Mining machine prices fluctuate more than coin prices? Two things you need to know before understanding the trend

Mining machines are a magical existence. As a computing device with a single function, why is it that sometimes its price has nothing to do with the cost, but changes constantly with the price of a certain commodity? In such a large industry landscape, why is it the first listed company in the blockchain field?

To answer these questions, we need to re-understand mining machines from the two main lines of electronic products and financial products, and understand the secrets behind this business.

Looking at mining machines from the perspective of the life cycle of electronic products

First of all, putting aside all the exciting slogans, a mining machine is essentially an industrialized mass-produced electronic product. It must be emphasized that a mining machine is not Bitcoin, and Bitcoin is not a mining machine.

The most familiar and largest impact of change in the electronics industry that we have experienced is smartphones.

In early 2010, smartphones were just taking off and the industry entered its exploratory phase, with many early players entering the market.

Then came the long growth period. Every once in a while, the memory, display, and CPU of smartphones were pushed up rapidly. In those years, it was normal to change your phone every year because smartphones evolved so quickly. That was the rapid growth period of smartphones. The dividends of the industry brought rapid growth opportunities to players in the field.

Now, the smartphone industry has already entered a mature stage. The competition pattern in the industry is becoming clearer and the smartphone industry is becoming more mature. If you think about it carefully, you will find that there is no obvious difference in the functions of the phone you are using now and the phone you used two years ago.

This is how the product life cycle curve works for smartphones, and it’s relatively intuitive for most of us, and it’s very similar for desktop and laptop computers.

After the product is mature enough, industry players can only increase sales premiums through after-sales or marginal innovation to maintain industry profits. Compared with the early stage, industry profits will be greatly diluted in the mature stage. In other words, the dilution of profits in the electronics industry is an inevitable process.

Ultimately, due to the limited progress of industrial technology and the irreversibility of productivity, capital will continue to reduce the average cost of production to the extreme. In other words, this is an arbitrage behavior throughout the entire product cycle. Industry pioneers pay the courage and cost to obtain an arbitrage advantage of one or two years ahead, and continue to arbitrage until the model is drained.

Speaking of mining machines, Yang Zuoxing, the founder of Shenma Mining Machine, said at the Mining Conference in September this year:

The era when the power consumption of each generation of mining machines was reduced by half is gone forever. In the future, the power consumption reduction ratio of each generation of mining machines can only reach 10% to 20% at most. In the future, the service life of mining machines will be extended to 4.5 years, and low-power mining machines will become more and more popular.

Essentially, this indicates that mining machines, as electronic products, have entered a mature stage and are approaching the current production limits of human physical science. The era of barbaric growth is over.

Ten years later, when an industry can produce a listed company, it is a sign of maturity. With the advancement of technology, the industry has entered a period of maturity with multiple players advancing together. Multiple mining machine companies will begin to share the market. The industry will never return to the glory days of 2017 when Bitmain dominated the market. At that time, things were as simple as one sentence: "Stupid, the biggest problem is supply and demand."

For mining machine manufacturers, the future will be a long struggle, and every number on the financial statements will be the result of hard work until the product life cycle is complete. Returning to the cartel or monopoly, no electronic product can have a practical and tangible entry threshold after popularization, and capital will flatten the last arbitrage space.

Jack Ma said: Today is cruel, tomorrow is crueler, and the day after tomorrow is beautiful, but most people die tomorrow night and will not see the sunrise the day after tomorrow.

But perhaps the truly cruel thing was the night after tomorrow, because then, the story ended.

Understanding mining machines from the perspective of financial attributes

You may find that the price of mining machines will keep changing according to the price of the underlying digital assets. This is often a difficult question to explain: Why is the price fluctuation of mining machines with low liquidity often greater than the price fluctuation of coins? As electronic products that carry computing power, how can we understand this phenomenon from a financial perspective?

The answer is: mining machines are actually the largest financial derivatives of various digital assets.

The calculation of the rights and interests of mining machines is relatively complicated. The fundamental reason for the complexity is that the mining machines themselves produce cryptocurrencies. Therefore, when pricing mining machines, the risk of fluctuations in cryptocurrency prices will inevitably be reflected.

So far, as shown in the figure below, Bitcoin computing power is in a state of continuous increase, and it is almost an exponential increase.

Without the introduction of legal tender, if a single mining machine is priced based on the cryptocurrency it produces, the number of coins that can be allocated to each hash rate is approximately equal to "current number of coins produced/total hash rate", and the result is bound to be close to exponential decay.

After the introduction of fiat currency quotes, the relationship between mining machines and fiat currency output has become extremely complex. Simply put, due to the linear output and decay characteristics of mining machines, when the currency price is high, it is similar to a discounted daily delivery lock-up long order; when the currency price is low and below the mining cost line, the mining machine is similar to a long option with a bad value.

Therefore, selling mining machines is selling discounted long orders that are attenuated, and this attenuation ratio is determined by the production capacity of the mining machine manufacturer. The stronger the production capacity, the greater the attenuation. The largest long orders in this industry are actually tied to mining machines, which explains why miners and coin hoarders have the most wealth in this industry so far.

The fact that mining machine manufacturers also mine has been explicitly ignored, so another question that needs to be considered is: when mining machine manufacturers can obtain excess profits through mining, why should they sell mining machines? After all, mining is not actually a high threshold compared to producing mining machines.

Simply put, when a large number of mining machines are put on the market, it represents the profit-taking behavior of the mining machine manufacturers, because the mining machines are actually priced according to derivatives. The miners who receive the goods often bear an implicit bet against the mining machine manufacturers. Of course, the current monopoly of miners has not been formed, but has instead moved towards a relatively vicious competition situation. People also have reason to believe that it will become increasingly difficult for mining machine manufacturers to manipulate the market.

The halving dilemma of mining machines

After the two previous Bitcoin halvings, the so-called halving market appeared. Naturally, the market also has expectations for the upcoming Bitcoin halving in the first half of 2020. According to statistics, in 2019, excluding futures, the actual mining machine transactions may reach more than 20 billion yuan. All of these funds will go to mining machine manufacturers and upstream industries, and not a penny will go into the market value of Bitcoin.

Miners use a lot of money to buy mining machines, and these purchases include a lot of financial leverage. Everyone hopes to benefit from the Bitcoin halving, hoping that the halving every four years will pay for a lot of leverage. This is a pretty scary game.

Will the miners' gamble pay off? We will have to wait and see.