Amid the crash, how do you view the asset attributes of Bitcoin and the mining industry?

Against the backdrop of a sharp decline in the global market, Bitcoin plummeted by 40%, and the prosperity driven by leverage is no longer there. In 2019, financial institutions began to appear in the market to provide digital currency pledge loans. Driven by leverage, the currency market presented a certain false "prosperity". This drop in the price of the currency is a process of market deleveraging.

The price of the currency is close to being halved, but the computing power has not fluctuated significantly, highlighting the flexibility of the mining industry. There are two reasons for the flexibility of mining: 1. Due to the constraints of the electricity use contract, the mining farm cannot be shut down; 2. Miners have a strong willingness to hold the currency at a low level and expect the currency price to rebound. The mining industry itself has flexibility, and whether to shut down or not depends on the specific situation of the miners. If the current state is maintained, all the mining machines of individual miners who use outdated machines and high electricity prices will be shut down. If these machines are sold to the mining farm at a lower price, they can continue to operate and bring certain benefits if the mining farm can get a low electricity price. The "halving" of Bitcoin mining rewards is imminent. In the next six months or so, there are three situations: maintaining the current currency price, continuing to fall in the currency price, and rebounding in the currency price. We have made a comprehensive analysis of the changes in the mining market structure: 1) If the current price range is maintained, all the mining machines of individual miners who use outdated machines and high electricity prices will be shut down; 2) If the currency price drops by another 25%-30%, about one-third of the outdated machines in the entire network will not be profitable during the high-water period of electricity prices, and the computing power will also drop by about one-third accordingly. At this time, only advanced machines with low energy consumption can continue to mine. The benefits of this group of people measured in currency standard are expected to increase significantly due to the decline in the computing power of the entire network; 3) If the price of the currency rises, the mining machines will not be shut down, and new mining machines will enter the market, and the profit expectations will be higher than in 2018.

In a weak market, the energy efficiency of mining machines is more important. Currently, mining machines with an energy consumption ratio of 75J/TH are on the verge of shutting down. Under the current market conditions, machines with energy consumption below 50J/TH are the best choice. They can maintain a certain leading advantage in the next two to three years and are relatively safe.

At present, Bitcoin is a special alternative asset, and its correlation with gold and emerging markets is not obvious. Although Bitcoin and gold have many similar properties, the price relationship analysis between the two shows that the correlation between Bitcoin and gold is not high; similarly, the correlation between Bitcoin and the MSCI Emerging Markets Index is not obvious. At present, we still believe that Bitcoin is a special alternative asset, but in recent years, it has received more attention from the traditional capital market and has a certain degree of interoperability with other assets in terms of liquidity and other aspects.

Last week's market review: Chainext CSI 100 fell 33.76%, with transaction payment performing best among the sub-sectors. From the perspective of sub-sectors, payment transactions and AI performed better than the average level of Chainext CSI 100, at -29.43% and -32.22% respectively; IoT & traceability, entertainment and social networking, commercial finance, basic enhancement, basic chain, storage & computing, and pure currency all performed worse than the average level of Chainext CSI 100, at -48.58%, -33.83%, -45.21%, -43.71%, -37.94%, -37.63%, and -34.07% respectively.

Risk warning: regulatory policy uncertainty and blockchain infrastructure development failing to meet expectations.

Against the backdrop of a sharp decline in the global market, Bitcoin plummeted by 40%, and the prosperity driven by leverage is no longer there. Against the backdrop of the global spread of the epidemic and the sharp decline in the global market, Bitcoin fell by more than 40% in 7 days last week (more than 70% from the previous peak). According to statistics, from 18:30 to 19:00 on March 12, a total of US$565 million was liquidated in the entire network in just half an hour. In 2019, some financial institutions engaged in digital currency pledge lending began to appear in the market. Driven by leverage, the currency market showed a certain "prosperity". This drop in the price of the currency is a process of market deleveraging.

The price of the coin has nearly halved, but the computing power has not fluctuated significantly, highlighting the resilience of the mining industry. There are two reasons for the resilience of mining:

1. Due to the constraints of the electricity use contract, the mines could not be shut down. Since mining is a high-energy-consuming physical industry, many mines signed power supply agreements with power suppliers in order to stabilize electricity prices or get relatively low electricity prices, such as paying a monthly electricity deposit. Therefore, they could not be shut down in the short term when the coin price was halved, so the computing power did not fluctuate significantly;

2. Miners are more willing to hold coins at low prices. After miners receive Bitcoin rewards from mining, they have a certain period of holding coins, and they do not sell them immediately after mining. Therefore, some miners expect that the price drop is just a flash drop and there is a possibility of recovery. Therefore, they do not shut down their machines for the time being, and the computing power has not fluctuated significantly. If the price of coins remains low for a long time, the computing power will still fall.

The mining industry itself is flexible, and whether to shut down or not depends on the individual situation of the miners. If the current situation is maintained, all individual miners who use outdated machines and high electricity prices will shut down their machines. If these machines are sold to mining farms at a lower price, they can continue to operate and bring certain profits if the mining farms can get low electricity prices. There are several possible situations for the current miners:

1. The group that uses digital currency to pledge loans and leverage is likely to be liquidated and will definitely shut down;

2. Miners who use digital currency for hedging have lower leverage and are less affected by the currency price. As long as they do not buy outdated mining machines, they will not shut down.

3. Miners with outdated mining machines can negotiate with the mining farms about electricity prices, and the machines may not be shut down.

4. Miners with sufficient capital reserves can buy some low-priced mining machines to prepare for the period of abundant water and low electricity prices.

The Bitcoin mining reward is about to be halved. If the current price of the currency is maintained, the price continues to fall, or the price rebounds in the next six months or so, how will the mining market change?

Ø If the current price range is maintained, all individual miners using outdated machines and high electricity prices will shut down their machines. If these machines are sold to mining farms at lower prices, they can continue to operate and bring certain profits if the mining farms can get low electricity prices.

Ø If the price of the currency drops by another 25%-30%, about one-third of the outdated machines in the entire network will not be able to make a profit during the high-water season, and the computing power will also drop by about one-third. At this time, only advanced machines with low energy consumption can continue to mine, and the benefits of these people measured in currency standard are expected to increase significantly due to the decline in the computing power of the entire network.

Ø If the price of the currency rises, the mining machines will not be shut down, and new mining machines will enter the market, and the expected profit will be higher than in 2018. Although the price of the currency rose significantly in 2018, the computing power also increased a lot, and the profit per unit of computing power did not increase much; recently due to the epidemic, 5G, and the Internet of Things squeezing chip production capacity, the production capacity of mining machine manufacturers may not keep up, so the computing power will not increase much. If the price of the currency rises at this time, the profit per unit of computing power will be considerable.

The energy efficiency ratio of mining machines comes first. Mining machines have the concept of energy efficiency ratio, which is measured in J/TH, and is a measure of the amount of electricity consumed per unit of computing power. Currently, mining machines with an energy efficiency ratio of 75J/TH are on the verge of shutting down. Under the current market conditions, machines with energy consumption below 50J/TH are the best choice, and they can maintain a certain leading advantage in the next two to three years and are relatively safe.

At present, Bitcoin is a special alternative asset, and its correlation with gold and emerging markets is not obvious. Some people in the market believe that Bitcoin and gold have many similar properties, so they regard Bitcoin as "digital gold". We conducted a data analysis on the correlation between Bitcoin and gold prices, and the results showed that there was no obvious correlation between Bitcoin and gold prices in the past few years (considering that global markets have fallen sharply recently, the correlation coefficient is close to 1 in the past month). The so-called "digital gold" is currently just a more realistic vision for the future application of Bitcoin. Similarly, the correlation between Bitcoin and the MSCI Emerging Markets Index is not obvious. Therefore, we still believe that Bitcoin is a special alternative asset with its own logic of existence. In recent years, with the greater involvement of traditional capital at home and abroad in Bitcoin, Bitcoin holders have changed from early geeks and coders to capital consortiums. In the current situation of global asset decline, it is difficult to remain immune.

2. Government-related news: China's first provincial blockchain platform landed in Yunnan

South Korea: The Gangwon Information Culture Promotion Agency in Chuncheon City, South Korea plans to invest 193 billion won (about 1.116 billion yuan) in five years to create a smart tourism ecosystem in Gangwon Province and integrate core technologies such as big data, artificial intelligence and blockchain into the system. On January 21 this year, the Korean Military Organization (MMA) launched its exclusive blockchain based on EOSIO software and launched a decentralized identity authentication (DID) system. In just one month, the MMA blockchain has more than 50,000 user records, and as of now, the user data using the DID system has been growing rapidly.

Australia: The Australian Taxation Office (ATO) will issue audit reminders targeting cryptocurrency investors. Hundreds of thousands of Australians will receive warning letters from the Australian Taxation Office in the coming weeks. Cryptocurrency is considered a form of property and therefore an asset for capital gains tax purposes. This means that any financial gains made from the purchase and sale of cryptocurrencies are generally subject to capital gains tax and must be reported to the Australian Taxation Office. The letters will warn recipients to correct their tax returns by April 1 and identify any undeclared profits or losses that may have arisen from their investments, otherwise they may be audited.

3. Industry Chain Related Dynamics: BTC Mining Revenue Decreased by 36.4% Month-on-Month

Last week, BTC had 2.1 million new transactions, down 10.8% from the previous month; ETH had 5.21 million new transactions, up 10.8% from the previous month.

Last week, the average daily income of BTC miners was US$11.36 million, a decrease of 36.4% from the previous month; the average daily income of ETH miners was US$1.71 million, a decrease of 31.6% from the previous month.

Last week, the BTC mining difficulty of the entire network was 16.55T, up 6.4% from the previous month; the next difficulty adjustment date is March 24, and the estimated difficulty value is 16.65 T (+0.60%); [RH1] Last week, the average mining difficulty of the ETH entire network was 2.25T, down 1.2% from the previous month.

4. Last week’s market review: Chainext CSI 100 fell 33.76%, with transaction payment performing best among the sub-sectors

The development of blockchain infrastructure has not met expectations. Blockchain is the core technology for solving supply chain finance and digital identity problems. Currently, blockchain infrastructure cannot support high-performance network deployment. The degree of decentralization and security will have certain constraints on high performance. There is a risk that the development of blockchain infrastructure will not meet expectations.