Observation | “Mining capitalization”, a flash in the pan or a general trend?

Author: Liu Jibin, Chief Observer of 500.COM Group and senior Bitcoin miner.

Since 2020, as the price of Bitcoin has run wild, some listed companies whose main business is virtual currency "mining" have emerged one after another. The stocks of several US and Canadian listed companies such as RIOT Blockchain, Bit Digital, and Marathon Patent Group have soared, attracting much attention and becoming a major attraction in the capital market. Coincidentally, 500.COM, a long-established Chinese concept stock listed on the New York Stock Exchange that has been silent for many years, also suddenly issued a new personnel appointment announcement on December 21, making a high-profile entry into the blockchain and cryptocurrency fields. On the same day, 500.COM's stock rose as much as 134% and triggered a circuit breaker. So, is the combination of "mining" business and capital market a move by individual companies to take advantage of the high price of coins, or is it a general trend based on the situation?

Some commentators believe that although the short-term performance of many listed companies with mining themes is strong, it does not reflect their true commercial value. It is just a flash in the pan brought about by the rise in the price of currency. Once Bitcoin experiences a sharp correction, it will be back to square one. Long-term fluctuations in the price of currency will cause unstable earnings of listed companies. Therefore, for the capital market, "mining" as a business model is not mature enough.

In my opinion, as the country's attitude towards "mining" becomes increasingly rational and relaxed, the global consensus value of Bitcoin continues to accumulate, and the investment mentality and organizational capabilities of "miners" become more mature, the "mining" business has become more in line with the tone of capital than ever before, and is more likely to be sought after by the capital market.

1. Policies are becoming more relaxed, and compliance with "mining" has become the main theme

In China, "mining" used to be synonymous with "gray area" and "borderline". From defining "mining" as backward technology and listing it in the list of eliminated industries, to deleting it from the list of eliminated industries, and then to supporting mining with policies, this series of subtle changes are having a significant impact on the field of "mining". In Sichuan, many cities such as Ganzi, Ya'an, and Liangshan have successively supported blockchain "mining" and built hydropower consumption demonstration areas. Taking a large blockchain big data center in Ganzi Prefecture invested, built and operated by the listed company 500.com as an example, this "mine" commonly known as the "mine" in the circle is firmly exploring the road of compliance. In addition to the formal electricity approval, the data center also has a complete set of qualifications and procedures such as park approval, project filing, environmental assessment, energy assessment, safety assessment, water conservation, fire protection, and IDC licenses given by relevant government departments, which can basically be aligned with the qualifications and standards of standard IDC data centers.

As the "channel" of the "mining" business logic, digital currency exchanges have also begun to actively embrace supervision and explore compliance. On December 15, OSL, a subsidiary of BC Technology Group (863.HK), was the first to obtain the first virtual asset license (or digital asset license) issued by the Hong Kong Securities Regulatory Commission, and also became the first digital Huobi exchange in China to obtain a license; Huobi, OKEX, Binance and other mainstream domestic exchanges are constantly strengthening compliance and security strategies, and obtaining policy support by cooperating with national security supervision. For example, Huobi launched the "Technology Assisting Police Channel" as early as the beginning of 2019, providing important data and strong technical support to judicial organs in data analysis, evidence collection, and fund tracking in cases such as blockchain fraud and money laundering.

Mining farms and exchanges are the key and difficult points in the pursuit of compliance for the "mining" business. Although the "one before and one after" and "one real and one virtual" compliance trends are not intended to cater to the taste of capital, they will be perceived by capital. In fact, capital has always been ambiguous and entangled about "mining": it is greedy for its "beauty" but feels that it is not "equal". From this perspective, the gradual "regularization" of various sectors of "mining" has also solved the "threshold" problem for the capital market to accept the "mining" business.

2. Consensus continues to grow, and the stable rise in coin prices promotes the stability of the business model

The steady rise in the value of Bitcoin is undoubtedly the key to strengthening the "mining" business model, and the consolidation of Bitcoin's value ultimately depends on the strengthening of Bitcoin consensus among investors, especially various financial institutions. Since 2020, many asset management institutions around the world have strongly acquired Bitcoin and become the main buyers in the Bitcoin trading market. Grayscale Fund continues to buy, buy, and buy, continuously increasing its holdings of Bitcoin without selling out; investment institutions such as Block.one (EOS's parent company), Microstrategy, and One River also show their "pixiu" nature and increase their holdings of Bitcoin. At the same time, traditional financial institutions such as banks, insurance companies, and payment companies are also vigorously strengthening their layout in the cryptocurrency market. Singapore's DBS Bank has launched a fiat currency trading service for mainstream cryptocurrencies; Massachusetts Life Insurance Company in the United States purchases Bitcoin for its general investment account; cross-border payment platform Paypal allows users to buy, sell and hold Bitcoin on the platform; Visa has also announced support for cryptocurrency payments; Jack Dorsey, CEO of mobile payment giant Square, even believes that "Bitcoin will eventually become the world's single currency in the next decade." The long-term investment of many financial institutions in Bitcoin has greatly promoted the consensus on Bitcoin. It has not only greatly increased investors' confidence in the value of Bitcoin, but also reduced its circulation by "hiding" a considerable amount of Bitcoin, thus strengthening its "golden" attribute of preserving and increasing its value.

Based on the above changes in attitudes and behaviors towards Bitcoin, the business model of "mining" entering the capital era has become increasingly clear. We assume several judgments as the basis for the establishment of this business model: first, it is assumed that there is no probability of Bitcoin returning to zero; second, it is recognized that it will maintain a unilateral upward trend in the long run; third, the situation where the price of the currency fluctuates significantly will exist for a long time and irregularly. The "pixiu-style" investment behavior of the above-mentioned investment institutions represents their high recognition of the first two points, and the firm actions of these institutions are also subtly guiding this trend. In contrast, the third point is actually just a problem of cash flow tolerance, which is relatively easy to solve for capital.

3. Miners are becoming more mature and are no longer just ordinary people

Early "miners" were cute and simple. From their perspective, "mining" was to make money, and "posture" was not important. Just do it when you see the right thing, don't make it too complicated. However, in a series of cases, "mining" is like playing an online game. At the beginning, the difficulty is low and you are invincible even if you "run naked". You can withstand a few hits. Later, the BOSS level is getting higher and higher, and the chance of game over is getting higher and higher. Why don't you choose a helmet for defense, a cane for attack, and a ruby ​​to increase your blood so that you can withstand more hits? In the 2.0 version of "Mining World", capital support may become an important basis for players to "pass the level":

(1) Increase health points: A large amount of health points can withstand the test, and a sufficient redundant fund plan should be made. When the price of the currency plummets, it can effectively defend against the dimensionality reduction attack caused by the fluctuation of the currency price;

(2) Add physical attacks: Capital has always been a powerful tool for model replication and expanded reproduction. As long as the model is proven to be stable and feasible to the capital market, capital can provide more bullets for the "miners" to enhance their combat effectiveness.

(3) Adding mana points: Who says that “mining and fighting monsters” can only be done head-on? Compared with the simple “mining” mode in the early days, “capitalized mining” is a fantastic way of fighting without close combat.

(4) Team bonus: Capital is a platform and has its own aura. After being integrated with the capital platform, top resources such as high-quality mining farms, sticky mining pools, and institutions holding large-scale mining machines will inevitably release a bonus effect of 1+1 greater than 2!

Compared with the "martyrs" who died on the beach at the end of 2018, the "survivors" and "latecomers" have accumulated enough cases of their own or others' blood. They will treat the relationship between the benefits and risks of the "mining" business more rationally, and will be more aware of the role of "capital", a set of top-notch equipment, in "mining and fighting monsters". Before, they "did not dare to think" (compliance is difficult to solve) and "too lazy to think" (mining has high benefits and a big chance of winning), but now they are going with the flow and it is imperative. It is foreseeable that in the near future, more head resources in the "mining" industry chain will be capitalized and integrated.

"Mining" was not a "win without effort" before, and it will not be a "win without effort" in the future. Only by participating in the wave of "mining capitalization" can we avoid ultimate risks and enjoy business dividends to the greatest extent. With the support of capital, the closed-loop "mining" model of self-owned high-quality mines + self-owned mining machines with equal load volume + redundant capital plan is obviously a more stable, lasting and imaginative business model, and will surely drive the "mining" ecological chain to take off again.