"Why do we still need to mine when hoarding coins is more profitable?" Series - Jiang Zhuoer's Insights

In the article "Q&A of Zhikuang University: Mining income is not very high, why are miners willing to invest in mining", we mentioned that the most profitable thing in the blockchain industry is to hoard coins, and a bull-bear cycle from the bottom to the top may have a 100-fold return. In contrast, even in a bull market, it takes about 200 days to pay back the investment of a mining machine, and the threshold for mining is relatively higher. The purchase, transportation, hosting, operation and maintenance of mining machines are much more troublesome than buying Bitcoin directly in the market.

So why do many people still choose mining instead of buying Bitcoin directly?

Jiang Zhuoer gave his answer in his speech at Huobi University in early 2019. The following content is excerpted from the speech:

01

Why mining?

We have just introduced the cycle of Bitcoin price fluctuations and hoarding coins, and introduced that hoarding coins has the highest rate of return. Even IC0s that cheat people out of money cannot outperform hoarding coins, so why should I mine?

Mining is not actually that profitable. Look at the S9 payback curve below. Even in a bull market, the payback period for mining is stable at around 200 days, which means that in a two-year bull market, you can only earn 300% to 500% of the profit.

If the returns from hoarding coins are much higher than mining, and there is even a chance to earn a hundred times more, then why should I mine?

The following picture shows the death bear market in 2011. The highest point of the upper lead in the picture was close to $32, and then it fell wildly to $2, a drop of nearly 95%, which made everyone doubt their lives. There was still more than half a year of sideways trading. Regarding Bitcoin, Satoshi Nakamoto himself said that Bitcoin was an experiment. At that time, many people were worried that the Bitcoin experiment would fall. In addition, Bitcoin did not have any practical use at that time. The famous transaction at that time was that a programmer named Lasler bought two pizzas with 10,000 Bitcoins.

▲ The death bear market in 2011

After this bear market, the price of the currency slowly recovered in 2013. The bull market in 2013 was also called the "bull market". At this time, many people judged that this plot was very familiar, and the death bear market in 2011 was just like this. Based on this judgment, many people thought that this time would be like 2011, with a drop of more than 90%, and there would be a half-year sideways trend at the bottom, so many people ran away at the position of 200 US dollars.

A typical example is the financial blogger Duan Hongbin, who I mentioned in my popular science article “What is Bitcoin?” He bought a lot of Bitcoin in 2011 and wrote many articles recommending Bitcoin, one of which was “Once This Thing Was Released, the World Revolted,” which pushed Bitcoin to a very high level.

It was precisely because he judged that Bitcoin would repeat the trend of 2011 in 2013, with a drop of more than 90% and would remain sideways at the bottom for a period of time, that he got out of the bear market in early 2013, but in fact the decline was only about 75%. After the last K-line in the above figure, there was a V-shaped reversal, which washed many people out of the market.

▲2013 bear market

The bull market at the end of 2013 was directly driven by QQ pop-ups and CCTV news. The rise was very fast and did not go according to the script. It was beyond the expectations of many people. Most people who did not have time to get on the train were completely thrown off by Bitcoin.

After Duan Hongbin was thrown off the bus, he turned from a fan to a hater, started writing about the Bitcoin bubble theory, and then promoted a wave of altcoins.

The most terrifying thing in the blockchain world is being washed out. Once you are washed out, it is basically impossible to get back on board. How can you buy coins worth tens or hundreds of yuan after buying them?

On July 8, 2013, the price of Bitcoin reversed in a V-shape, and the increase and speed were both very impressive. Most people entered the market during the bull market, because the bull market sometimes attracts big attention. I also entered the market at about $800.

02
Mining can be financed

At the end of 2013, I was working in big data at Shanghai Mobile, leading a team of more than a dozen people. I first heard about Bitcoin in 2011. Like many people, I didn’t take it seriously at first, but the next time I heard about it, I was impressed by its huge increase, and then I got in. I resigned at the end of 2013 and started mining and running a mining pool. From the initial two graphics card mining machines to the current 200,000, it has increased 100,000 times.

What to do if you don’t have money to buy coins? Should you raise funds and leverage? This is very dangerous!

After I entered the market at the end of 2013, I felt that the bubble had already reached its end, so I slowly started to accumulate coins and wait. After that, the price of the coin remained at the bottom for more than a year. I was relatively free, so I wrote some popular science articles about Bitcoin.

Around October 23, 2015, the number of active Bitcoin users had been rising. With only a few months left before the halving, I judged that the market would definitely rise. At this time, the problem I faced was that I had no money to buy Bitcoin. Like many people, the solution I thought of was to increase leverage. In fact, increasing leverage is very scary. I myself almost got liquidated once.

I leveraged futures myself, and once I was very close to the liquidation price. My liquidation price was 2900. When the futures hit the lowest point, it was around 3000. I was lucky to escape. A friend of mine had his liquidation price at 3100, and he was just blown up, so he lost a lot of coins and never recovered from his mental depression. The risk of leveraged cryptocurrency trading is extremely high.

I adopted another way to leverage: borrowing money to mine.

If you ask someone to borrow money and say you want to speculate in cryptocurrencies, it is unlikely that you will be able to borrow money; but if you say you want to borrow money to mine, especially if you put the mining machine in a mine controlled by the creditor, the mining machine can also be considered collateral, so it will be easier to borrow money.

In order to borrow money and obtain more Bitcoins, this was my purpose of leveraging mining in 2015.

During this process, I also discovered that many traditional capitals did not dare to buy coins when entering the blockchain industry, but they thought they understood mining, so many traditional capitals entered the blockchain industry through mining.

The scale of the mine will give people a very spectacular and down-to-earth feeling: the huge roar of the mining machine and the endless factory buildings will give people a sense of the impact of large-scale industrial production. It is easier to raise money through mining, and it is also safer to increase leverage in this way.

Therefore, if you don’t have money to buy coins, a good solution is to borrow money to mine! Therefore, mining is essentially a financial behavior.

03
Mining can alleviate the embarrassment of escaping the top too early

Mining is not only a safe way to increase leverage, but also can reduce the financial losses caused by escaping the top too early.

Regarding escaping the top, I would like to share two of my experiences:

The first time was before 94 in 2017. Judging from the K-line pattern at that time, it was a relatively obvious peak signal, so I sold part of my coins.

Another time was when the price of Bitcoin was over 30,000 yuan, and I also felt the obvious bubble characteristics at that time. I was quite hesitant at that time because the atmosphere of the bubble was already very much like the end of the bubble, so I finally chose to sell all the coins when the price was over 30,000 yuan.

As for what happened later, perhaps everyone knows that more than 30,000 yuan was not actually the top of this round of bull coins. I escaped the top too early, but fortunately I used the money from selling the coins to buy mining machines at the bottom.

After the 94 regulation, many large domestic exchanges moved abroad. At that time, I judged that the bull market might not be over yet, but at this time many people were selling mining machines.

From the bottom of 2015 to 94 in 2017, the price of Antminer S9 miners remained at 9,000 to 10,000 yuan. After the 94 regulation came out, domestic miners panicked and began to sell off their miners in large quantities, causing the price of miners to drop to 6,000 to 7,000 yuan. I used all the money from selling coins to buy miners, and basically bought out all the miners on the market.

Looking back now, it was because I mined and bought the mining machine at the bottom that I was able to stay on the bus and not be thrown off even though I fled the peak too early. About 3 months later, the mining machine price increased from 6,000 yuan to 30,000 yuan, which was about the same as the price of the coin, and during this period I was able to mine more than 100 coins every day.

It is precisely because I have built a business system with currency as the core and have business in it that I am always on the train and not a foolish believer. Of course, building a business system related to currency does not necessarily mean mining.

Another benefit of mining is that you need to keep a base position to protect against the risk of fluctuations in luck value. If the price of the currency rises rapidly, the increase in this base position can also bring additional income. The income brought by this base position will be dozens of times the handling fee.

04
The evolutionary tree of blockchain

I firmly believe in the economic freedom brought by blockchain. It is even a greater invention than the separation of powers and the Internet, and will create greater value.

Blockchain may grow into an evolutionary tree in the future, which is one of the reasons why I don’t want to be a believer. A branch that believers stick to may become extinct at some point. Even BTC may not exist forever, but blockchain will exist for a long time. So, try not to be a believer, understand the system, and grow with it. The system may evolve into a huge evolutionary tree. It is still in a very early stage, and we need to find a way to keep ourselves on the train.

Finally, I would like to end this speech with a sentence that I like very much: Bitcoin, one more choice, one more freedom.