Gu Yanxi: The US Bitcoin mining industry will grow rapidly in the next few years

2020 is a year of accelerated development of crypto digital finance in the US market, especially in the fourth quarter. PayPal began to provide Bitcoin payment and trading services to its 300 million users worldwide. Micro Strategy, a listed company, purchased a total of $425 million in Bitcoin. Asset management company Guggenheim plans to use up to $500 million to buy Bitcoin. Diem (formerly Libra) plans to first issue a digital stablecoin based on the US dollar in 2021. Visa plans to issue a credit card based on the US dollar stablecoin USDC.

These actions in the market have driven the price of Bitcoin to rise sharply again. The open interest of Bitcoin derivatives in the Chicago Mercantile Exchange has reached the highest level in the world. It is highly likely that Bitcoin will reach a record high of $20,000 before the end of 2020. The main open interest of Bitcoin options for December 2021 is $50,000, which shows the market's optimism about the future of Bitcoin.

The growth in Bitcoin prices this time is fundamentally different from the growth in 2017.

The growth in 2017 was mainly the result of speculation in the market. It fell quickly after reaching a new high due to unstable foundations. Since 2017, crypto digital finance has continued to develop in the US market. The development of some of these areas is largely determined by regulatory policies. The different regulatory policies of different US financial regulatory agencies have led to very different developments in the US industry (see my related article). But in areas that are not financially regulated, the development of this area is entirely the result of market selection. Bitcoin mining is such an area.

When it comes to Bitcoin mining, the U.S. market is not leading the world in development.

Given the price and volatility of Bitcoin, as well as the characteristics and costs of mining, the US market is not very optimistic about this business. So although the United States is one of the leading countries in this field, it is not the most advanced.

But this situation seems to be changing significantly now. The US market has changed its judgment on the development of encrypted digital finance. As a result, the price of Bitcoin has increased significantly, and its volatility has also decreased a lot. The cost of mining each Bitcoin is between $5,000 and $6,000. The current price of Bitcoin is close to $20,000, and the market is generally optimistic about the future growth trend of Bitcoin. A very extreme view in this regard is the view of Tim Draper, a famous American venture capitalist. At the end of 2019, he believed that the price of Bitcoin would reach $250,000 by the end of 2022 or the beginning of 2023.

Tim Draper is a firm believer in Bitcoin, so he has been buying a lot of Bitcoin for a long time. His investment direction is consistent with his views. In terms of market size, due to the expectation of Bitcoin's future price, the future market size of Bitcoin can meet the basic requirements of many institutions to enter this business field. Finally, the mining business has developed to this day and has begun to have higher thresholds. For example, in today's US market, a capital investment of 100 million US dollars should be the most basic requirement. Due to the above characteristics, Bitcoin mining business has become a very viable business for many institutions. In 2019 and 2020, the Bitcoin mining business in the US market has shown a growth trend. We can see from the following two figures that the global market share of Bitcoin computing power in the US market has increased significantly during this period.

Bitcoin global computing power ranking, September 2019

Bitcoin global computing power ranking, April 2020

The main factors that determine Bitcoin mining are electricity prices and the efficiency of the mining machines.

In terms of electricity prices, the price of bare electricity in the United States can be as low as 3.5 cents, equivalent to 0.23 yuan. Such prices are very competitive globally. Another important factor that determines the Bitcoin mining business is the stability of power supply. This is because the Bitcoin system runs uninterruptedly 24 hours a day, 7 days a week, and the Bitcoin mining business also needs to run uninterruptedly. The US market has a very good guarantee for the stability of power supply, which is very important for the mining business.

In terms of capital markets, the US market also has very strong advantages in this regard. Therefore, the Bitcoin mining business in the US market has a very good foundation. But on the other hand, in terms of construction and operating costs and taxes, the US market is not the most competitive. But overall, the United States is a very good choice for Bitcoin mining business. This is why companies like Germany, Canada and Japan have begun to carry out Bitcoin mining business in the United States. In 2020, there are already companies building mining farms with a production capacity of 300 megawatts. It is expected that in the next few years, the Bitcoin mining industry in the US market will see more significant growth.