The “mining collapse theory” is prevalent. Under the prisoner’s dilemma, are 70% of mining machines facing their last fight?

Is the mining industry about to collapse?

As the computing power of Bitcoin mining dropped from 115E to a minimum of 85E, the following scene emerged before our eyes: the Ant S9, which once provided 70% of the computing power for the entire network, was being taken off the shelves one by one by miners, and thrown into the garbage dump before even the dust could be blown off.

Statements like “If the price of currency does not rise further, 70% of mining machines will be shut down” have deepened this pessimistic impression.

Once the cornerstone of the mining industry is overturned, cryptocurrencies will fall into an irretrievable situation: a large number of miners will flee, mining machine companies will go bankrupt, currency prices will fall, the number of traders will drop sharply... Under the shadow of the global crisis, it is not an exaggeration to prepare for the worst.

So, will horror stories like “70% of mining machines forced to shut down” really happen?

1. 70% of mining machines will be shut down?

“If the price of the currency does not rise significantly, 70% of the mining machines in the entire network will be shut down.”

On March 20, F2Pool co-founder Shenyu said this in an interview. If this happens, it means that the computing power of the entire network will drop by at least 70E, and the computing power will return to the level of 2018. Of course, eliminating 70% of the mining machines may not reduce the computing power by 70E, after all, the new generation of mining machines such as S17 are being rapidly deployed.

Shenyu also gave a more detailed forecast of the future mining situation. He believes: "This year's halving is originally a very big shock to miners and mining machines. Before the halving, there have been large-scale shutdowns, and mining machines such as S9 have basically withdrawn from the stage ahead of time. If there is a sharp drop after the halving, coupled with the impact of factors such as the global epidemic, market sentiment will panic and there will be a stampede-style escape, which may cause a short-term 'death spiral'. After a reshuffle and adjustment, market sentiment will gradually recover and usher in a new cycle."

If this situation really happens, then such a reshuffle may even lead to the bankruptcy of mining machine companies and a large number of miners fleeing the cryptocurrency circle.

"This situation is quite extreme. The market is unpredictable and we can only go with the flow," Shenyu added.

Numerous data show that this mining crisis is not only eliminating mining machines, but also many small miners may be "brutally slaughtered." This will in turn accelerate the process of mining machine elimination.

Recently, an investigative report by the cryptocurrency information platform AMBCrypto showed that competition in the mining industry has become very fierce and small mining companies find it difficult to survive.

According to the platform, the recent drop in Bitcoin prices has hit miners the hardest, as they are less profitable. Small mining companies that cannot afford the costs are shutting down their machines, which has led to large miners monopolizing the industry. Bitcoin mining difficulty is 16.55 T, which makes it difficult for small miners to continue operating.

Miner Kiven said that small miners have no room to survive. He believes that "there is chaos all over the world, and everything seems to be stagnant, but the competition in the mining industry is still very fierce. Large miners are forcing mergers and acquisitions, and small miners have almost no place to stand."

So, will the big miners have an easier time? It may not be that simple.

Kiven believes that life is not easy for large mining companies either. He points out,

“It’s obvious that large-scale mining farms must be invested in order to cope with various risks, such as the sharp drop in the price of coins caused by the epidemic. But what most people don’t know is that when a miner has a large-scale mining farm of 5-10 megawatts, he generally does not sell the mined Bitcoin immediately. The general practice is to hoard the Bitcoin and sell it when the price is higher.”

"But what if the price of the currency doesn't go up for a while? Miners will have to lose money mining, and if the price of the currency doesn't go up, a large number of mines may go bankrupt. If this happens, the industry will lose 70% of its mining machines, which is a small number." Kiven told the Intelligence Bureau.

In fact, due to the sharp drop in the price of the currency, the difficulty of mining on the Bitcoin network is being reduced.

According to BTC.com data, the total network computing power is 94.11EH/s, the 24-hour transaction rate is 3.66txs/s, the current mining difficulty is 16.55T, and there are 2 days and 16 hours before the difficulty adjustment. It is expected that the next mining difficulty will be reduced by 13.20% to 14.37T.

So, is it really possible that the mining industry will fall into a death spiral collapse as Shenyu said?

2. In the prisoner’s dilemma, collapse may not be that easy

In reality, a mining collapse is not that easy.

If you carefully observe the changing pattern of hash values ​​in the blockchain browser, you will find a very surprising fact: the price of the currency has long fallen below the shutdown price of the Ant S9 mining machine, but the real-time computing power has not dropped significantly.

According to the Intelligence Bureau's previous interviews and industry research, the computing power provided by S9 currently accounts for 30%-40%. The price of this model of mining machine is roughly around US$6,000. When the price of the coin fell below US$5,000, we found that the network computing power did not drop rapidly by 30%.

Why is this? Here we need to explain the “shutdown coin price”.

The shutdown price refers to when miners find that the mining income is not enough to pay the "comprehensive electricity fee" (comprehensive electricity fee includes mining site rental, electricity fee, operation and maintenance expenses) under the "current price", it will be unprofitable to use the mining machine for mining, and miners will choose to shut down the mining machine. The "current price" mentioned here is the shutdown price.

Therefore, from a purely economic perspective, miners should shut down their machines quickly after the coin price reaches the shutdown price to reduce losses.

So, since Bitcoin has subsequently fallen to $3,500, the computing power has not dropped significantly. Why is this? Is there something wrong with the derivation process?

Actually not. There are three main reasons, which is why the mining industry is not so easy to collapse.

First of all, the so-called shutdown coin price is nothing more than the general electricity price in the industry. For example, the so-called "thermal power price is 0.35 yuan/kWh" actually refers to the average electricity level in the industry. However, in fact, many miners' electricity prices are higher than this price, while some large miners' electricity prices are much lower than this price, and even some miners who steal electricity for mining do not need to pay electricity bills. Therefore, at the same coin price, only some miners will really choose to shut down, and a large number of miners do not need to consider this issue.

Therefore, when we say that the price has fallen below the shutdown price, we are using the general electricity price level in the industry, but it does not rule out that miners with cheap electricity resources can still run old mining machines.

Secondly, under the constraints of the "contract", it is not as simple as "pulling the switch" for miners to shut down. In the current mining industry, some miners specialize in building mining farms to sell electricity and mining machine slots, while some miners are only responsible for buying mining machines for mining.

When the mining machine is put on the market, the mining farm will report the electricity consumption to the relevant departments. Once the formalities are completed, it will not be convenient to shut down suddenly. For customers who cannot afford the electricity bill, both parties are likely to choose to temporarily rent the machine to the mining farm to continue operating.

Once these mining machines are taken over by the mine owners, their electricity costs will be lower, and running old mining machines will not necessarily be a loss.

Finally, miners will face the "prisoner's dilemma", which also makes it less easy for miners to shut down. The prisoner's dilemma refers to a special game between two captured prisoners, which shows why it is difficult to maintain cooperation even when cooperation is beneficial to both parties. The prisoner's dilemma is a representative example of non-zero-sum games in game theory, reflecting that the best choice for an individual is not the best choice for the group.

This theory can also explain the situation of miners. If the S9 mining machine is shut down, the computing power of the entire network will drop significantly, and the price of this type of mining machine will also drop significantly. At this time, some miners will choose to turn on the machine. This is the "prisoner's dilemma" of miners.

Therefore, in reality, it is not so easy for all old mining machines to stop mining, and the mining industry is not so easy to collapse.

However, as new models of mining machines continue to be put on the market, the elimination of old mining machines is inevitable. Is there really no room for "bargaining"? No!

3. The flood season is the last chance

"Hydroelectricity costs only 0.2 yuan during the flood season. The cheap electricity rates in Yunnan, Guizhou and Sichuan during the flood season may be the last chance for old mining machines." Miner Xiaochen told the Intelligence Bureau.

The electricity price has dropped from 0.35 yuan/kWh for thermal power to 0.2 yuan/kWh for hydropower. What does this mean?

"Assuming that the power load of a mine is 10,000 loads, and other conditions remain unchanged, when the electricity price cost is reduced by 0.01 yuan, the photovoltaic power bill can be saved by 1 million yuan in 365 days a year." When calculating the specific electricity cost, Xiaochen told the Intelligence Bureau, "The price difference of 0.15 yuan between hydropower and thermal power is more than 10 million yuan a year."

Load: how many KW·h of electricity can be consumed per hour. 10000 load means 10000 KW·h of electricity is consumed per hour.

"A mining farm with a power consumption of 10,000 loads only has a capacity of 7,500 S9s. Now it is normal for a mining farm to have tens of thousands of machines, so the money saved is even greater," Xiaochen told the Intelligence Bureau.

In fact, according to the current daily coin production of 0.000055908 per S9, the total annual revenue of 7,500 S9s is less than 4 million.

The cost saved by using hydropower is more than 10 million. This is why cheap electricity during the flood season is so important to miners, and this may be the last chance for mining machines such as S9 in their "limited life".

“This flood season will be the last chance for small miners and old miners.”

Xiaochen gave his own judgment on how the mining ecology will change after the flood season. In his opinion, the mining industry will develop in a more professional and large-scale direction after the flood season. "The era of barbaric development is gone forever."

As for why this happened, Xiaochen gave his own explanation.

"As the industry grows in size, the government may conduct further supervision. For example, taxation will be standardized and the entry threshold will be raised. After large-scale operation, it will be very unfriendly to small miners." Xiaochen said, "In the past, you could start with a few million yuan, but now you have to invest tens of millions or even hundreds of millions of yuan."

"Only through large-scale operations can we reduce rates and maximize profits," Xiaochen told the Intelligence Bureau.

The left picture shows the growth trend of Bitcoin's total network computing power, and the right picture shows the trend of Bitcoin mining difficulty changes

At the same time, according to Xiaochen's judgment, the flood season may also push the computing power of the entire network to a new height. On March 24, 2020, the computing power of the entire Bitcoin network soared to an unprecedented 95.34EH/s. During the flood season, the computing power will increase by more than 30EH/s on the basis of the existing computing power. The more computing power, the less Bitcoin each mining machine will get.

At the same time, new models of mining machines are constantly pouring into the market, further squeezing the living space of old mining machines.

On March 23, Bitmain officially launched the S19 series of new mining machines on its official website, and plans to ship them in May. Antminer officials said that the two mining machines have been sold out in seconds, and the sale of the mining machines has nothing to do with options. Currently, Bitmain's official website shows that the S19 mining machines are sold out.

Obviously, if the price of the currency does not rise significantly, and the computing power generated by the new mining machines continues to increase, the elimination of old mining machines is inevitable, and the cheap electricity during the flood season becomes the last chance for a number of mining machines such as S9.