After the “huge profits” disappear, are there new opportunities in the post-mining era?

Since the birth of the first Bitcoin, the mining industry has gone through nearly ten years of development. Both miners' income and mining machine iterations have shown a slowdown trend. Compared with the early "golden" era of mining, current mining participants are facing competition in operation and maintenance, upstream and downstream cooperation in the industrial chain, compliance resources, and even environmental innovation.

Original by ChinaBlockchainNews (ID:ChinaBlockchainNews)

Author | Feng Ming

Since the birth of the first Bitcoin, the mining industry has gone through nearly ten years of development. Both miners' income and mining machine iterations have shown a slowdown trend. Compared with the early "golden" era of mining, current mining participants are facing competition in operation and maintenance, upstream and downstream cooperation in the industrial chain, compliance resources, and even environmental innovation.

In the post-mining era when "huge profits" have disappeared, what will be the future development trend of the mining industry?

Can the miners land safely?

To some extent, mining is not only an industrial production, but also a financial behavior. As a business with heavy investment, the investment in mining includes not only the cost of mining machine configuration, but also high electricity expenses and mining machine maintenance costs. For a long time, miners have to bear multiple risks such as currency mismatch, hardware equipment iteration, and currency price fluctuations. Therefore, mining has high liquidity requirements for miners.

Liu Changyong, director of the Blockchain Economic Research Center of Chongqing Technology and Business University, told ChainNews that in the late bull market, miners who have just entered the mining field will face huge risks: first, the purchase price of mining machines is high; second, they are unfamiliar with the mining industry and frequently fall into pitfalls; and third, the computing power deployment cycle is long. "Once prices start to fall continuously, it may not be possible to recover the investment."

"Mining is an economic model that invests in basic materials and produces revenue through time costs. This model is more similar to the traditional real economy." Zheng Yi, a senior analyst at blockchain consulting firm PANONY, told Chain News.

From the overall situation of the industry, the main financial pressure of miners comes from paying electricity bills. After purchasing a mining machine, as long as the output of Bitcoin can cover the electricity bill, the mining machine will continue to run. In the bull market, miners have more profits and funds can maintain operations. Some miners who are familiar with the currency circle begin to choose to allocate some other cryptocurrencies, some miners will choose to cash out excess profits, and some miners begin to use financial instruments to hedge risks.

"Due to the problem of insufficient production capacity of chips and mining machines in the past, miners have generally made greater profits in this bull market. The main purpose of using financial instruments is to lock in profits," Liu Changyong told Chain News.

According to Zheng Yi's observation, "There is actually a certain gap between the miners and the cryptocurrency users. There are not many miners who know how to use financial instruments to hedge risks, and many veteran miners are not even proficient in using exchanges."

"Using financial instruments to hedge risks, when the currency price fluctuates greatly, the risk will be greater. I personally use my own spot BTC for hedging. This operation can make a little profit at most, and there is no risk of liquidation when using financial instruments." Wang Yang, initiator of the One Person One Coin (BTC) consensus community, told "Chain News".

"The main force of mining has shifted from ordinary retail investors to large institutions and funds. For them, what they pursue is not super high returns, but relatively stable and safe returns, so they will use some futures or options tools for risk management." Senior miner Wang Liang (pseudonym) told "Chain News".

It is reported that these institutions usually have a large amount of funds, at least tens of millions or hundreds of millions. Relatively speaking, they have a better tolerance for risks. If the price of the currency plummets, even if the payback period of the mining machine exceeds 2 years, these institutions will continue to hold and insist on mining.

Overall, although financial derivatives can provide miners with an effective hedging option, given the uncertainty of mining difficulty, Wang Liang suggested: "When using financial instruments for hedging operations, do not be too aggressive and leave appropriate positions."

Are there new opportunities in the mining industry?

This is the best of times, but also the worst of times. In recent years, the overall profit margin of the mining industry has plummeted, and business has become increasingly difficult from mining machine sales, mining farm hosting to pure mining.

"Scaling and specialization has become a trend. I was also a small miner a few years ago, with dozens of mining machines. At that time, mining was relatively simple. I just needed to buy a machine and find a mining farm of a familiar friend to host it. In addition, many mining farms in the past were run by one or several people in partnership, and the level of specialization in the entire industry was not that high. But in the past two years, I have clearly felt that funds have come in, which will improve the productivity of the entire industry, and will inevitably eliminate some miners with insufficient competitiveness." A miner told "Chain News".

As more and more mainstream funds enter the mining industry, competition among industry participants is becoming increasingly fierce. A typical example is that a few years ago, it was almost unimaginable that the mining pool had a zero handling fee, but now some platforms have turned to zero or even negative handling fees. As the mining pool business is becoming less and less profitable, many mining pools have begun to transform and consider how to add financial services to the mining pool business and develop diversified services.

"We have our own mine, with a self-owned load of about 260,000 kilowatts. We used to get our investment back in half a year or a year, but now it takes about two and a half years. Such a long payback period creates a problem, which is to see who has the lowest capital cost, otherwise you can't build a mine." Liu Fei, CEO of Bixin Mining, said at an industry summit held at the end of last year that the role of finance in the entire mining industry will become increasingly important, "because the competition is becoming more and more fierce, and there are more and more details to compete on. We have to consider how to increase profits and reduce costs, and the overall profit margin is beginning to move closer to that of traditional industries."

Judging from the current development trend, the penetration rate of finance in the mining industry is gradually deepening. According to the service objects, it can be divided into two types: ToB and ToC. It is reported that the ToB business mainly cooperates with some large-scale financial enterprises, such as equity, guarantee, and financial leasing enterprises to conduct joint mining. The ToC business is mainly aimed at high-net-worth individuals, providing customized cloud mining products and allocating the proportion of funds according to risk preferences.

As we all know, the mining yield mainly depends on the computing power cost, the network computing power difficulty and the coin price. The network computing power difficulty and the coin price are uncontrollable factors, which are the same for all platforms. In terms of computing power cost, in order to increase the yield, many platforms have begun to vigorously promote the standardization of cloud computing power.

It should be noted that the cloud computing market is still in its early stages of development, with a mixed bag of participants. Due to the lack of transparency in the flow of funds, it is easy for Ponzi schemes to occur.