[Q&A at Zhikuang University] As the Bitcoin halving is getting closer, can I still buy mining machines?

Recently, many friends have sent me private messages asking whether it is still possible to buy mining machines as the Bitcoin halving time is getting closer. Is it better to buy mining machines before the halving or after the halving?

Response from Zhikuang University:

Different investors have different fund use time, investment return expectations, and risk resistance. Whether it is appropriate to buy a mining machine at this time is different for each person.

This article analyzes whether you can buy a mining machine from the perspective of an ordinary retail investor. In fact, as long as you understand a few questions, you can conclude whether you can buy a mining machine.

01
Will the price of the currency rise or fall in the next 1~2 years?

Many people have made countless analyses on whether Bitcoin will rise or fall, and whether the market will be bullish or bearish in the next 1-2 years. No matter when, there are always long and short sides in the market, and both sides are looking for various evidences and indicators to prove the correctness of their predictions.

The essence of mining machines is a call option for Bitcoin. I tend to agree that the next 1~2 years will be a bull market. I believe that the halving of output will lead to a reduction in market supply, and the original supply and demand balance will be broken, which will drive the price of the currency up. If you are bullish on Bitcoin in the long term, then participating in mining is a good choice.

02
Will the price of mining machines rise or fall in the future?
How to select mining machines before halving?

Before 2018, due to production capacity constraints, the financial attributes of mining machines were stronger, and the price would be separated from its manufacturing cost, and was mainly priced based on the financial attributes of the mining machine. Generally, a mining machine will pay back in about 10 months. The price of mining machines has a synergistic effect with the price of coins. When the price of coins rises, the price of mining machines will rise simultaneously. In the bull market of 2017, the Ant S9 mining machine sold for more than 30,000 yuan; when the price of coins is low, the price of mining machines is low. At the end of 2018, the Ant S9 only cost a few hundred yuan, which is far lower than the manufacturing cost.

As the competition among mining machine manufacturers becomes increasingly fierce, the financial attributes of mining machines are weakening, and the pricing of mining machines is slowly returning to industrial products. Due to sufficient market competition, the current profit of mining machines is not high. According to personnel from mining machine manufacturers, at present (February 2020), the price of mining machines is close to their manufacturing cost, and they are basically shipped at par or even at a slight loss.

The halving effect will definitely have an impact on the price of mining machines, but the impact on different mining machines is different. The price of high-performance mining machines (low energy efficiency ratio, high computing power) is relatively less affected by the halving, while the halving effect has a greater impact on low-performance mining machines, and may even cause many low-performance mining machines to shut down directly. If the coin price remains unchanged, the price of mining machines will also drop significantly, even close to zero. In line with the principle of anti-fragile investment, this must be prevented.

Therefore, as an ordinary mining user, if you choose to buy a mining machine before the halving, you should choose a high-performance mining machine. In this way, even if the price of the currency does not increase much after the halving, it will not shut down and can continue to generate cash flow. If the price of the currency increases by more than double, not only will the mining income increase, but the price of the mining machine will also increase. If a mining accident occurs, it will be a fatal blow to the low-performance mining machine.

03
About mining accidents

The mining disaster in 2018 is still fresh in people’s memory. The price of the first-generation king Ant S9 mining machine was only a few hundred yuan at its lowest point. After the output of Litecoin was halved in 2019, the computing power of the entire network continued to fall from the highest 466.92TH/s to 135.43TH/s, a drop of about 70%. A large number of Litecoin mining machines were sold at low prices, with prices ranging from 100 to 200 yuan. The sold mining machines were basically transferred to large miners.

Once the coin price drops sharply (under the halving effect, the coin price increase is far less than 100%), it will mean mining difficulties for miners with low-performance mining machines and high-priced electricity.

So, will there be mining accidents in Bitcoin mining in the next 1 to 2 years?

The editor believes that the probability of a large-scale mining accident in the next 1-2 years is relatively low. Zhikuang University once elaborated on a similar view in the article "Zhikuang University Q&A - If the price of Bitcoin does not rise after the halving in 2020, will a mining accident occur?"

Antminer S9 mining machines will be eliminated sooner or later, and have already completed the transfer from retail investors to large miners. The shutdown price of new mining machines is very low. The output halving event coincides with the flood season, and the electricity price will drop. The possibility of large-scale mining accidents is not high. In this process, the more likely scenario is that new and old mining machines gradually complete the "metabolism", and old mining machines without competitive advantages are eliminated by high-performance mining machines with low energy efficiency.

As of now, it seems that in the next 1 to 2 years, mining machines will be replaced smoothly and large-scale mining accidents are unlikely to occur.

04
Summarize

In the short term, the price trend of the currency is difficult to predict. If the time span is 1 to 2 years, or even longer, the editor judges that Bitcoin will usher in a bull market with sustained growth.

The current selling price of mining machines is close to the manufacturing cost of mining machines. For high-efficiency mining machines, they can effectively resist the impact of halving. Benefiting from the reshuffle of previous mining accidents, low-performance old mining machines have basically been transferred to large miners with cost advantages, and the output halving event coincides with the flood season in time, so the probability of large-scale mining accidents is low.

Participating in mining before the halving and purchasing high-performance mining machines can better prevent the risk that the price of the currency will increase by far less than double after the halving, and have sufficient anti-fragility. If the price of the currency increases by more than double, then after the halving, not only will the mining income increase, but the price of the mining machine will also rise accordingly.

If you choose to buy a low-performance mining machine, it is essentially a gamble. If the coin price increases by more than double after halving, then you have made the right bet, and the profit will be much higher than choosing a high-performance mining machine. However, if the coin price increases by less than double, the outcome will be a total loss. It is not recommended for ordinary miners to make this kind of gambling investment.

It would be safer to consider participating in mining after the halving when the market situation is clearer. Although doing so may miss the potential benefits brought by the sharp rise in the coin price, it also avoids the potential risk that the coin price will not increase by more than 100% or even fall after the halving.

The essence of a mining machine is a call option on Bitcoin. Whether to participate in mining depends on your view on the future price of Bitcoin. Whether to participate before or after the halving depends on your prediction of the price trend of the currency before and after the halving, your risk preference, etc.

Risk warning: This article only represents the personal views of the editor of Zhikuang University and does not constitute any investment advice.