Reuters: Global chip shortage will hit China's Bitcoin mining industry

A global chip shortage has hobbled production of the hardware that mines bitcoin, a sector dominated by China. A surge in cryptocurrency prices has boosted demand for the equipment, sending prices soaring.

The scramble will squeeze out smaller miners and accelerate industry consolidation, potentially allowing powerful players, many of them outside of China, to profit from the bitcoin bull run.

Bitcoin is the world's largest cryptocurrency, and its traders and users are closely watching the bitcoin mining industry because the amount of coins mined and sold into the market affects supply relations and market trends.

Bitcoin was trading around $32,000 on Friday, down 20% from its peak two weeks ago but still up about 700% from its March low of $3,850.

“There are not enough chips to support the production of mining machines,” said Alex Ao, vice president of Innosilicon, a leading provider of chip design and mining machines.

Bitcoin miners use increasingly powerful, specially designed computer equipment, or mining machines, to verify Bitcoin transactions, a process known as mining.

Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Co., the main producers of chips for mining machines, will also prioritize supplying to industries such as consumer electronics, which are considered more stable, Ao said.

A global chip shortage is disrupting production of products around the world, including cars, laptops and mobile phones.

The profitability of mining depends on the price of Bitcoin, the cost of electricity to power the mining machines, the performance of the mining machines, and the computing power required to mine Bitcoin.

Gordon Chen, a cryptocurrency asset manager and co-founder of mining company GMR, said demand for mining machines has surged as bitcoin prices have soared.

“When the price of gold goes up, you need more shovels. When the price of milk goes up, you need more cows.”

Industry consolidation

“Almost all the big miners are scouring the market to find mining machines, and they are willing to pay high prices for second-hand machines,” said Lei Tong, managing director of PayPal Financial Services, which provides loans to miners.

“There’s huge buying in North America, which is compressing supply to China,” he said, adding that many miners are ordering products that can only be delivered in August and September.

Most of the products from Bitmain, one of China's largest mining machine manufacturers, have been sold out, according to the company's website.

The sales manager of a mining machine agent said that the price of second-hand mining machines in the market has risen by 50% to 60% in the past year, while the price of new equipment has doubled. The quotation of high-end second-hand mining machines is about US$5,000.

“This is normal, look at how much Bitcoin has risen,” said the agent, who gave his surname as Li.

Rising cryptocurrency prices are affecting the qualifications of miners to mine.

Atlas Mining founder Raymond Yuan said rising investment costs are accelerating the elimination of small companies.

"Institutional investors have both the advantages of conducting large-scale mining and rich management advantages, while retail investors who cannot keep up will be eliminated," Yuan said, adding that his company has invested more than $500 million in cryptocurrency mining and plans to continue investing heavily.

Many of the largest companies expanding their mining operations are based outside of China, often in North America and the Middle East, said Wayne Zhao, chief operating officer of cryptocurrency research firm Token Insight.

"China used to have low electricity costs as its core advantage, but with the rise in bitcoin prices, that has changed," he said.

Zhao said that while China’s bitcoin mining once accounted for 80 percent of the world’s total, it now accounts for only about 50 percent of the world’s total.

By Samuel Shen and Alun John | Reuters

Compiled by: Juan Technology