging, and grow with BTC.

Miner Wang Liang believes that in the first half of the bull market, you should focus on hoarding coins and not give up your chips easily. In the second half (for example, when the coin price exceeds $100,000), you should sell the mined coins appropriately to make a profit. For most ordinary miners, Wang Liang's advice is to sell all the mined coins first, and then consider hoarding coins after the mining machine has recovered its cost.

"Different strategies actually take into account different risk tolerance. For people with low risk tolerance, selling coins first to recover the investment and then hoarding coins is a very correct choice." Wang Liang said.

Liu Changyong told Lianxin that miners can be divided into several types: one is the fiat currency-based miners, who mine to earn RMB, so all the bitcoins they mine will be sold immediately, and they will even hedge when the price of bitcoin is high, borrowing bitcoins to sell and repaying them after mining. They are considered professional miners. The other is the currency-based miners, who mine to hoard more bitcoins, and generally keep all their profits in the form of bitcoins, and only sell some to pay for electricity. They are long-term investors in bitcoin.

"Most miners are somewhere in between the two. They cash out part of their mining profits and hoard part of them. It depends on their personal judgment of the market conditions. If they think a bull market is coming, they will hoard more; if they think a bear market is coming, they will cash out more. These behaviors are all reasonable, and the difference is only in the judgment of the market," said Liu Changyong.

The increase in coin price far exceeds the increase in computing power

Bitcoin mining is a problem-solving process, and changes in mining difficulty are closely related to changes in computing power. In the mining cycle, rising coin prices, rising computing power, and increased difficulty have formed a causal chain reaction.

From the perspective of network status, the mining difficulty of the Bitcoin network was adjusted 28 times in 2020, with a cumulative increase of about 43.79% in the whole year. Compared with the cumulative increase of 97.67% in 2019, the difficulty adjustment is relatively milder.

According to statistics, the total computing power of the Bitcoin network increased from 112.93 EH/s at the beginning of 2020 to 153.48 EH/s at the end of the year, with an annual increase of about 35.91%, a sharp drop from the 143.59% increase in the total computing power in 2019. Compared with the 304.74% increase in BTC prices in 2020, the moderate increase in computing power enabled the mining industry to obtain excess profits.

Since the core of proof of work is an incentive mechanism designed around energy consumption, many people also criticize POW as being energy-intensive and unsustainable.

"The significance of proof of work is to entrust the key links that determine the security of the system to highly competitive ones, to exclude profit-seeking behaviors influenced by spiritual and social factors as much as possible, and to ensure the realization of consensus at the cost of resource consumption. This is the safest consensus mechanism known so far." Liu Changyong told "Chain News".

He believes that there is no consensus mechanism with absolute advantages. Different consensus mechanisms make trade-offs between security, performance and functionality and are suitable for different scenarios.