From Bitcoin asset attributes, optimal mining models to asset allocation suggestions, industry leaders talk about the survival and development of cryptocurrency users

In the "Hundred Regiments Battle Mining Summit Halving" interview event initiated by Zhang Keqi on March 31 , Jiang Zhuoer, founder of BTC.TOP, Shenyu, co-founder and CEO of F2Pool and Cobo , Xingkong, founder of Bixin , and Wang Li , co-founder of PayPal Finance , shared their views on some issues related to mining .

The following is the main content of the interview:

01
Bitcoin: Risky Asset or Safe-Haven Asset

Moderator : For quite some time, the market has regarded Bitcoin as electronic gold and believed that Bitcoin also has safe-haven properties. In this process of the epidemic, deleveraging, and the Bitmex technical dead loop that caused the price of the currency to fall to 3,800 points, and the Federal Reserve's massive money printing and quantitative easing that the traditional financial market is about to face, how should we view Bitcoin? Is Bitcoin a risky asset or a safe-haven asset?

Jiang Zhuoer : Bitcoin is definitely not a safe-haven asset, it is a very typical risky asset.

The theoretical basis of Bitcoin is Hayek's "Denationalization of Money", which states that different currencies, namely credit currency and legal tender, should fully compete with each other. Many problems with legal tender may be solved by blockchain digital currency. This theoretical basis is highly controversial, which is reflected in the fact that the price fluctuates up and down. When it rises, it rises 100 times, and when it falls, it can fall 80%-90%.

In fact, the essence of the statement "Bitcoin is a safe-haven asset" is "Bitcoin is a hedge asset for fiat currency." If fiat currency has problems, Bitcoin will succeed. It can hedge some of the risks of fiat currency, but it cannot hedge all risks. In this sense, gold can hedge all systemic risks, but Bitcoin cannot serve as a store of value. Bitcoin can only serve as a store of value after large-scale use.

Shenyu : We cannot simply look at whether this is a risky asset or a safe-haven asset. In the black swan event, the central bank is printing money on a large scale. Bitcoin has high-quality liquidity 24/7, so it is under pressure to sell, but the liquidity crisis of the entire market has not been effectively alleviated. When liquidity is fully alleviated, I believe that Bitcoin and digital currencies like Bitcoin will still become assets that resist inflation.

Wang Li : Bitcoin should not be considered a safe-haven asset. According to the traditional definition, it is at most an alternative asset.

The big drop on March 12 actually had several stages. At the beginning, there was some panic about the new coronavirus. The trigger point was the collapse of OPEC talks on March 7, which led to a drop in oil prices. The stock prices of new energy companies with large weights in the US stock market began to fall, and some liquidity crises began to occur. The US stock market was falling, but gold was rising, so in the early stage of the crisis, traditional safe-haven assets were actually rising. Gold rose to US$1,700 , which is already a high in recent years.

Later, gold fell from 1700 to 1400. At this stage, the real liquidity panic came. All assets were falling, not just Bitcoin. Gold also fell sharply from 1700 to 1400. Bitcoin fell from more than 7000 points to more than 3000 points. In fact, it was not bad because it had a certain leverage. When everyone sold all assets, it actually showed that Bitcoin had good liquidity. It was traded 24 hours a day, 7 days a week, and there was no price limit or market restriction in the world. Therefore, Bitcoin fell and triggered the leverage in the market.

This crisis does not reflect whether Bitcoin is a safe-haven asset, because it is just a liquidity crisis. In fact, Bitcoin is still a hedge for many events, such as geopolitics and sovereign credit crises. Although Satoshi Nakamoto originally intended Bitcoin to be a currency, it is not a currency at this stage, but more of an alternative asset. At the same time, Bitcoin also has the value-preserving characteristics of gold, which can be seen from its trend with gold since March.

Starry Sky : The volatility of Bitcoin prices and the depletion of liquidity are more due to problems caused by lack of regulation. However, as a decentralized value storage and supranational virtual asset, Bitcoin has a hedging effect in the long run.

At present, the price of Bitcoin is also recovering. If it were not for deleveraging, it would not have caused such a big drop this time, so in the long run, it still has a great hedging effect. Leveraging an unregulated asset is extremely risky. If it is used as an asset allocation, it is a safe-haven asset; from the perspective of leverage and lending, it is a risky asset.

This decline will make the liquidity of small currencies worse and worse, Bitcoin will get better and better, and the Matthew effect will become apparent .

02
Subsequent price trends and suggestions

Host : Buffett has experienced 5 U.S. stock market circuit breakers in his lifetime, and we have experienced 4 in one month. At 9 a.m. on March 12, Bitcoin plummeted 42%. What impact will this have on the subsequent price trend? How do you view this financial cycle of leverage and deleveraging, and what advice do you have for miners? How did you persevere through the ups and downs before?

Jiang Zhuoer : First of all, you can’t persevere just by spirit, you must be prepared in advance. The situation of miners’ leveraged liquidation mentioned just now is actually not so bad, because most miners’ collateral ratio for loans is 65%-70%, and the borrowed money is used to pay electricity bills/buy mining machines. Compared with the current coin price, which was 60%-70% off at that time, it is actually not so bad.

In a bear market, it is very important for miners like me to build mines and get cheap electricity, because my mining machines will not shut down, and I can buy mining machines when others sell them at a low price. Although it takes longer to pay back the investment in mining farms and mining machines than buying coins, building a mining farm can increase the resilience of the asset portfolio against risks and hedge the risk of possible price declines .

Shenyu : Simply put, this is a very good thing to reduce risk. If this crash did not happen on March 12, but happened a week or two after the halving, the coin price crash plus the halving may cause the entire mining market and the entire difficulty to change. A large number of mining machines will not be able to support the electricity costs and have to shut down, and cause congestion in the Bitcoin network. Therefore, this crash will release the risk of halving in advance, which is good for the security of Bitcoin's network and encourage miners to use better mining machines.

As for the impact on the subsequent price of the currency, this plunge can quickly establish the low point of Bitcoin and form a relatively good bottom support. For the cycle of leverage and deleveraging, Bitcoin is also accelerating the evolution of financialization, so a large number of financial derivatives and leverage methods have emerged. For the entire mining industry, the profit margin of mining is gradually decreasing, from the huge profits of the past few months to a normal level.

Many miners use leverage tools and ignore their risks. Bitcoin is still in the early stages of market development and lacks regulation, which has led to dramatic ups and downs and black swan events. I suggest that miners anticipate their risk exposure before using leverage tools and use appropriate financial tools to hedge their risk exposure . Although these are very low-probability events, they often happen in the cryptocurrency world, so make sure you don't have a large risk exposure!

Wang Li : My attitude towards leverage has not changed. Leverage itself is neither good nor bad. Instead, users need to improve their risk awareness and use leverage well .

From the perspective of the debt cycle, the cycle of digital currency is very short. At the end of 2018 and the beginning of 2019, there were not many digital currency pledge loan institutions, and not many people provided services for miners to borrow to pay electricity bills. At the end of 2019, inter-institutional lending rose rapidly, and exchanges were also raising funds at an interest rate of 36%. Everyone was borrowing stablecoins to go long, which was leveraging in the wrong direction at the wrong time.

As for the impact on miners, when leverage was increased crazily in February, the proportion of miners was declining, because many people were doing arbitrage. At that time, the premium between futures and spot was very high, reaching an annualized rate of more than 50%. Even if one borrowed USDT at an interest rate of 30% and could release 50% for arbitrage, the risk was very low in an efficient market.

My thinking is that human nature is unchanging, and the so-called greed and fear may be faster in the blockchain market. Leverage is actually a good thing if it is used correctly, in the right direction, and at the right time. In addition, the deleveraging of this industry is too violent. Traditional finance needs at least ten years to leverage and deleverage, but Bitcoin deleveraging only takes two days!

As the boss of Shenyu said, this incident actually makes the market more optimistic. Regardless of the direction of the epidemic and the loosening of the traditional central bank, it is actually good for Bitcoin. The scale of the Fed's QE is huge compared to the market value of Bitcoin, so I am more optimistic about the price trend of the currency in the future. In addition, the Fed's proposal of unlimited QE is actually a damage to sovereign credit. If coupled with the sovereign default events of some important countries, it will be an ultimate benefit. Bitcoin will be transformed from an alternative asset or a safe-haven asset with gold-like properties to a "decentralized" currency described by Satoshi Nakamoto. Therefore, compared with February, I am more optimistic.

03
Is it possible to buy at the bottom?

Host : Do you think some financial products can be used to buy at the bottom? What suggestions do you have for miners to use financial products at this point in time?

Wang Li : In fact, it mainly depends on the risk tolerance of each person and the proportion of digital assets in the total. At present, it is a good time to buy at the bottom. At the same time, it is not only about investing in digital currency assets from the direction. The direction is just a vector. There are also many financial products that allow customers to invest in market volatility (such as selling options) and investment time products (such as fixed income and options products). Even if the income is less and the leverage is less, it is a good thing to survive and not be eliminated.

04
How to survive tough times

Host : You have experienced several bull and bear markets in the past. I believe there have been many moments that challenged your beliefs and even times when you were ready to give up. So, how do you continue to stick to your beliefs?

Xingkong : I have experienced many crashes. The main problem is that the market is not regulated, so there are many factors of human manipulation. Because a lot of data is known by third parties, there are some leverage risks, but leverage itself actually reduces the volatility of the entire industry, which is a good direction.

This crash is actually not a "dark moment". When the leverage interest rate was relatively high in January and February , we also pointed out that the possibility of the price of the currency rising was very small. After such a deleveraging process, the entire industry is healthier, the trend is more stable, and the possibility of falling is less.

For the mining industry, everyone is slowly returning to a normal average profit level, and the opportunities for huge profits are slowly decreasing. It’s just that everyone here participated in the mining industry earlier, so they have more advantages in operating the mining industry. This year’s miners are relatively harder, because in addition to the sharp drop in the price of coins, there is also a halving, and there are new mining machine iterations. In the future, with the full competition of mining machine manufacturers such as Shenma, Avalon, and Xindong, the update and iteration of mining machines will become faster and faster. I think mining machines will be scrapped every two years or so. At the earliest time, we thought that S17 would be the last generation of 7nm mining machines, but soon S19 and Shenma M30 machines also came out, so we can see that technology is constantly improving, and the efficiency of Bitcoin mining machines will be the same as Moore's Law. The computing power of Bitcoin mining machines will double every two years.

In such an environment, miners must control the payback period to within two years. If it exceeds two years, the risk will be very high , because no one can guarantee that new mining machines will be available within two years and the old mining machines will be eliminated. Miners need to arrange mining assets, diversify assets, and find ways to lower electricity prices. I hope miners will try their best to control their risks and not gamble too hard.

Shenyu : To be honest, it is not the darkest moment yet. The current price of around 6,000-7,000 is actually similar to that of early January last year, and it is basically just a correction. But the special thing about this year is the halving, coupled with the price drop and the replacement of mining machines.

In history, we also observed the first halving of Bitcoin in 2012. At that time, the change in computing power was very terrifying, and there was also a process of converting graphics cards to ASIC cards. Under the dark and long-term decline in the price of the currency, many miners were washed out, and the remaining miners gritted their teeth and persisted, constantly optimizing their costs. Therefore, miners took the initiative to move from industrial electricity to hydropower in places like Sichuan.

Now, we are about to enter the flood season. If miners can control their costs, I believe they should have good returns this year. If the cost is controlled at around 0.1 cent, then the return is actually good. Therefore, this is not the darkest moment in the mining industry. It should be a turning point, a process of adjusting the market electricity price cost, optimizing costs, and improving efficiency for the second or third time.

05
The logic of choosing a mining machine

Host : Mr. Jiang bought 21 million S19s, and predicted that S19 would repeat the glory of S9. You also predicted that this bull market would be slower and more cyclical, and it is possible that S19 could mine for four years or even longer, because it is a low-power model, and it will have income no matter how much the price of the currency drops. If it needs to be shut down, other machines will shut down first, and S19 can continue to mine. This sounds like a good hedge against other low-computing machines. Can you explain to us the logic of choosing a mining machine?

Jiang Zhuoer: There are different internal logics for buying mining machines at different stages . Sometimes you buy the mining machine with the worst power consumption, and sometimes you buy the mining machine with the best power consumption.

When should we buy the miner with the worst power consumption? Let me give you an example. At the end of 2018 and the beginning of 2019, the price of the coin fell to around 3,000. At that time, Ant had a T9+ miner, which had a lower power consumption than the S9. It had been shut down for 1-2 months and was very cheap, costing only about 200 yuan. We bought tens of thousands of T9+ miners from Ant. I bought this miner because I believed that the price of the coin would always bottom out and rebound, and the price rebound of high-power machines would be higher than that of low-power machines .

Let me explain why. For example, if the daily output is 10 yuan, 9 yuan of the T9+ is used to pay the electricity bill, leaving only 1 yuan, while the S9 may be better, with 7 yuan used to pay the electricity bill, leaving 3 yuan. (Then at this time, the market price of T9+ is 200 yuan and S9 is 600 yuan based on a 200-day payback period). When the price of the coin goes up, the daily output will increase from 10 yuan to 20 yuan. At this time, a very interesting phenomenon will occur. The net output of T9+ will increase from 1 yuan to 11 yuan, while the net output of S9 will increase from 3 yuan to 13 yuan. The net output of T9+ has increased by 11 times, but S9 has only increased by 4 times. At this time, the increase in T9+ will be much greater than that of S9, so the price of the mining machine will also increase higher. This is a mathematical problem. You must understand this mathematical problem in order to mine better.

So why do I now buy the S19 miner with the best power consumption instead of the S9 miner which has poor power consumption but is also cheap? This is because we cannot predict the future price trend of the currency.

There are two possible scenarios for the future development: one is that the epidemic is resolved and the economy recovers rapidly. With the massive release of funds by the Federal Reserve, the price of the currency will soon rise to the previous 10,000. This is of course very good, and everyone will make money no matter what model they buy. In this case, the increase in the price of S9 is higher than that of S19. There is also a bad situation, that is, the new crown pneumonia cannot be controlled, and it lasts for 6 months or even a year. A large number of people in Europe and the United States are infected and many people die. At this time, no matter how the central bank releases funds, the economy will collapse. Although Europe and the United States are directly affected, the Chinese economy will also be greatly hindered. Then the price of the currency will not be able to hold up more than 6,000 points in the end, and it will go to more than 5,000, 4,000, and 3,000 points. At this time, the question is whether you can survive in the future? I am more cautious. In order to ensure that I can survive, I bought the S19 with the best power consumption. Because in this way, even if the price of the currency falls to 3,000 or even 2,000, the S19 can still be turned on.

In addition, there is another factor. The price of S19 is not too high now. In fact, Bitmain was going to release S19 last week, but because the price of the currency was too low, they discussed it for a long time internally, so they postponed it for a week. It can be seen that the price of S19 is relatively reasonable now, and the inexpensive cost can be further reduced by continuously starting the machine. As long as you can still start the machine, the cost of each T mining machine will continue to decrease, so you can be invincible. You are also welcome to come to B.TOP to purchase mining machines.

06
Leverage and Asset Allocation

Host : Regarding asset allocation, as a cryptocurrency trader, we often worry that if we don’t use enough leverage, we won’t make enough money. If we increase the leverage, we’re afraid that we won’t be able to hold on and get out too early. So what is the correct financial approach for miners at this stage?

Jiang Zhuoer : First of all, everyone should fully understand that leverage is the root of all evil. Ordinary people should never touch this thing . If you are 30 years old and your net worth is not yet 10 million, you should honestly admit that you are an ordinary person. Ordinary people should not touch leverage, especially on-site leverage (defined as leverage that will close your position in a short period of time as the price falls). Don't touch futures or mortgage currency lending.

If you want to use leverage on the exchange, you should use it as a financial tool to control and hedge risks. For example, if you use futures for hedging, or combine it with options to hedge risks, or when you use collateralized coins to borrow money, you should think from the beginning that these coins may not be returned. If the coin price falls, it is equivalent to selling the coin at a 40% discount. If it rises, I may have a certain profit. So when doing these things, you must be mentally prepared, and you may be liquidated.

If you must use leverage, you can actually consider using OTC leverage (defined as credit loans or mortgage loans and other borrowing channels, that is, it will not be closed when the price of the currency goes down, and the cycle is long, preferably 1.5-2 years). OTC leverage is actually beneficial. First, you can use external funds to expand your mining capabilities. In fact, this is what I did at the end of 2015 and the beginning of 2016. Earlier miners may still remember that I also did several borrowing mining on Babbitt at that time, and created very high returns after the price of the currency rose. So this is the right way, attracting traditional funds to enter through mining, and try not to add on-site leverage. In addition, we must use similar hedging methods to protect our positions and investments. Regarding this, you can go to my Weibo to watch the replay of the previous live broadcast.

Wang Li : I would like to reiterate that leverage is a neutral tool and is not the root of all evil, but using the wrong leverage is the root of all evil . This mistake includes errors in direction and timing.

Regarding asset allocation, we are observing some macro indicators at this time, such as interest rates, which reflect the overall market credit and overall market leverage. These important indicators are very close to the historical bear market, but they are completely opposite to February, and the market sentiment is also opposite. I also agree with what Mr. Jiang just said, that it is actually a very good thing to be able to add OTC leverage. In-market leverage will indeed lead to a larger drawdown when the price of the currency falls. Similar scenarios of in-market vs. OTC leverage are like when the price of the currency falls, it is very different whether you use Bitcoin or USDT as margin.

Now is actually a time when everyone is panicking, and it is also a very good time to add leverage , such as making good use of option products. For older mining machines, if miners think there will be risks after the halving, I also suggest that they can do some reverse leverage, such as hedging for one month to avoid downside risks. Risk and return are relative, and leverage is neutral. Everyone chooses the appropriate leverage according to their own risk preference and risk tolerance, and uses some financial tools to hedge to ensure that they can survive.

07
User Questions and Answers

Question : What do you think of BCH's 12.5% ​​donation plan?

Jiang Zhuoer : The 12.5% ​​donation plan will definitely not be implemented, mainly because people like Roger in the community are opposed to it, but we still need to solve the funding problem for developers. This problem is a problem that spans all currencies, and there is currently no good solution.

At present, our BCH community is still looking for various ways to solve this problem. Some people have proposed to establish the Satoshi Nakamoto Award, where companies can reward development groups that have contributed to the development . This is still meaningful, because it has a news and exposure effect for companies, and the source of funds for companies is a source of water, which can look forward to a better and better future. In fact, the funds required by developers are a relatively small amount for the ecology of a coin, so it can be solved by companies awarding developers. Another advantage is that the direction of developers is in line with the market, because developers must satisfy users and companies before they are willing to award you and give you money, so this is the direction we will work hard in the future. Of course, there is still a lot of work to be done.

Question : What is the most promising mining machine in 2020?

Starry Sky : Moore's Law will continue to be effective - the computing power of mining machines will double every 18 months to two years . In the past, because the market was immature, S9 could mine for a long time. At that time, there were only Bitmain and Avalon on the market. Avalon's technology was not very mature at that time, and it was not in a fully competitive situation. In addition to mining machines, power consumption ratio is very important, as well as ease of maintenance, damage rate and stability. For example, the heat sink of Shenma mining machine is made of very good materials, and the same is true for Avalon. In terms of power consumption ratio, Bitmain is 10% better than the existing Avalon and Shenma, but each company has its own advantages. If the damage rate is too high, it will be very tiring for miners to enter the site and need to return for repair.

Question : What are the criteria for F2Pool to select small mining coins? Which ones do you personally prefer?

Shenyu : Currently, the fish pool supports 40 to 50 PoW small mining coins. The basic screening criteria are: first, the project has a certain degree of innovation , no major flaws (such as over-issuance or debt risks), the project runs normally and has a certain degree of liquidity , and we will choose to go online.

Personally, we are optimistic about some algorithmic innovations, including small currencies that are innovative in direction. They follow PoW fundamentalism, the founding team does not hold many zero-cost coins, and the consensus mechanism does not have many flaws. From a personal perspective, I am optimistic about CKB, HNS, and this year's Filecoin and Conflux will also be launched.

Question : Mr. Jiang is a very large owner of S9, including importing some S9 mining machines at the end of last year. Now I would like to hear your thoughts on S9.

Jiang Zhuoer : First of all, I have a lot of S9 positions. I have a nickname in the industry: mining machine black hole. I will not actively sell mining machines. I will mine until the mining machines are scrapped and take advantage of the entire hairtail market. So I still have hundreds of thousands of S9 machines on hand. Of course, S9 is also a big problem for us now. At present, they are all stopped and placed in the warehouse. As for whether S9 can run again when the flood season comes, I don’t know now. But we can calculate it. Assuming that everyone’s S9 stops, the computing power decreases, and the low-priced electricity fee of more than one cent in the flood season is added, then S9 should basically be able to run at this time. Therefore, in order for S9 to run in the flood season, it must have its own low-priced electricity in the flood season. I am more optimistic about it when it is about two cents or less .

Risk warning : The content of this article only represents the personal opinions of the guest, does not represent the views of Zhikuang University, and does not constitute any investment advice or suggestions.

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