Interpretation: Coinshares 2019 latest global mining research report

The third issue: Coinshares 2019 latest global mining research report

Text length: 3467, reading time: about 5 minutes

Report source: CoinShares Research Author

Text: Chain Kayser Operation | Xiao Chai Editor

Produced by: Computing Power Internet Mining Chronicle

1. Behind the changes in compliance policies of mining in various countries, there are conflicts of interest between power groups within the country.

2. The electricity cost of the previous generation of hardware equipment (such as Avalon A8, with a power consumption of around 100W/T) is less than 3 cents/kWh, while the electricity cost of the new generation of hardware equipment (such as Avalon A11, with a power consumption of around 55W/T) is still profitable even if the electricity cost is greater than 5 cents/kWh.

3. 65% of mining activities take place in China, with Sichuan alone accounting for 54% of the world’s total, of which renewable energy accounts for 73% of the entire mining energy structure.

4. A large number of new devices have been deployed in China to prepare for the upcoming block reward halving, and then the equipment will gradually migrate abroad.

We compared this report with similar reports released by CoinShares in Q4 2018 and Q2 2019, and found the following major changes:

1. Investment break-even point. The estimated model has been adjusted accordingly, extending the depreciation period of the equipment and the percentage of additional operating costs (C&O OPEX). In the model analysis of the 2018Q4 report and the 2019Q2 report, combined with the currency price at the time and the depreciation period adopted, the average marginal cost was US$6,799 (5 cents/kWH, +30% additional operating costs) and US$5,570 (5 cents/kWH, +15% additional operating costs), respectively. Today, when the electricity price is 4 cents/kWH, the average marginal cost is about US$6,100. Throughout the process, miners have gone from being unable to make a profit to being able to make a profit even with the previous generation of hardware equipment, and now the mining industry is at an iterative watershed.

2. The average cash flow (Cashflow) is nearly 18% higher than the average cash flow balance point of US$3,300 in the Q2 report of 2019, which is also affected by the decline in currency prices and the end of the flood season.

3. In CoinShares' Q4 2018 and Q2 2019 reports, renewable energy accounted for 77.6% and 74.1% of the energy mix, respectively. In comparison, it has declined slightly recently, probably because some regions like Iran use coal for power generation.

China accounts for 65% of computing power, and most of the new equipment is expected to be deployed in China

Since June 2019, the computing power has almost doubled, from 50EH/s to 90EH/s, with a peak of over 100EH/s. During this period, the growth rate of computing power was slightly lower than the 5-year average (roughly equivalent to the beginning of the "industrial age" of Bitcoin mining), but significantly faster than the previous 6 months.

The combination of a relatively high average coin price and increasingly powerful hardware performance has enabled a significant increase in the total network computing power. At the same time, the report shows that the large-scale structural changes in the past six months have been relatively calm. Between November 2018 and June 2019, there were a large number of bankruptcies and capital transfers of miners. The development in the past six months has been mainly expansion, with the previous generation of hardware equipment transferred to Iran, and Kazakhstan becoming one of the main mining areas. However, compared with the changes between November 2018 and June 2019, these transfers are relatively small.

The Coinshares research team predicts that most of the new hardware will be deployed in China, which may be the result of relationships with manufacturers and geographical proximity, making the barriers to entry relatively low. At the time of writing this report, China's share of Bitcoin's total network computing power is as high as 65%, reaching the highest level since the network was monitored.

Canaan Creative and Bitmain

Canaan Creative completed its IPO on November 20, raising $90 million and valuing it at $1.33 billion. The newly raised $100 million allows Canaan Creative to improve its balance sheet by repaying short-term debt and make significant investments in R&D and increasing production capacity, which may help fill existing technology and output gaps.

Bitmain, for its part, needs new capital inflows to heal a series of self-inflicted wounds from poor strategic decisions. Judging by internal leaks and financial statements released as part of the explanation for its failed Hong Kong IPO, Bitmain has been hit by a series of bad investments, including a failed spin-off, hardware overproduction, overhiring, and, perhaps worst of all, poor results, all of which led to balance sheet problems. According to a recently leaked internal memo from Bitmain chairman and co-founder Jihan Wu, the company was nearly in trouble in early 2019.

The hidden secrets behind the policy

In April this year, my country listed mining as an industry that should be phased out, but removed it from the list in November. After that, there were also comments in Sichuan calling for government subsidies to attract more miners.

This seems like a welcome development for Chinese miners. However, there is still some caution regarding the apparent domestic acceptance of the industry. Despite the recent announcement by Chinese leader Xi Jinping that the country’s strategic focus is on “blockchain,” it is clear that they do not consider truly decentralized cryptocurrencies to be part of the strategy. It is worth mentioning that China still prohibits the use of Bitcoin for transactions or retail payments, and prohibits banks and financial institutions from using Bitcoin for any purpose.

Almost all Western countries have a clear attitude towards cryptocurrency mining, and the main mining areas where the regulatory status is still unclear are Russia, Iran and Kazakhstan. Iran has large-scale mining activities, but it is observed that the authorities are implementing increasingly stringent measures to restrict mining activities, and the future is expected to be uncertain. In Russia and Kazakhstan, Bitcoin trading is still banned, but mining seems to be at least tolerated and even encouraged in some cases. This highlights the conflicts of interest that exist between power groups within certain countries.

1. Return on Investment (ROI) Balance Point

This chapter estimates the average marginal cost of the entire market (the cost of mining machines and electricity) by creating a model. Taking into account the extension of equipment life, the average midpoint of the depreciation period (the longest time the equipment can run) is adjusted to 30 months. (In the 2019Q2 report, the midpoint of the depreciation period was 18 months.) When the electricity cost is 4 cents per kilowatt-hour, the marginal cost of 30 months is about $6,100, which means that the investment can be recovered.

This combination of circumstances becomes even more powerful if miners can get preferential treatment or well-timed pricing on mining equipment (from mining machine manufacturers or existing VIP customers).

At the current Bitcoin price, the entire mining industry is still profitable. Previous generation hardware equipment can generate a positive return on investment at a cost of less than 3 cents/kWh, and new generation hardware equipment can generate a positive return on investment at a cost of more than 5 cents/kWh.

In the model analysis of the 2018Q4 report and the 2019Q2 report, combined with the currency price at the time and the depreciation period adopted, miners have experienced a process from being unable to make a profit to being able to make a profit even with the previous generation of hardware equipment. Turning to the present, the mining industry is at an iterative process point of equilibrium.

Note: C&O OPEX: Additional operating costs (cooling, management)

CAPEX: Capital Expenditure

ROI break-even point: the price limit where expenditure and return are equal

Figure 3. Break-even point line chart for expenditure under 15% additional operating cost (under various depreciation periods and electricity rates)

Figure 4. Break-even point for ROI (-50% to +50% CAPEX) with 15% additional operating costs at 4 cents/kWh

Table 1-5. Electricity and depreciation costs under standard capital expenditures of -50% to +50% in the market (15% additional operating costs)

2. Average cash flow balance point

This parameter is crucial for miners to adjust the shutdown threshold price, i.e. the shutdown price. Although the positive and negative return on investment (ROI) is also important, if it continues to be below the break-even point of the ROI, the capital of the miner will gradually disappear. On the other hand, a price below the cash flow break-even level will also lead to a reduction in the computing power of the entire network.

The current market average cash flow breakeven point is estimated to be $3,900 at 4 cents/kWh (15% additional operating costs).

Table 6. Average cash flow break-even point (under different electricity rates and additional operating costs)

Table 6 explains the balance points calculated only from the additional operating cost factors (5% to 25%) under different electricity tariffs (depreciation period 30 months).

Compared with the average cash flow balance point of US$3,300 in the Q2 report of 2019, it is nearly 18% higher, and is also affected by the decline in currency prices and the end of the flood season.

Improving the efficiency of mining equipment has no effect on the total power consumption of the entire network, it will only increase the computing power consumed per unit of power. In the long run, only block rewards and electricity costs will affect the total power consumption of the network.

CoinShares estimates the total electricity consumption of Bitcoin mining to be approximately 6.7 GW, a 43% increase from the level in June 2019. However, from an industrial perspective, electricity consumption is only 6.7% of the global aluminum smelting industry.

The miners are reasonably distributed, with areas with developed renewable energy being the main regions.

These areas are the main mining centers.

China: Sichuan, Yunnan

United States: Washington, New York

Canada: British Columbia, Alberta, Newfoundland and Labrador, and Quebec

Russia: Siberian Federal District

Iceland, Norway, Sweden

Caucasus (Georgia and Armenia)

The penetration rate of renewable energy in the mining energy structure is 73%, about four times the global average for other industries.

It was 77.6% in the fourth quarter of 2018 and 74.1% in the second quarter of 2019. In comparison, it has declined slightly recently, mainly because some regions like Iran use coal for power generation.

Renewable energy as a share of total electricity generation in the Bitcoin mining network

In the remaining regions, we observe coal, nuclear, solar and wind power generation resources. Some regions, such as Iran, are dominated by natural gas, while others, such as Kazakhstan, Xinjiang and Inner Mongolia, are dominated by coal, supplemented by a small amount of wind or hydropower. Although there are miners who use solar as their main energy source, such operations are relatively rare.

It is currently estimated that 65% of global mining activity takes place in China, with Sichuan alone accounting for 54% of the world’s total, and the remaining 11% being more or less evenly distributed between Yunnan, Xinjiang, and Inner Mongolia. Subsequently, 70% of the newly deployed hashrate since the last report went to China, with the remaining 30% going to non-Chinese mining regions.

The report shows that Bitcoin mining efficiency and computing power growth will continue its five-year trend. As long as the price of Bitcoin remains at a healthy level, the computing power of the entire network will increase massively when the next generation of hardware devices are connected to the mining network.

Combining estimates of global mining locations and regional renewable energy penetration, Bitcoin mining consumes mostly renewable energy. Our current share of renewable energy generation in the Bitcoin mining energy mix is ​​about 73%, about four times the global average for other industries.

Overall, Coinshare reiterates their view through the report that Bitcoin mining is a buyer of surplus electricity around the world. As a result, infrastructure tends to be concentrated in areas with relatively low utilization of renewable energy. This may help reverse losses and make renewable energy projects profitable. As the industry matures and becomes permanent in the public eye, renewable energy projects may eventually become a driving force for new renewable energy development in areas that were previously uneconomical.