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Analyst | Carol Editor | Tong Visual design | Produced by Tina | PANews Since the end of last year, the expectation of production cuts has become one of the main narratives in the industry. Including Bitcoin, at least 12 digital currencies will see production cuts this year. Among them, whether in terms of currency price, market value or industry status, Bitcoin's third production cut is the most concerned issue in the market. According to the historical data of the first two Bitcoin halvings, the price of Bitcoin will experience a significant increase within six months before and after the halving. In February this year, Bitcoin successfully reached the important mark of $10,000, with an increase of more than 30% in the first month of the year, which makes the market full of expectations for the market after the halving. But the ideal production cut script was disrupted by the "black swan". As the COVID-19 pandemic spreads around the world, investors' panic continues to ferment, and Bitcoin, as a risky asset, is sold off. The price of the currency fell below $5,000 before the "halving", and the computing power fell to 85EH/s. Although the price and computing power have recovered after the oversold, as of April 25, the closing price of $7,541 is still lower than the average of the six months before the production cut, which is at a low point in the past six months, but the computing power has recovered to more than 110EH/s, close to the level of the currency price high this year. As the hash rate of Bitcoin fork coins switches to Bitcoin after the production reduction; the flood season is approaching, the electricity price will be adjusted; and the large hash rate machines of Bitmain and Shenma will be put into use after the halving, which will be important factors affecting the hash rate after the halving. The relative increase in the price of coins and the hash rate is an important reference for measuring the survival environment of the mining industry. If the increase in the price of coins is greater than the increase in the hash rate, then the mining industry is in a prosperous stage, otherwise the survival space is squeezed. Judging from the current price and computing power, the relative changes of the two have been misaligned. If Bitcoin is to experience its third production cut on this basis, what will the mining industry face in the next six months? Before the third halving, the price of the currency fell, the computing power increased, and the mining profit decreased If the period of six months before the production cut (calculated as 180 days, excluding the day of the production cut) and six months after the production cut (calculated as 180 days, including the day of the production cut) is taken as a production cut effect cycle, then based on May 10 as the expected production cut date, the third production cut effect period of Bitcoin is from November 12, 2019 to November 6, 2020. According to data from BitInfoCharts, in the six months before the reduction, the price of Bitcoin rose from $8,776 at the beginning of the reduction period to a peak of $10,331, and then fell all the way to $5,005 on March 16. As of April 22, the price rebounded to $6,872. The price of Bitcoin fell by 21.70% in the six months before the reduction, and is still lower than the average level in the six months. Unlike the price trend, the total computing power of Bitcoin network is still showing an upward trend. In the first six months of the production cut, the total computing power of Bitcoin network rose from 97.49EH/s at the beginning of the production cut effect period to a maximum of 133.29EH/s. Although the total computing power of the network also fell back to a minimum of 85.01EH/s in mid-March as the price of the currency suddenly plummeted, the computing power soon recovered to above the half-year average. As of April 21, the total computing power of the network was about 119.13EH/s, an increase of 22.19% from the beginning of the production cut effect. In the six months before the third Bitcoin halving, the price of the currency fell, but the computing power of the entire network increased. The misaligned development of the two led to a decline in mining revenue and a squeeze on the mining industry's living environment. According to statistics, when the production reduction effect period began on November 12 last year, the mining income that miners could obtain per terabyte of computing power per day was about $0.154. Although the price of the coin has since reached the $10,000 mark in early February, the unit mining income has not reached a new high. As the price of the coin plummeted, the unit mining income also fell to a low of $0.069 per terabyte of computing power per day. As of April 21, the expected mining income per terabyte of computing power per day is about $0.109, which is still lower than the average value of the six months before the production reduction, and the six-month decline is about 29.22%. The relative increase in coin price and computing power affects mining revenue Based on PAData’s previous observations of Bitcoin mining, the relative changes in the currency price and the total network computing power are a window into understanding the mining industry’s living environment. Judging from the historical relative changes in Bitcoin price and total network computing power, there are two types of correlations between price and total computing power. One is the same direction change, that is, when the price rises, the total network computing power also rises. This is also the most common correlation, such as in 2017 and 2019. On the contrary, when both the price and the total network computing power fall, it has only happened in history during the crash in March this year. Another correlation is that the price of the coin and the total network computing power do not develop in the same direction, that is, one rises and the other falls at the same time. But assuming that miners are rational people and profit-seeking is the main motivation for mining, then when the price of the coin rises, the total network computing power is unlikely to fall. Conversely, when the price of a coin falls, the total network computing power may still rise, such as in 2018 and now. At this time, the driving force for the continued increase in the total network computing power may come from the expectation of future coin price increases. Although mining income also includes transaction fees, according to PAData's analysis of Bitcoin chain data in 2019, transaction fees only account for an average of 2.8% of miners' income, which is basically negligible compared to the income from block rewards. Therefore, considering only the different relative changes in coin prices and total network computing power, the survival environment of the mining industry can be roughly divided into four types. The first is when the coin price rises and the computing power of the entire network also rises. If the increase in coin price is greater than the increase in computing power during the same period, the mining industry is in a period of prosperity and mining can obtain excess profits. If the increase in coin price is lower than the increase in computing power of the entire network during the same period, mining can still make a profit at this time, but the game of existing computing power will compress the profit space. The second living environment is excluded from consideration because it is basically impossible for the price of the currency to rise and the computing power of the entire network to fall at the same time. When the price of coins falls and the computing power of the entire network also falls, the third living environment of the mining industry is formed. If the price of coins falls more than the computing power during the same period, then the market is likely to eliminate a large number of remaining computing power to maintain market balance; if the price of coins falls less than the computing power during the same period, then the market may obtain excess returns and new computing power will enter the market. However, this scenario has never occurred in the history of mining. The fourth survival environment of the mining industry is when the price of coins falls but the computing power increases. At this time, although the decline in the price of coins is still within the tolerance of the mining industry, the profit space of mining is further squeezed, and internal competition will become fierce. Whether the computing power will increase in the future depends on the miners' judgment on the future trend of the coin price. The current mining industry is in this environment. Since the flood season may reduce the mining cost and there is an expectation of halving in half a month, the current computing power has not shown a slowing trend. The second production cut brought a significant reduction in the dividends of the mining industry Judging from the changes in the mining industry’s living environment before and after the first two Bitcoin production cuts, the possibility of the mining industry generating excess returns after the third production cut this year is relatively low, or in other words, it is relatively difficult. According to statistics, in the first half of the year before the first halving, the price of Bitcoin rose from $5.24 to $12.22, an increase of 133%. During the same period, the total network computing power rose from 10.92TH/s to 25.85TH/s, an increase of 136%. Judging from the relative increase in the price of the currency and the total network computing power, in the first half of the year before the first halving, the effect of the halving was strong, the price of the currency rose significantly, the computing power was deployed in advance, and the mining industry was in the first environment, which was generally prosperous. However, since the increase in computing power was higher than the price of the currency, the profit of mining was squeezed. Six months after the first production cut, the price of the coin rose from $12.27 to $128.35, an increase of 945%. During the same period, the computing power of the entire network rose from 27.62TH/s to 104.78TH/s, an increase of about 279%. The increase in the price of the coin is much higher than the increase in computing power. Six months after the first production cut, the mining industry as a whole has obtained excess profits, and the living environment has been greatly improved compared with the six months before the production cut. According to data from BitInfoCharts, during the first production cut period, the expected income per T computing power per day increased from US$3,653 to US$5,450, an increase of approximately 46.56%, and reached a maximum of US$13,352, with a maximum increase of approximately 265.51%. However, by the time of the second production cut in 2016, the benefits brought to the mining industry by the production cut had been greatly reduced. In the first six months of the second halving, the price of Bitcoin rose from $445.54 to $649.59, an increase of about 45%, which is much lower than the increase in the first six months of the first halving. However, during the same period, the computing power of the entire network rose from 0.89EH/s to 1.56EH/s, an increase of about 75%. Although the overall living environment of the mining industry in the first six months of the second halving was the same as before the first halving, the increase in the price of the currency was lower than the increase in the computing power, and the overall prosperity was under pressure on profits. However, in the first six months of the first halving, the increase in the price of the currency was only slightly lower than the increase in the computing power by 3 percentage points, and the pressure on the profits of the mining industry was relatively small. However, in the first six months of the second halving, the difference between the two increases was 30 percentage points, and the pressure on the profits of the mining industry increased significantly. Six months after the second halving, the coin price rose from $645.33 to $927.98, an increase of about 43%. During the same period, the computing power rose from 1.65EH/s to 2.34EH/s, an increase of about 42%. The increase in coin price was slightly higher than the increase in computing power by 1 percentage point, and the mining industry obtained excess profits, but the excess profit space obtained was much lower than that in the six months after the first halving, that is, the mining profit decreased after the halving. Moreover, according to the analysis conducted by PAData earlier with reference to the coin price after Coin Metrics correction, the coin price rose by about 37% in the six months after the second halving, which was lower than the increase in computing power in the same period. Therefore, the mining industry did not obtain excess profits, but the pressure on mining profits was greater than before the halving. According to statistics, during the second production reduction period, the expected income per T computing power per day fell from US$2.15 to US$0.85, a drop of approximately 60.47%. No matter which set of data is referred to, it all points to the same conclusion, that is, the dividends brought to the mining industry by the second production cut have been greatly reduced. Judging from the data of the first two production cuts, although the price of coins and computing power have increased in the six months before and after the production cuts, the increase has shrunk, showing a certain marginal form. And more importantly, the relative increase in the price of coins and computing power is shrinking. When the increase is close, even if the increase in the price of coins is greater than the increase in computing power, the expected mining income will still decline. The third Bitcoin production cut is about to come in half a month. Under this trend, what situation will the mining industry face in the six months after this production cut? Three possible situations that the mining industry may face after the third production cut According to data as of April 21, the price of coins fell by 21.70% in the first half of this halving, and the computing power increased by 22.19%. The mining industry is in the fourth possible survival environment. At this time, the profit pressure of the mining industry is already relatively large. On this basis, combined with the trends of the previous two halvings, there may be three theoretical changes in the survival environment of the mining industry after this halving. The first possible development trend is that if the price of the currency rises after the halving, then according to the historical trend of the price of the currency and the computing power, plus the fact that it is the flood season, the computing power will most likely rise. Assuming that the computing power increase decreases in the six months after each production cut, the computing power increase in the six months after this production cut may not exceed the 42% computing power increase after the second production cut. According to the maximum value of the 42% increase in computing power, if the price of the currency increases by more than 42%, then the mining industry will definitely obtain excess profits, and the profit environment will be significantly improved compared to the current situation. According to the closing price of $6,872 on April 22, the price of a 42% increase in the price of the currency is $9,785. On the contrary, if the price of the currency increases less than or slightly more than the computing power increase, the mining industry may not be able to obtain excess profits, and profitability will continue to be under pressure. If we do not extrapolate based on the assumption that the computing power growth rate will decrease in the six months after the production cut, but instead extrapolate based on the average daily growth of 0.50% in computing power since the beginning of this year, then the computing power will increase by 90.15% in the six months after the production cut. At this time, the price dividing line for the mining industry to inevitably obtain excess profits will be around US$13,056.8. The second possible development trend is that after this production cut, the price of the currency falls and falls to a level that breaks the survival red line of the mining industry, such as when the machine is operating at a loss, then the computing power may decline. If the price of the currency falls more than the computing power, it means that there is still a surplus of computing power in the market, and the computing power may continue to be eliminated. When the price of the currency falls less than the computing power, new computing power may re-enter the market, and its driving force is the future room for the price of the currency to rise. Here, the extent of the decline in computing power depends on the height of the miners' survival red line. Bitmain Chairman and CEO Jihan Wu recently said at the BitDeer 421 Water Festival that his personal opinion is that, considering the distribution of existing mining machines and other factors, it is predicted that the computing power of the entire network will drop by 20% after the halving. If the computing power drops, the price of the currency will most likely fall. A 20% drop in computing power is equivalent to returning to the level of November last year, but the current price of the currency has fallen by about 20% since then. If it falls again, the pressure on the mining industry to make profits will be greater than at the end of last year. This may be a big blow to miners who have increased their investment in the production reduction cycle in advance. But in the long run, this may be an opportunity for internal adjustments in the mining industry. The third possible development trend is that the price of the currency has fallen after this production cut, but the decline is not large, and the computing power is still growing, but the growth rate has slowed down, such as the situation in the second half of 2018. Then, the survival environment of the mining industry after the production cut will be similar to the current one, but will be more severe. In any case, the third halving will be a challenge for miners, whether to survive or to perish.
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