Bitmain is betting on the halving with three strategies. What is it betting on?

On December 11, a Weibo user named "WinterCoiner" posted his calculations and analysis of the Bitcoin halving next year, which aroused widespread concern among people in the industry about "big gambling in the mining circle" and "mining accidents". The user's point of view is that according to the current trend of computing power growth, if the price of the currency does not rise next year, the halving of the income brought by the halving of Bitcoin production will make it difficult for miners to persist, and will eventually cause super mining accidents.

Information source: Weibo In this regard, Jiang Zhuoer, founder of Litecoin Mining Pool, said, "Bitcoin computing power is restricted by three factors: mining machine performance, electricity price, and coin price. The entry and exit of computing power is the result of comprehensive game in all aspects. (The mining circle) is not gambling." In other words, the changes in miners' income, the computing power of the entire network, and the difficulty of mining are a dynamic adjustment process. The computing power of the entire network will not continue to grow at a high speed, and mining difficulties will not come.

Indeed, the probability of a mining accident is relatively small, but it is true that the mining circle is making a bet on next year’s halving.

On December 7, mining machine manufacturer Bitmain held a customer appreciation meeting and disclosed its "mining machine promotion" strategy at the meeting. The three major gameplays of down payment + final payment mining machine sales model, put options, and joint mining are linked. Some media stated that Bitmain has added financial leverage to mining, and "the mining field has entered the leverage era from then on."

- 01 - Bitmain's three-pronged bet on halving

On the afternoon of December 7, Bitmain held its annual customer appreciation meeting in Chengdu, the "capital of mining". In this meeting, in addition to the highlight of Wu Jihan's official return, Bitmain also dropped a bombshell about the "new mining machine sales model". This mining machine sales model was called Bitmain's "three axes" by some media.

A. Betting on halving and funding sustainability

Two of the three strategies are Bitmain’s bet on the halving next year and its own ability to sustain funding. According to Crypto Valley Live, Bitmain believes that the price of Bitcoin will rise sharply if the production capacity is halved, so the company plans to bear many operational risks from customers.

• Put Option

Bitmain has provided put options for large customers with order amounts of more than 10 million. The option product is the "Bitcoin 2020/3/27 35000 CNY Put Option", which is a product purchased by Bitmain for customers from Matrixport, a new company that mainly engages in financial business. The purchase amount is 1% of the customer's order amount. For each share of this option product held by a customer, he or she can sell one Bitcoin at a price of 35,000 RMB on the exercise date, March 27, 2020. In other words, on the exercise date, no matter how much the price of Bitcoin falls, some of the Bitcoin in the hands of the customer will have a bottom price. Bitmain's move can be said to kill many birds with one stone: the put option provides a bottom line for customers, and customers' willingness to buy mining machines will increase; cultivating miners' awareness of using financial instruments to hedge mining risks can promote the cold start of Matrixport's financial products; on the premise of sufficient funds, it has laid out a channel for itself to purchase Bitcoin at a low price in advance.

Obviously, Bitmain has transferred some of the miners' loss risks to itself, and the starting point of this domino effect is the Bitcoin price. If the Bitcoin price does not fall sharply and Bitmain's own funds are sufficient to make up for the miners' losses, there will not be too many problems. However, once a black swan event occurs in the price of the currency, Bitmain may face the situation of selling the currency at a loss and suffer huge financial losses.

In order to add more insurance to this behavior, some analysts believe that Bitmain will purchase put options in the market or further hedge risks through financial instruments such as futures.

• Merged Mining

In the "joint mining" model, Bitmain and the mining farm will conduct cooperative mining for a period of one year. Bitmain will provide S17 series mining machines and pay the annual mining electricity fee at a price of 0.35 yuan/kWh. The partner will be responsible for providing the mining farm and operation and maintenance costs. In terms of the distribution of income, if the income is greater than the electricity cost, Bitmain will obtain 75% of the net income and the mining farm will obtain the remaining 25%; if the income is not enough to offset the electricity cost, no income distribution will be made.

There are many benefits to cooperating with mining farms: first, it saves the cost of building a mine; second, these cooperating mines are likely to develop into potential customers; third, when the price of the currency rises, Bitmain can obtain considerable capital flow in this way, but if the price of the currency does not perform well, it will prolong the payback period and bring financial pressure; finally, this also allows the excess mining machine inventory to be effectively utilized. Like the put option, the risk of "joint mining" will eventually return to the price of the currency and the sustainability of its own funds. Bitmain needs to have sufficient funds to face the possible black swan events of the currency price.

Wu Jihan speaks at a customer appreciation meeting. Image source: PANews

B. Betting on the market demand for new mining machines

• Down payment + final payment sales model

In the first two moves, Bitmain was betting that the price of the currency would not fall sharply next year and that it would be able to provide continuous funds to withstand certain risks. In the new sales model of down payment + final payment, Bitmain is betting more on the market demand for a new generation of mining machines and the competitiveness of the new generation of Antminers among all mining machines.

This year's situation is obviously unfriendly to the mining industry. The price of Bitcoin has fallen below $7,000 many times, and as a result, many mining machines, including the former king of the generation S9, have reached the shutdown price. On the one hand, the price of the currency has fallen, and the old mining machines cannot maintain profitability. On the other hand, the computing power of the entire network has increased, and the output of old mining machines has become lower and lower. The competitive advantage of the new generation of mining machines with low power consumption and high computing power is becoming more and more obvious. In fact, the replacement of old and new mining machines has become a key consideration for many miners at present, and the market has a demand for new machines. According to information from Honeycomb Finance, at the mining conference held in October this year, it was reported that 4 billion yuan of mining machine futures had been sold in the mining machine market.

The mining machine down payment + final payment sales model proposed by Bitmain is very attractive to miners. It is reported that customers who purchase more than 100 mining machines only need to pay a minimum down payment of 50% when placing an order. If the order quantity exceeds 5,000 units, the down payment ratio can be reduced to 20%, and the remaining amount only needs to be paid 7 days before delivery. Antminers are generally futures, and the delivery time is often delayed by 1-2 months from the order date. The payment model changes from full payment to down payment + final payment, which can provide customers with a certain buffer time and reduce their financial pressure. Correspondingly, Bitmain needs to bear more risks of "customers do not pay the final payment, and mining machines are produced more than sold."

Down payment + final payment mining machine sales model, image source PANews

C. Regaining market share by catering to miners Bitmain's move was interpreted by many as "regaining some market share by taking greater financial risks." In fact, Bitmain's mining machine sales this year are not good. Due to problems with production and mining machine pricing, its originally overwhelming market share has been eroded this year. Zhu Yu, co-founder of CoinIn Mining Pool, once said in an interview with the media that "it is a fact that the sales volume of Shenma mining machines has exceeded that of Antminer this year." The Science and Technology Innovation Board Daily previously reported that during Zhan Ketuan's tenure, Bitmain had major problems in the market and sales. Antminer's pricing strategy was much higher than that of MicroBit's Shenma mining machine in the case of insufficient production, and it also introduced some measures that were unfriendly to miners, such as prepayment and pre-order. Although it obtained higher profits, it also led to a significant decline in Bitmain's market share. At the same time, MicroBit's Shenma mining machine has seized a lot of market share with its cost-effectiveness.

The mining machine sales model of down payment + final payment is obviously a major adjustment in sales strategy made by Wu Jihan after his return. It is reported that in addition to the change in the mining machine sales model, Bitmain also reduced the price of high-priced orders by more than 40%, and returned the difference to the miners in the form of no-threshold coupons.

D. Betting on the new Antminer On the one hand, Bitmain is "pleasing" miners by reducing prices and paying in installments, and on the other hand, it is also betting that the new generation of Antminers can stand out from the crowd. MicroBit's Shenma Miner is undoubtedly the biggest competitor of the Antminer. According to a report by "Wu Says Blockchain" on the 2nd of this month, MicroBit's new mining machine M30S for next year has been successfully taped out by Samsung (that is, trial production), and it was in the process of wafer return verification at the time. The new machine is expected to be mass-produced in January-February next year. Bitmain's S19 chip has also been sent to TSMC for wafer production, and will be returned for wafer verification soon. The expected mass production time is also in the first quarter of next year. It is reported that the M30S will use Samsung's 8nm technology, with a power consumption ratio of 38J/T (power consumption ratio is the power consumption per T of computing power, the lower the power consumption ratio, the better). In comparison, the power consumption ratio of the Antminer S17pro, the highest-performance mining machine on the market, is 39.5J/T. MicroBit officially calls the new machine "an industry benchmark that cannot be replicated."

Bitmain's new machine S19 seems to be even better. Relevant sources revealed that compared with M30S, Bitmain's upcoming new machine S19 may be better than M30S in terms of power consumption ratio and economy, although the mass production speed is slower. S19 will adopt TSMC's 7nm technology, and S19pro's lowest power consumption ratio can even reach 30J/T. In addition to the competition between the performance and power consumption ratio of the mining machine itself, the outcome of the mining machine war next year will also depend to a large extent on the production capacity of each chip manufacturer. It is reported that the TSMC chip used by Bitmain is better than Samsung of BitMicro, but because TSMC has too many customers, it has disadvantages in chip production capacity and price; in contrast, Samsung's 8nm chip performance is insufficient, but except for supplying Samsung mobile phones, only the mining machine shipments are large, so there are certain advantages in production capacity and price.

Bitmain's Antminer S19 has higher performance and lower power consumption, but at the same time, TSMC's production capacity and price are not advantageous. Therefore, it is still unknown who will win the battle of mining machines next year. Bitmain is betting that the Antminer will win next year.   Put options, joint mining, down payment + final payment model, Bitmain is betting on the price of the currency next year, its own funding sustainability, the market demand for a new generation of mining machines, and the competitiveness of Antminer's new mining machines. The launch of all these strategies is actually Bitmain's active response to market demand in order to regain market share.

- 02 -Behind the mining gamble

Behind the mining gamble, there are actually three important issues revealed.  

First, the mining industry is facing a difficult situation.

According to Tongzhengtong, the second half of 2019 was the most frantic period for Bitcoin miners to compete in computing power. Since the computing power of the entire Bitcoin network broke through the high point of 57 EH/s in 2018 in June, the computing power of the entire network has further increased by more than 80% in 5 months, even breaking through 100EH/s, setting a daily computing power record of 109EH/s. The computing power has risen rapidly, but the price of Bitcoin has been very sluggish, and the price has fallen below $7,000 many times. In other words, the competition among miners has intensified, but the price of the currency has declined. Some media have written that "2019 is the worst period that Bitcoin miners have experienced in recent years." The currency price has not shown signs of a bull market, making it extremely difficult for mining machine manufacturers to sell mining machines. In an article, the Planet Daily pointed out that from September to December this year, the prices of high-computing mining machines from various mining machine manufacturers have dived by 27-57%.

Mining machine prices fell. Source: Odaily

The worse the environment, the stronger the participants' desire for a better future. The entire mining industry is in urgent need of a turnaround, and next year's halving is the most likely time for a turnaround. It can be seen that major mining machine manufacturers are currently accelerating the development of new mining machines, and the competition and competition among mining machine manufacturers is now particularly fierce, and Bitmain is also among them.  

Second, the mining landscape is changing.

MicroBT founder Yang Zuoxing pointed out at this year's mining conference that "mining machine manufacturers have entered an era of flourishing, and Bitmain is no longer the only one." Many people in the mining circle revealed that the market share of Antminer has shrunk since this year, and mining machine manufacturers such as Shenma have taken a lot of "cake". Bitmain's performance this year is indeed not good. Yang Zuoxing revealed at the end of September this year that 30-40% of the 30E computing power added to the market at that time was contributed by Shenma. In contrast, the sales of the new mining machines S15 and T15 launched by Bitmain in November last year were sluggish, and the two mining machines were reduced in price; in the iteration of 7nm models, Bitmain's actions were also one step slower than Canaan Creative; in November, Canaan Creative successfully listed on Nasdaq, which is also something Bitmain cannot achieve at present.

The market structure dominated by mining giants has collapsed. All mining machine manufacturers want to seize the opportunity of next year's halving to overtake others. The former king, Bitmain, wants to "break the deadlock" by providing discounts to miners and taking on some risks to cater to the market in order to regain lost market share.   Third, the mining industry has entered a new era of competition. According to information from the Planet Daily, the research and development of ASIC chips has reached its ceiling, and the performance growth of mining machines is getting slower and slower, which can be seen from the slowdown in the growth rate of the total network computing power.

The growth rate of Bitcoin computing power has slowed down. Information source: Odaily. It can be seen that the technological monopoly in the field of mining machines is gradually shifting to market effect priority, and this may be the reason why Bitmain launched option financial gameplay and adopted a strategy of cooperation with mining farms.

Reference articles:

"Bitmain's sales strategy is freshly released to overcome the difficulties in the face of the cold winter" by Crypto Valley Live

"Wu Jihan uses three tactics to help Bitmain regain its glory?" by PANews

"Miners are betting big on the halving market, is a super mining disaster coming?" by Tongzhengtong

"Shenma M30S has returned to mass production and Antminer intends to compete with speed in terms of performance" by Wu Shuo Blockchain

"I plan to leave with the flagship S9" by Odaily