2020, the year of life and death for Bitcoin mining

Source: Bitcoin Magazine

Translation｜First.VIP

A December 2019 report on the Bitcoin mining network by digital asset management firm CoinShares Research showed that the industry was in good shape at the end of the year, with computing power nearly doubling over the past six months, the market launching a new generation of more powerful and efficient technology, and continuing to use sustainable renewable energy.

The report shows that based on this year's average Bitcoin price, fee rate and block frequency, miners' total revenue in 2019 will reach US$5.4 billion, slightly lower than 2018 but much higher than US$3.4 billion in 2017.

The report states:

“Unlike previous reports, the past six months have been relatively quiet in terms of large-scale structural change. While there were a number of bankruptcies and capital transfers between November 2018 and June 2019, the past six months have been dominated by expansion.”

As the Bitcoin mining sector builds on this positive momentum from the end of 2019 into 2020, factors such as growing hashrate, new hardware, and the upcoming reward halving will determine the overall growth of the industry and Bitcoin.

Good news for Bitcoin mining in 2020

CoinShares reports “huge growth” in mining hashrate, which has nearly doubled over the past six months, from around 50 exahashes per second (EH/s) to nearly 90 EH/s, with peaks exceeding 100 EH/s.

The report attributes the growth to the availability of a new generation of more powerful and efficient mining equipment, as well as strong average Bitcoin prices.

Source: CoinShares Research

After this report was released (December 3, 2019), Bitcoin hashrate continued to grow.

In a recent episode of the What’s Halvening podcast, CoinShares director of research Chris Bendiksen discussed the growth in hashrate, saying that mining in China in particular accounted for nearly 70% of the growth. China’s hashrate now accounts for 65% of the global Bitcoin hashrate.

Bendiksen noted that the growth in hashrate is mainly the result of technological improvements, and that, since most new mining machines are produced in China, Chinese miners have first access to new generation technologies. He expects that as new technologies make their way to Western markets, hashrate there will also rise.

He also pointed out that there are signs that as Chinese miners upgrade their machines, they are shipping older Antminer S9s to places like Iran and Kazakhstan.

Samson Mow, chief strategy officer at Blockstream, whose company has mining operations in Quebec, Canada, and Adel, Georgia, echoed Bendiksen’s bullish view on 2020.

Mow told Bitcoin Magazine:

“Bitcoin’s network hashrate will continue to climb as miners replace older equipment with newer, more efficient equipment.”

Will China Continue to Dominate Bitcoin Mining in 2020?

CoinShares also noted in the report that as much as 65% of Bitcoin’s computing power is based in China — the highest level since network surveillance began in late 2017.

Although Bitcoin mining is growing in various parts of the world, such as North America, Russia, and the Middle East, China still dominates the industry. Some may be concerned about this, especially as China's dominance is expected to grow further as we enter 2020 - since mining machines are one of the most critical industries for Bitcoin.

For Mow, China’s dominance is certainly noteworthy, but he ultimately considers it “not a problem.” He said:

“I wouldn’t be concerned about China’s dominance in Bitcoin mining. The main advantages of Chinese mining are faster setup times and lower initial capital expenditures, coupled with closer proximity to ASIC assembly sites, which can drive the development of the industry…Now that we have established mining infrastructure in North America, such as Blockstream, the capital expenditure advantage is not so important. We have the additional advantage of lower electricity costs.”

The CoinShares report notes that the Chinese government has made a significant “policy shift” — from designating mining as an undesirable industry in April 2019 to removing it from that list entirely (although Bitcoin itself remains illegal).

However, Mow doesn’t see China’s mining dominance as a primary concern for 2020. “Mining in China is still done by individuals and companies, just like mining in North America or anywhere else,” Mow said. “Also, the concept of ‘Chinese hashrate’ is misleading because mining in China also includes foreigners and foreign companies, just as there are Chinese miners in North America.”

How will the 2020 halving affect Bitcoin mining?

We reached out to a number of Bitcoin mining leaders and CEOs to ask about their priorities for 2020. Several mentioned the upcoming Bitcoin halving, which is expected to take place in May 2020, as something to watch.

“The halving will be the biggest factor affecting the mining industry in 2020,” said Andrew Kiguel, CEO of Hut 8 Mining.

“All miners should prepare for several scenarios that could happen next. As the reward drops from 12.5 BTC to 6.25 BTC, less efficient miners will be forced to exit.”

Regarding Bitcoin mining hardware, the CoinShares report states that by the spring of 2020, when the reward is halved, older equipment still widely used in the network, such as the ancient Antminer S9, will be obsolete unless the price of Bitcoin rises dramatically or more operators are able to obtain electricity at around 1 cent/kWh or less.

Bitcoin mining power will also be affected by the halving. Bendiksen said in an interview with What's Halvening that if the price of Bitcoin remains unchanged, the computing power will drop by 50%, and some companies will go bankrupt. But if the price of Bitcoin doubles, the computing power will return to its original level.

When it comes to the halving and its impact on prices, Mow remains optimistic. He said:

“The upcoming halving will reduce the number of bitcoins produced from 1,800 to 900, and with overall bitcoin awareness having increased significantly and many more bitcoin trading platforms than four years ago, I expect the price of bitcoin to rise — if not at the time of the halving, then in the coming months.”

Ultimately, the halving will impact all major metrics of Bitcoin mining in 2020: equipment used, hash rate, and price. But the extent to which the mining industry will be affected remains to be determined.

Will the network hashrate drop significantly after the halving? Kiguel said:

“I believe it will, as miners will no longer be able to use old equipment. Will the price of Bitcoin go up as a result of the halving? Or is this the final price? I think we will see a price increase, but maybe not as high as some people expect, maybe 50% to 100% higher than current levels.”

Of course, as 2020 approaches, the halving and its expected impact are top of mind for every significant Bitcoin mining hardware manufacturer.

Wes Fulford, CEO of Bitfarms, said:

In order for post-halving gains to equal pre-halving gains, the price of BTC needs to increase significantly, otherwise the network hashrate will drop sharply as more expensive miners shut down their machines.

Will mining technology continue to advance in 2020?

Bendiksen noted that mining technology is currently developing faster than ever before as mining hardware companies like Canaan and MicroBT are intensifying competition with hardware giant Bitmain.

Meanwhile, companies like Canaan and Bitmain have filed for IPOs in the U.S., and the hardware market is set to become more fragmented by 2020.

In the report, CoinShares lists Bitmain and its Antminer 15 and 17 series, MicroBT and its Whatsminer 10 and 20 series, Bitfury and its latest Clarke chipset, Canaan and its Avalon 10 series, Innosilicon and its T3 series, and Ebang and its E10 model as the main players in the manufacturing market.

“These new models generate five times the unit hashrate of their predecessors, meaning that on a unit basis, Bitmain and MicroBT have the ability to provide the majority of the hashrate to the network,” the report said.

It’s no surprise that Fulford understands the importance of using the latest and most efficient technology in 2019, as this will likely allow Bitfarms to be even more productive in 2020.

“We added 13,300 new-generation miners, which resulted in a 291% increase in hashing power this year,” he said. “New-generation miners now represent 73% of our computing power, making us one of the most energy-efficient cryptocurrency miners on the public market.”

Plouton Mining is a solar-powered Bitcoin mining company operating in Mojave, California. Plouton CEO Ramak J. Sedigh told Bitcoin Magazine:

“In 2020 and beyond, we will continue to focus on running the most efficient hardware and maintaining extremely high power utilization, which is a key foundation for maintaining operational profitability.”

However, this investment in the latest technology is of course dependent on the continued profitability of Bitcoin mining in 2020. To this end, Sedigh explained that his biggest concern is whether Bitcoin can maintain a stable price. Sedigh said:

“The success of any mining activity, and indeed the entire industry, really depends on the stability of Bitcoin. We plan to survive prolonged lows, but the price of Bitcoin needs to remain at a higher average level so that traditional investors have confidence in investing in Bitcoin-related projects. To this end, I am more concerned about price manipulation because it is estimated that when the total market value of Bitcoin reaches $150 billion, it is easy to manipulate its price through exchanges, which will increase volatility.”

According to CoinShares, Bitcoin mining will not be an option for the faint of heart in 2020 as price volatility remains a huge unknown.

In an interview with What's Halvening, Bendiksen expressed shock at the decision of those risk-takers who are prepared to invest billions of dollars in Bitcoin mining despite many doubts. He said that any risk analysis would tell those investors that this is a high-risk investment. However, the behavior of the participants shows that Bitcoin miners are clearly confident in Bitcoin and the Bitcoin network.