How should miners and investors deal with the “certainty” and “uncertainty” on the eve of Bitcoin production cut?

The drama of production cuts has been staged one after another, becoming the most realistic portrayal of the cryptocurrency circle in 2020.

The latest statistics show that in the first quarter, Beam and ETC were reduced in production, in the second quarter, BCH, BSV, BTC, and DASH were reduced in production, in the third quarter, XZC and ZEC were reduced in production, and in the fourth quarter, ZEN was reduced in production. Therefore, the protagonist of the currency circle in 2020 is production reduction.

So what impact will this "protagonist" have on the cryptocurrency world? What will happen to the mining industry in the future? How should practitioners and investors follow this trend? Will this be a year of the rat that will bring about a comeback?

1. The “certainty” of production cuts

The bell of New Year's Day 2020 has just rung. At that time, Bitcoin was only around 7,200 US dollars, BCH was only 200 US dollars, BSV was less than 100 US dollars, ETC price fluctuated around 4.5 US dollars, and ZEC price has been sideways around 28 US dollars for more than half a month...

At this point, there are only 3 months left before the ETC production cut, and only 4 months left before the BCH and BSV production cuts. Compared with the Litecoin production cut in 2019 that just happened - which started half a year in advance and rose 35% in one day - such price performance does not look like the eve of a "unstoppable" market in any way.

Based on this, many analysts are still discussing whether the production cut will come as expected, and investors are still worried about whether to go long or short. For example, a well-known cryptocurrency investor chose to short BSV with a large position when BSV was around $95.

There are coins with reduced production every quarter

Many big names are also directly involved in predicting the production cuts.

Regarding whether the halving will come, Tron founder Justin Sun even posted a note on WeChat Moments, saying: "Today I met Charlie, the founder of Litecoin, who has always been a trading master I admire. He told me that the halving will definitely come, and there is no problem for Bitcoin to conservatively break through the previous 14,000. The halving time is roughly May 12, and there are 107 days left. I'm keeping this note."

As Charlie points out, history is not on the side of the bears.

After New Year's Day, BCH took the lead in firing the first shot of production cuts, and its price rose from $195 to around $220, and showed a very strong trend in the next few days. After that, ETC, BSV, BTC, ZEC, BTG, etc. followed suit. To date, ETC has risen by 260%, BCH has risen by more than 90%, ZEC has risen by more than 110%, BSV has risen by more than 170%, and the price of Bitcoin, the most representative cryptocurrency, has risen from $7,300 to $9,300.

Today, production cuts are no longer a prediction made by analysts, but a certain event.

Data from Google Trends shows that the keyword "bitcoin halving" for bitcoin production reduction has reached a four-year high in Google searches, second only to the search volume before bitcoin production reduction in 2016.

Google Trends: Global search trends for "bitcoin halving" over the past five years

At the same time, the data company also provided professional research on the Google index of "bitcoin halving".

According to BraveNewCoin, according to a recent report from Norwegian research company Arcane Crypto, Google searches for "bitcoin halving" have doubled since December last year, reaching the highest level since the last halving event in 2016. As of the week of January 19, the relative search volume for the keyword "bitcoin halving" in the United States reached 37, while the average data in December last year was only 14, more than doubling, which is similar to the search volume growth trajectory before the last halving event.

These signs indicate that the production cuts are far from over and bullish sentiment remains strong.

As for the increase since New Year's Day 2020, RenrenBit CMO Zi Cen believes that it is just a "warm-up".

At the "How to Seize the Halving" conference jointly held by Golden Finance and OKEx Mining Pool on February 4, Zi Cen, who has experienced two complete Bitcoin production cuts, said:

"I think it's just a warm-up. At least the mining industry has reacted in advance. On the one hand, there is an optimistic expectation for the halving, and on the other hand, there is a desire to mine as many bitcoins as possible before the halving. The computing power competition is getting more and more intense. Halving brings not only a reduction in inflation rate, but more importantly, holders begin to cherish their coins and stop selling. At least none of the old players I have contacted will sell their coins before the halving. According to the experience of the last halving, the next plot should be all the way up, a wave of correction near the halving, and then continue to attack, and finally break through the previous high, and finally there will be a sea of ​​stars."

So, will the market after the production cuts be a sea of ​​stars ahead? And how will the miners who are most closely related to the price of coins be affected?

2. Uncertainty after production cuts

"The wave of miners who entered the market around New Year's Day all made the right bet, including me."

Haitao is a miner who experienced the reduction in Bitcoin production in 2016. His mine is located in Xinjiang. Due to the impact of the Wuhan pneumonia, he spent the Year of the Rat Spring Festival in 2020 with his operation and maintenance personnel in the mine. When talking about the impact of the recent market on the mining industry, he said that in his opinion, the miners who have poured in since the second half of 2019 have all made money and they seized the opportunity.

“But don’t be happy too soon. No matter how confident miners are, they must take market uncertainties into account.” Haitao said, “We must take the upcoming production cuts into account. The BCH and BSV production cuts in two months will drive some miners to the BTC network. But when BTC production cuts in three months, where will the computing power go?”

"Miners around the world are now running at full capacity and basically all the mining machines that can be put into use are in use. If nothing unexpected happens, the SHA256S computing power of the entire network will not increase significantly in the second half of the year." Faced with the SHA256 computing power of the entire network exceeding 120E, Haitao made such a judgment.

This is the uncertainty brought about by the production reduction of a number of PoW currencies such as ETC, BCH, BSV, BTC, etc.: it may lead to mining accidents.

Currently, the BTC price is around US$9,300. If there is no significant increase in three months, "it may be enough to make the miners suffer."

"For miners, production cuts mean an increase in mining costs when the price trend of the currency is unclear. BTC.COM data shows that the current computing power of the entire network is around 120EH/s. If the price of Bitcoin does not rise significantly after the production cut, many miners will face losses." Haitao said.

At the same time, the upgrading of mining machines will also increase the "uncertainty" brought about by the reduction in Bitcoin production.

2020 is the year of the upgrading of mining machines. Bitmain's 7nm mining machine has even developed from the first generation S15 to the current S17. Shenma M20 has also been launched. Canaan Creative and Ebang International's 7nm mining machines have been on the market for more than half a year. This is both an opportunity and a challenge for the mining industry.

In mid-January 2020, at a Dialogue with Shenyu event held by ChainNode, Cobo CEO Shenyu said:

“Will the price rise sharply after the halving? If the price does not rise sharply, the current 30-40E mining machines represented by S9 will have to be shut down, the computing power of the entire network will drop sharply, and the payback period of the mining machines will be longer. Will there be any substantial negative impact on electricity costs and feng shui? If both factors are negative, the halving may bring mining difficulties.”

In Shenyu’s view, the previous generation mining machine Ant S9 may become a “victim” of the production reduction market.

F2pool's latest "shutdown coin price"

According to the OKEx Intelligence Bureau, the real-time information of "shutdown coin price" provided by F2pool shows that when the price of Bitcoin was around US$9,300, the mining electricity cost of Antminer S9 had reached 87%, which can be said to be "hanging by a thread". This also coincides with Shenyu's judgment on the possibility of mining accidents in the future.

"Some people who have just entered the circle may not understand why the logic is like this, so I will simply give you a brief explanation," said Haitao.

"Miners mine for rewards. When the total network computing power, mining rewards, Bitcoin prices, electricity costs, mining machine costs, and operation and maintenance (labor costs, mining site rental fees) remain unchanged, miners' income is fixed and life is peaceful. However, the reduction in Bitcoin production will force this static process to break. In early May 2020, the reward for a single Bitcoin block will change from 12.5 to 6.25, and the income of all miners will be halved. At this time, those mining machines with poor performance will lose money, such as S9, and they will have to shut down, which is equivalent to a mining accident."

"This process is like an avalanche. In a quiet valley, someone suddenly fires a shot, and a large amount of snow begins to collapse, which in turn causes more collapses."

Both certainty and uncertainty will become part of the entire market. As investors, observers and practitioners, the best choice is to actively participate in this wave.

3. Will the year of reduced production be your year of turnaround?

“No matter how many people are shorting or keen on short-term trading, I only go long.”

From New Year's Day 2020 to the present, Xiao Chang, who has quadrupled his BCH assets by going long, told OKEx Intelligence Bureau that as someone who has been working in the cryptocurrency circle for three years, he has long been familiar with the price trends of cryptocurrency assets and has learned to follow his heart.

"Steady, accurate and ruthless is my investment logic. On New Year's Day 2020, I thought that the production cuts would definitely come, and they would happen one after another." Based on this judgment, Xiao Chang bought all his assets in the cryptocurrency circle into BCH and added 5 times leverage. "Although there are many people who are strongly shorting, such as Xiao Xia, who is very influential on Weibo, who has been shorting BSV, I will not follow them."

Of course, investors like Xiaochang are still a minority. After all, not everyone can be "steady, accurate and ruthless".

In June 2019, after the Litecoin production cut ended, the blockchain media "Blockchain Tax Bureau" conducted a survey on its fans titled "2019 Cryptocurrency Investment Return Rate". 1,400 fans participated in the survey. The survey found that when BTC rose by more than 700% and LTC rose by more than 240%, 66% of investors had a return rate of less than 240% (did not outperform the market), and 85% of investors had a return rate of no more than 700% (did not outperform the LTC increase).

In other words, when most people are basically unable to outperform the market, grasping the trend becomes crucial.

As a relatively experienced investor in the cryptocurrency circle, Xiao Chang believes that every "point" must be hit correctly in 2020.

“Regarding my own operation, I just want to share one point, which is also the most critical: BCH will reduce production on April 7, and BTC will reduce production on May 6. Should you exchange your BCH for BTC before April 7? Of course, there will be production cuts for many other currencies in the future, which may all mean opportunities. But I must remind you that I am just sharing my thoughts and ideas, and maybe I wouldn’t do this myself.” Xiao Chang said.

How should miners "operate"?

Haitao also made some emergency plans in the face of the production cuts from April to May. "We contacted some low-cost electricity in Central Asia. If the price of the currency does not increase significantly before the production cuts come, we will ship the mining machines to foreign regions with low electricity costs, and use high-performance machines in China."

Haitao's operating ideas are not original.

"At the end of 2018, when Bitcoin fell from $6,000 to more than $3,000, a mining accident occurred in the mining circle. At that time, the Middle Eastern miners with cheap electricity resources shipped the obsolete mining machines back to China at '30 yuan per kilogram'. Since the cost of the mining machines was very low and the electricity was cheap, they could basically get their investment back in 40 days. You dare to believe this, but this is a fact that has happened."

So, will history really repeat itself? There is no answer.

Zhang Lei of Hillhouse Capital said that investing in China is not suitable for people with weak wills.

This sentence is suitable for investors anywhere in the world. The weak-willed cannot hold on to Tesla's stock (TSLA), which has quadrupled in 8 months despite losing money year after year. Facing the investment market, whether it is miner Haitao, Xiaochang, or observers like you and me, we all need our own courage and faith.

As the famous financial blogger "Fantong Dai Laoban" said, no matter how angry and shouting you are in your heart, you must have a long-term optimistic spirit in the investment battlefield and avoid making the following three mistakes: treating rhythm problems as structural problems, treating cycle problems as trend problems, and treating local problems as universal problems. If you can't avoid these three points, most of the rich returns in the market will have nothing to do with you.

In 2020, I wish you a turnaround (if you are like me).

Note: The interviewees in this article are anonymous and the views expressed in this article do not constitute any investment advice.