Small miners suffer before halving

Text | Vincent

Nuclear Finance Report: After a cold winter, we are shivering in the spring. It turns out that the distance from ordinary life to the luxurious world is only separated by a Bitcoin.

As the weather warms up, the winter jasmine flowers in Beijing are blooming. However, inside the rental house outside the North Fifth Ring Road, the scene is quite different. The three young people are worried and ready to face a great enemy. You know, the "iron triangle of the mining circle" that was formed less than half a year ago was full of vigor and even vowed to make a name for themselves.

Wang Ge is the core figure of the iron triangle. He is sturdy and dark-skinned. He is half-lying on the sofa, and his posture is similar to "Ge You lying down". Xiao Hai next to him is dressed in trendy men's clothes and is concentrating on playing games. Yuan Yuan is a taciturn, honest and simple fat man. This makes people wonder what brings these three people with different styles together.

After all, the wealth effect brought by mining is crazy.

Unfortunately, the more you want to get something, the more things will go against your wishes. "From being unknown to being penniless, I couldn't withstand two days of extreme market conditions." Brother Wang sighed and stared at the ceiling in a daze.

It is learned that on March 12 and 13, the cryptocurrency market was hit by a "tsunami" and the three brothers suffered a series of critical hits: first, they were slaughtered in the contract market and all 4.19 bitcoins were liquidated; then, their own mining machines were unable to make ends meet and had to be shut down. As a result, their already poor lives became even more miserable.

A realistic question lies before them: Should they liquidate and leave or continue to hold on? If it is for survival, the Iron Triangle is already in danger.

The gambler's dream of getting rich is shattered

At the end of 2018, Brother Wang unfortunately became an unemployed person in the blockchain industry.

He was quite unwilling to give up. "As a migrant worker in Beijing, I can't see the future and I can't go back to my hometown." He said, "There is a saying in the mining circle, 'When the mining machine sounds, there are thousands of gold bars.' I want to take a gamble while I am still young."

Mining has become the lever to realize dreams.

At the beginning of 2019, Bitcoin was at the bottom of the bear market, miners were panicking, and computing power dropped sharply. Wang Ge immediately learned the famous saying of "stock god" Buffett, "I am fearful when others are greedy, and I am greedy when others are fearful", and invested everything he had into the mining circle.

"I bought 120 Antminer S9 and S9i from the second-hand market," Wang recalled. "The price was very affordable at the time. A small number of them were bought for 1,400 yuan, and most of them were bought for 1,300 yuan."

Data shows that at that time, the total computing power of Bitcoin network was around 40EH/s, and the price of Bitcoin hovered around $3,500. Since then, Bitcoin has been trotting all the way, approaching $14,000 on June 27, setting a high point for the year.

With the help of this market trend and cheap hydropower during the flood season, Brother Wang had a smooth sailing in the first six months as a miner and recovered most of his costs.

Then, a bunch of bad things happened. First, the dry season came, electricity prices rose, and mining income turned from profit to loss. Second, in mid-November, the regulatory authorities took action and the "net cleanup" campaign in the cryptocurrency circle was launched, and Bitcoin fell accordingly.

At the same time, Wang Ge is obsessed with the third Bitcoin halving, which is the most anticipated and worrying event for him. According to estimates by Bitcoinblockhalf.com, as of 21:00 on March 22, the halving is expected to arrive at 8:00 on May 13, 2020. After that, the reward for each mined block will be reduced from 12.5 bitcoins to 6.25 bitcoins.

Countdown to Bitcoin block reward halving. Data source: Bitcoinblockhalf.com

“During the first two halvings, the highest increase in Bitcoin exceeded 1,200%. It seems that ‘halving means increase’ has become a kind of consensus.” Brother Wang said that it is precisely because of the hint of cyclical fluctuations that I still have hope when the industry is in a downturn.

Because, when others are fearful, that is the day of greed.

At this time, his childhood playmates "Xiao Hai and Yuan Yuan" came to him and begged him to "take them flying", saying that they wanted to "share weal and woe". "I wanted to refuse, but seeing their eager eyes, I softened my heart and agreed," he said.

Like Brother Wang, Xiaohai and Yuanyuan also turned their attention to the second-hand mining machine market because the price of new mining machines was too high to afford. In Xiaohai's opinion, second-hand mining machines under 1,000 yuan can be easily owned, and he bought 100 of them at once. Yuanyuan was the same. Although the money for buying mining machines was scraped together, she finally entered the market.

Unfortunately, "black swans" happen every year, and this year there are more of them. Xiao Hai said that the changes in the cryptocurrency world are always unexpected.

On January 3, 2020, the famous Iranian general Soleimani was killed in a bombing, and it seemed that a war was imminent. "It is widely rumored in the industry that Chinese miners in Iran will return, and the mine owner has also expressed his intention to accept large miners to move in." At that time, the three brothers felt the helplessness of small miners for the first time.

At the end of January, Yuanyuan welcomed his zodiac year with trepidation. "A spreading epidemic and the sudden death of 'Black Mamba' completely changed the color of life," he said.

In March, after the oil crash, gold plunge, and the U.S. stock market circuit breaker, Bitcoin was cut in half, and the contract market was in a bloodbath. The three brothers were not spared. "On a certain contract platform, there was a freeze under the waterfall market, which made it impossible to open and close positions in time. I watched helplessly as my position was blown up." This incident made Yuanyuan very sad.

According to the data from Hetongdi, on March 12 and 13, the long and short sides suffered a total liquidation of US$4.6 billion, of which the three brothers contributed 4.19 bitcoins.

Along with this, the so-called “halving trend” in the industry seems to have come to an abrupt halt, and small miners are struggling on the brink of life and death.

Waiting is just a slow poison

As the saying goes, good fortune never comes alone, and misfortune never comes singly. The crisis hanging over the heads of the three brothers is not just one end.

"Now, life is even more difficult." Brother Wang admitted that the mining machines of the three of them are all shut down and they have no income.

In fact, the shutdown is not an isolated case when Bitcoin price was cut in half. Jiang Zhuoer, founder of Litecoin Mining Pool, said in an interview with Nuclear Finance APP that "Litecoin's own mining farms have also shut down all Ant S9 mining machines." What's more, some mining farms have even shut down and closed down.

Since short-term theoretical computing power does not represent actual computing power, the mining circle usually uses the 7-day average computing power to estimate the increase or decrease of mining machines in the entire network. Tokenview data shows that the average computing power of the entire Bitcoin network from March 1 to 7 was about 123 EH/s, and the average from March 15 to 21 was about 94EH/s, with a difference of 29 EH/s. Industry insiders pointed out that most of the mining machines currently shut down are low-computing models such as Ant S9. Assuming that the average computing power of these mining machines is 15TH/s, it is equivalent to about 1.93 million mining machines being shut down.

Daily network computing power trend. Data source: Tokenview

In recent days, although the price of Bitcoin has rebounded, it is still far from the price of Antminer S9. As of 21:00 on March 22, the price of Bitcoin was hovering around $6,050. According to the data from F2Pool, at an electricity fee of $0.05 per kWh, the daily income of an Antminer S9 is -$0.36.

Antminer S9 series mining machine revenue. Data source: F2Pool

“According to my estimation, after the Bitcoin halving, if the price of the currency rebounds, coupled with cheap hydropower during the flood season, perhaps Ant S9 can still compete.” Although Brother Wang said this, he was really unsure in his heart.

"This is an industry that depends on luck." Zhu Yu, co-founder of CoinIn Mining Pool, also said that it is too early to pronounce the "death sentence" on Ant S9, and everything depends on the price of the currency.

He also said that if the mining farm temporarily shuts down the mining machines, they will not be driven away immediately. However, if these machines cannot be turned on for more than three months, the mining farm will definitely remove them from the shelves.

According to Zhu Yu, the three brothers have a time window of about two and a half months.

But at the moment, it is obviously far from their expectations. The only thing the three brothers can do now is to wait patiently.

Apart from the awkward situation of the three brothers, there is the dominant party in the mining circle. Under the dual effects of the flood season and the halving, they are replacing the old with the new, and the intergenerational competition is intensifying.

"Since the second quarter of last year, we have launched a batch of new mining machines with low power consumption and high computing power. In terms of performance parameters, they have crushed the old mining machines." A large miner who did not want to be named told the Nuclear Finance APP that he is still paying close attention to the latest iterative products.

Jiang Zhuoer recently revealed to the media that he has ordered the latest S19 mining machine worth tens of millions of yuan from Bitmain, which is expected to be shipped in late May.

In addition, Yu Yang, COO of Kuanghaihui, also said that many large institutions are watching the major event of Bitcoin halving, and once the situation stabilizes after the halving, they will feel at ease to enter the market. The implication is that the computing power of the entire Bitcoin network will continue to rise.

"Mining is a business that requires heavy investment, long cycles, and high risks. It is currently moving towards scale and specialization." Zhu Yu pointed out that small miners have weak risk resistance, and their way out should be to purchase cloud computing power or cloud mining machines.

"In essence, mining is a process of continuously eliminating backward production capacity, but the key to winning is still the price of the currency." Yu Yang revealed the secret in one sentence.

Small miners have little chance of turning the tables

Under such heavy pressure, "bullish" may be the only hope for small miners to turn things around. "The more it falls, the more it rises." Brother Wang is almost obsessed with this.

This is very similar to the image of Ah Q in “The True Story of Ah Q”, who always fantasizes that the positive impact of halving will drive up the price of the currency, in order to cover up the struggle and unbearableness in reality.

"In fact, this is a life-saving straw for the entire industry." The above-mentioned big miner explained that the miner's income is positively correlated with the price of Bitcoin. In other words, only when the price of Bitcoin is higher can you sleep well at night.

He said, "When the halving comes, it means 'the cost remains the same, and the benefit is halved'. For us, who doesn't want Bitcoin to rise as a consolation?"

Yuanyuan also believes that investing in mining is equivalent to a "call option" on Bitcoin, and mining is like using money to bet on the market conditions in the next year.

Zhao Dong, founder of DFUND Fund, said in an interview with the media that from the actual impact point of view, halving itself does not have much substantial impact on the price of Bitcoin, but it has a speculative impact. He believes that there is a certain correlation between halving and the bull-bear cycle of Bitcoin, but not causality.

At the same time, no one can guarantee that the rise of Bitcoin will be realized as expected at a certain point in time.

Even so, life is not just about getting by, there are crises not far away. Next, Wang is worried about how the policy will be implemented.

At the end of last year, mining sites once again faced a wave of regulation, especially the "unusual movements" in Ganzi, Sichuan, which made the entire industry feel like it was facing a formidable enemy.

It is worth mentioning that Ganzi is famous for its low electricity prices due to its rich hydropower resources. It is called the "Mining Capital of the World". To a certain extent, the policy fluctuations in Ganzi and even Sichuan are really like a barometer of mine operations, affecting the nerves of everyone in the mining industry.

On December 24 last year, Ganzi, Sichuan issued a notice titled "Ganzi Prefecture Actively Prepares for Peak Winter Power Supply". The notice stated that it is necessary to regulate the power supply behavior of power companies and properly deal with the power supply shortage during the dry season. Wang Ge believes that the intention of the notice is obvious, and the focus is on ensuring electricity for people's livelihood.

He laughed self-deprecatingly and said, "Mines are a disadvantaged group. In the flood season, there is excess electricity generation and hydropower stations are willing to cooperate with them. But once the dry season comes, they are no longer loved by their grandmas or uncles."

On the 27th, Ganzi also held a "Bitcoin Mine Cleanup Work Seminar". According to people familiar with the matter, the seminar listened to the opinions of hydropower companies, Bitcoin mine owners and other parties, hoping that mining companies would actively participate in the "Consumption Demonstration Zone" to digest the surplus electricity.

"Although we have avoided a one-size-fits-all approach to strict governance, the alarm has not been lifted. Judging from the policy trends in recent years, supervision has always been the sword of Damocles hanging over the heads of mining farms." Wang Ge said, "As early as 2018, Inner Mongolia required a comprehensive clearance and rectification of Bitcoin mining farms; on April 9 last year, the National Development and Reform Commission issued the "Draft for Soliciting Comments on the Guidance of Industrial Structure", which once listed virtual currency mining as an outdated industry to be eliminated. It was not until November 6 that the "Guidelines for Industrial Structure Adjustment (2019 Edition)" was officially released and deleted."

"In my opinion, Sichuan's policies will be more stringent this year, and the outlook for mining farms is not optimistic." Yu Yang also believes that the electricity costs of mining farms in other regions will also show an overall upward trend.

This seems to indicate that tightened regulation may also cause "secondary harm" and the living space of small miners may be squeezed again.

"Reality is cruel." The law of competition of "survival of the fittest" is being played out all the time. For the three brothers, this situation is really terrible.

(At the request of the interviewees, Wang Ge, Xiao Hai, and Yuan Yuan are pseudonyms in this article)

Editor: Agatha