Jiang Zhuoer’s example: What is the underlying logic of graphics card mining?

On October 15, Jiang Zhuoer, founder of BTC.TOP, Bitcoin evangelist, and big miner, participated in a live broadcast event held by Shanghai Waiyi as a special guest. The theme of the live broadcast was: Big miner’s example - What is the underlying logic of graphics card mining?

The following is the transcript of Jiang Zhuoer's Q&A session:

01
Graphics Card Investment Opportunities

Moderator Apple from Shanghai Waiyi Investment Department : Graphics card mining has been a hot topic in the market recently. Waiyi has developed the graphics card business very early, and Mr. Jiang has also made key layouts in graphics cards. Can you talk about how you discovered this year's graphics card investment opportunities in conjunction with the business?

Jiang Zhuoer, CEO of Litecoin Mining Pool : First of all, I didn’t just discover the graphics card investment opportunity, but have been in the track for a long time.

Friends who are familiar with me know that the proportion of my investment targets is public, mainly BTC+BCH+ETH. And when I entered the circle in 2013, the first thing I bought was two graphics card mining machines, mainly considering the low risk of graphics card mining machines.

Second, the graphics card mining machine is a non-standard product . The graphics card models in each batch of graphics card mining machines are slightly different, unlike the tens of thousands or hundreds of thousands of Bitcoin mining machines of the same model. One graphics card mining machine may occupy the position of three S9 mining machines, and the requirements for the mining farm are relatively high. Only a small number of mining farms can accommodate graphics card machines. In the foreseeable long period of time, it is very difficult to deploy a large number of graphics cards, and it is difficult to accumulate positions quickly. Therefore, I have never accumulated a lot of graphics card mining machines before, nor have I sold them to the outside world. I have been mining by myself.

It is very difficult to find opportunities in the market because there are so many new hot spots and new concepts in the market that one person cannot analyze them all. For example, the popular DeFi liquidity mining is still very promising, but it is meaningless to analyze it from a rational perspective.

Liquidity mining actually arises because of the problem of DEX, or decentralized exchanges. In centralized exchanges, you can place an order at a very low cost and then cancel it. But in decentralized exchanges, both placing and canceling orders must be uploaded to the chain, which is slow and has high fees, resulting in the inability to place orders on DEX.

Later, someone developed an AMM method that did not use the ordinary exchange order method, but instead used a supply and demand curve. It only needed to be put on the chain when a transaction actually occurred. It did not need to be put on the chain when no transaction occurred. A liquidity pool was used to solve the TPS upper limit problem.

However, I believe that everything is conserved. If you gain benefits in one place, you need to pay in another place. The problem of insufficient TPS has never been solved in DEX. Even if the method of liquidity mining is adopted, it only transfers the problem to other places. The TPS upper limit is insufficient because orders cannot be placed and the depth is not enough. The price difference between buyers and sellers is relatively large, and this price difference cannot be eliminated.

The AMM method transfers the loss of price difference to the liquidity provider, that is, the "farmer". The "farmer" finally creates a new thing called "impermanent loss", which is essentially caused by insufficient order depth. After the "farmer" suffers such a loss, he must be compensated, and the way to compensate is to distribute the exchange equity to the liquidity provider. Once the whole set of things is circulated, it will form a capital disk, and in the long run, this bubble will burst.

DEX has a certain significance. It can be a supplement to CEX and list long-tail tokens that are difficult to list on centralized exchanges, but it cannot become a mainstream exchange. If you analyze it in advance, you will think that liquidity is meaningless, but once it enters this capital disk mode, it will immediately become a hot spot, and it is very difficult to notify in advance.

A more meaningful approach is to look for some places where new ways of playing and new opportunities may emerge . Ethereum is such a blessed place, and all kinds of interesting things will continue to appear on Ethereum.

This is why I am interested in Ethereum.

02
The underlying logic of graphics card mining investment

Host : Mr. Jiang once predicted that "there is a high probability that the highest market value of Ethereum will exceed that of Bitcoin in this bull market." Can you analyze why you made such a judgment from the underlying investment logic? What do you think is the underlying logic of graphics card mining investment?

Jiang Zhuoer : Let’s not talk about logic first, let’s talk about facts first. In the middle stage of the last bull market, Ethereum’s highest total market value reached 80% of Bitcoin’s market value, and the highest number of active addresses reached about twice that of Bitcoin. In fact, Ethereum already has the strength to challenge Bitcoin .

In addition, Ethereum is more volatile than Bitcoin. In this bull market, coupled with the fact that Ethereum often has various interesting things happening, it is very likely that Ethereum's maximum total market value will exceed that of Bitcoin.

Why do all kinds of interesting things always appear on Ethereum?

First of all, we need to understand the underlying value of Ethereum. The value provided by Bitcoin is currency freedom. Whether in China or the United States, there are actually many capital control regulations. For example, in China, only 50,000 US dollars can be exchanged each year. As a free currency, it is completely free from any restrictions. This is the greatest value of Bitcoin.

What is the value of Ethereum? Ethereum itself also has monetary freedom . Its high volatility will have a certain impact on monetary freedom, but it provides something else to make up for this - Ethereum's smart contract.

Smart contracts are essentially contractual freedom. If you remove the physical part of business logic in the real world, what remains is contract + currency. After providing contractual freedom, countless smart people in the entire market will want to use contractual freedom. Because individuals and the market have different understandings, it is very difficult to find opportunities in the market. People who analyze these tend to be rational and will first eliminate some bubbles or those that seem unreliable, but these may instead become a hot spot.

At this time, as I just said, we should look for a target that can generate more opportunities for profit or welfare. Ethereum, for example, will continue to generate opportunities through contractual freedom, which is the underlying logic of Ethereum.

Secondly, the amount of money I have to buy Ethereum directly is very limited. If I go mining, I can use a lot of money to become a fund-raising node for mining, and get a portion of the profits after making money.

In a bull market, it is expected that Ethereum will continue to be congested. Ethereum congestion is different from Bitcoin congestion. Bitcoin can be expanded, but it cannot be expanded for various reasons, while Ethereum is very difficult to expand. Now, due to the side effects of smart contracts, Ethereum consumes far more computing resources than Bitcoin for each transaction. Ethereum may have to wait until 2.0 sharding to expand, and sharding will increase the complexity of the entire system. Therefore, during the period of Ethereum congestion, investing in Ethereum mining machines will earn very high income, even double to triple the income of the previous period.

Why did I invest in graphics card mining machines in the first place? When I first entered a new market, I actually didn't understand the market, so I first considered some low-risk methods. The low risk of graphics card mining machines is that they are all general hardware : CPU, hard disk, motherboard, and the most critical graphics card. According to historical data, graphics cards depreciate by about 30% each year. Under normal circumstances, the residual value of graphics cards that have been used for two or three years is still 30%. At this time, if the graphics card is refurbished, or the GPU and video memory are removed and remade into a new card to sell on the market, there will still be a certain residual value. As Moore's Law gradually becomes invalid, the update of graphics card hardware will become slower and slower, and the speed of hardware elimination will become lower and lower. This is the underlying logic of my investment in graphics card mining machines.

03
Timing of GPU mining

Host : The graphics card market was extremely hot before, but now it has returned to a calm stage, and the payback period has gradually lengthened to more than one year. Faced with such a volatile market, is it still a good time to enter the market? Mr. Jiang, you are a top miner in the mining industry and have purchased a lot of graphics cards. Based on the situation of graphics card investment, please talk about your views on the layout of graphics card investment at this stage.

Jiang Zhuoer : Now is a good time to mine with graphics cards.

The first reason is that Ethereum is currently in the early stages of a slow bull market. The price of the currency recovered in 2019, and slowly rose in 2020. A more obvious bull market may occur between 2021 and 2022, and it is a better choice for miners to hoard coins at this time.

The second reason is that graphics card miners are different from Bitcoin miners. Here is a further explanation of why graphics card manufacturers do not welcome miners. In 2017, mining was very popular, and miners bought up almost all graphics cards on the market. Gamers paid very high prices for cards, which affected market share and was very troublesome.

At that time, the price fluctuations were terrible. Graphics card miners placed orders when they had money, and defaulted directly when they had no money. For example, when the market plummeted in early 2018, there were many default orders. Later, a large number of mining cards were sold to the market, further pushing down the price of game cards. On the surface, it seems that gamers can buy mining cards at a low price, but in fact, many mining cards have become very unstable after running at full capacity for a long time, and may soon break down. Therefore, neither manufacturers nor gamers welcome graphics card miners, so the computing power of graphics cards cannot rise as much as ASIC mining machines.

Some manufacturers in the industry have tried to ASIC it, but this is equivalent to rebuilding the graphics card, which is costly and has no residual value, so the market does not actually recognize it. The only advantage of ASIC is that when there is a big bull market, if Ethereum wants to exceed the total market value of Bitcoin, it will have to rise many times. If the production of graphics cards cannot keep up during the rise, then ASIC mining machines may occupy the market because there is no restriction on large-scale shipments.

The third point is very important, don’t buy graphics card mining machines during the bubble stage.

For example, when graphics cards were hot a while ago, it was not cost-effective to buy mining machines. The most typical example is buying a Bitcoin mining machine worth 20,000 or 30,000 yuan in 2018, which may never pay back. If the bubble is high, you can buy futures. For example, when we ordered futures, when the bubble started, we actually exchanged time for price. At this time, buy futures first to avoid the time when the bubble was the largest.

When buying graphics cards, I will pay more attention to new graphics cards from Nvidia and AMD, including Nvidia's 3000 series and AMD's 6000 series. Graphics card upgrades are getting slower and slower now, and new graphics card mining machines have certain advantages. It is possible that after two years, the residual value is still 50%.

04
Financial Instruments

Host : Hedging is an application of financial instruments. In addition to hedging, what other financial instruments do you use, Mr. Jiang?

Jiang Zhuoer : First of all, hedging is not wrong, because hedging avoids large losses when the price of the currency falls. This is somewhat similar to options, giving up part of the profit to offset the other part of the loss. Therefore, hedging should be viewed from a larger perspective. If you use some high-risk funds, including some borrowed funds, there is a need for hedging. If you use your own funds to mine, hedging is generally not recommended, because hedging greatly reduces the probability of getting back the investment. Your own money can actually withstand relatively high risks, and at this time you can use risks to exchange for profits.

The most important thing about hedging is the cycle. If you hedge during an obvious rise or bull market, you will suffer a very large loss. The most extreme example is in 2016-2017, when a platform borrowed Bitcoin for mining and lost a lot of money because the difficulty increased by dozens of times and it was impossible to mine so many Bitcoins, and the price of the currency increased by 100 times. So don't hedge for too long a period of time. Most people can't predict where the price of the currency will be in half a year or a year.

In most cases, including our advice to clients, it is best not to hedge. If you have already added some leverage elsewhere, you must eliminate the risk through hedging. Mining is essentially a financial behavior, and the essence of finance is risk control. You must use different methods to control the overall risk in different time periods. The core purpose of all financial tools is risk control.

In fact, many people use financial tools incorrectly, treating them as a form of gambling. Financial tools, such as futures, are actually created to hedge the risks of farmers. The only thing we can be sure of is that blockchain provides more freedom, so it will continue to rise in the long run, but there will be very large fluctuations in the short term, and financial tools are needed to reduce risks.

Therefore, among financial instruments, I am most opposed to using on-site leverage , especially Ethereum, which is too volatile. On-site leverage means that if the coin falls by half, the market will be forced to close, so don’t use on-site leverage. For example, on March 12, Bitcoin fell by half, and all those who used leverage, even if it was 1x leverage, were wiped out.

If you must use leverage, you can use off-market leverage and find a way to borrow money off-market. There are many off-market financing channels, whether it is a credit loan or a mortgage loan.

05
Physical Standard

Host : After talking about the combination of financial instruments and mining, I would also like to know that Mr. Jiang has always insisted on the "currency standard". Please talk about your views based on specific investment cases.

Jiang Zhuoer : Actually, I don’t believe in currency standard, but physical standard .

Whether it is RMB or Bitcoin, they are both monetary units, and monetary units will bring about monetary illusions. For example, if you deposit 10,000 yuan in Yu'ebao and the interest is one yuan today, how much wealth has increased? In fact, whether it is Yu'ebao or other bank financial management, if you collect one yuan in interest, your wealth will lose about three times.

Why does wealth lose three times? For example, find some long-term stable physical objects, such as a bowl of pork chop noodles, and treat it as a physical unit. Convert wealth into pork chop noodles to calculate how many bowls of noodles your net worth is today. This is a more interesting target, because pork chop noodles have ingredients, labor, rent costs, etc. In the past 20 years, using legal currency to compare pork chop noodles, assuming that 10,000 yuan this year buys 3,000 bowls of pork chop noodles, and next year you can only buy 2,700 bowls if you do nothing, and lose 10% of your wealth. You can convert anything into a physical object that is just needed, such as how many bowls of noodles your net worth can be converted into, to see whether your wealth has increased or decreased.

Bank interest is only a partial compensation for wealth loss, not an increase in wealth. If you deposit 10,000 yuan in a bank, plus an annual interest rate of 2.5%, you will lose about 7.5% every year. This is the money illusion.

As for the currency standard and the legal tender standard, I think I am closer to the physical standard, because legal tender inflation is very serious, especially the RMB. In the news, someone deposited 3,000 yuan in the bank for 44 years, and the interest was 4,000 to 5,000 yuan, but at that time 3,000 yuan could build a house or buy a house, but after 44 years, 4,000 or 5,000 yuan could only eat for one month, and the wealth in the middle disappeared.

I usually make investment decisions based on physical assets, so most of the time I focus on whether the investment in coins can pay off. I have never made any company equity investment because I think none of them can outperform coins. Facts have proved that no one or any company can outperform coins. For some investment opportunities, using fiat currency is profitable, so mining may not pay off at a certain time, but there is no problem with mining with fiat currency. At this time, I will use some over-the-counter means to get investment or provide joint mining services to obtain some free mining options.

Therefore, the most important thing is to be based on physical assets and know clearly where your wealth is and how much wealth you have.

Risk warning : The content of this article is only the author’s personal opinion, does not represent the views or position of Zhikuang University, and does not constitute any investment opinion or recommendation.