The halving may be the beginning of a mining disaster for Bitcoin miners

Canaan Creative, a Chinese mining machine manufacturer, was officially listed on the Nasdaq on November 21, 2019, with CEO Zhang Nangeng ringing the bell. The company is considered to be the first Chinese mining machine company to be successfully listed. Before them, the more influential Bitmain also tried to list in Hong Kong, but it seemed that it did not succeed for various reasons and soon fell into a "civil war".

Many people in the digital currency industry tend to regard mining machine manufacturers as the top of the industry, because it seems that almost endless funds are pouring into mining machine manufacturers. In the eyes of many people, each Bitcoin mining machine is as magical as a "money printing machine", and it seems that as long as you can buy a mining machine, it means wealth will roll in. But the reality does not seem to be the case, because the huge fluctuations in Bitcoin prices have always been a huge concern for miners.

The so-called "Bitcoin mining machine" is a computer designed specifically for the Bitcoin algorithm, and the chips in it are customized for the algorithm. According to the algorithm designed by Satoshi Nakamoto, Bitcoin was born on January 3, 2009, and it was initially produced at 50 per hour. This production rate can be maintained for about four years, and then halved every four years. The first halving occurred on November 28, 2012, when 10.5 million bitcoins were mined, and the Bitcoin network began to produce 25 every 10 minutes. The second halving occurred on July 10, 2016, when the total amount reached 15.75 million (5.25 million new ones, which is half of 10.5 million), and it was halved again to 12.5 every 10 minutes.

According to the current speed, the next halving will occur around May 2020. Once the output decreases sharply and the demand remains unchanged, the price will inevitably rise. This seems to be the main logic of many Bitcoin investors at present, so many people in the industry believe that the so-called "halving market" will appear in 2020. As a result, many people have invested or increased their investment in Bitcoin mining, resulting in a continuous growth in Bitcoin hashrate.

If calculated at a price of $7,200 per bitcoin and at the current bitcoin production rate (12.5 per 10 minutes), bitcoin miners will produce approximately $4.73 billion worth of bitcoins per year. Considering the current good liquidity of bitcoin, it is no wonder that so much money is invested in bitcoin mining.

First of all, regarding the so-called "halving market", in fact, if we observe the trend of Bitcoin prices, the rise of Bitcoin only appears at least half a year or a year after the halving, and it peaks almost a year later. The previous two peaks were in December 2013 and December 2017. In the face of such a long delay, it is doubtful whether there is an inevitable connection between the so-called Bitcoin market and halving.

At least for the peak in December 2017, the general view is that due to the ICO craze, a large amount of hot money poured into the digital currency, thus creating a huge bubble in the industry, and it seems to have little to do with whether Bitcoin is halved. Even if the peak at the end of 2013 was related to the halving of Bitcoin in November 2012, a single isolated case does not seem to give us enough reason to believe that the halving in 2020 will definitely bring about a crazy rise in Bitcoin.

But after all, there is still a lot of money frantically invested in the manufacture of mining machines, which has rapidly increased the production cost of Bitcoin. The halving of Bitcoin will make the cost even more alarming, so some people believe that the increase in the cost of Bitcoin will lead to a surge in the price of Bitcoin.

This is obviously another unconvincing reason. The price of any commodity has never been strongly correlated with cost. The price is always determined by supply and demand. If the market does not need or does not need so much, no matter how high the cost is, it is impossible to support the price.

But in any case, it seems that many people still believe that the "halving market" will definitely occur in 2020, and have invested a huge amount of money to buy Bitcoin mining machines to start mining. Although we don't know how much money has been invested, the rapidly growing computing power data has already said it all.

The Bitcoin network’s hash rate has grown 80% since June, likely due to the adoption of advanced mining equipment. According to a recent report from digital asset management company CoinShares, Chinese Bitcoin miners currently control about 66% of the world’s “computing power,” the highest value recorded since China’s share broke through 60% in June. Chris Bendiksen, director of research at CoinShares, said the growth in Chinese miners’ computing power may be due to the adoption of more advanced mining equipment in China.

CoinShares also stated that the world's most important mining centers are currently located in Yunnan, Xinjiang, Inner Mongolia and Sichuan provinces in China, with Sichuan accounting for more than half of the global hash rate. Other centers are located in the United States, Russia, Kazakhstan, etc.

The firm expects bitcoin computing power to be more evenly distributed around the world as mining chips made by Chinese companies such as Bitmain become easier to export.

At present, the computing power of the entire network is about 95E, and according to the current increasing speed, the computing power may rise rapidly at a rate of 10E-15E in the next few months. When the halving occurs next year, the computing power may reach a record high of 140E-150E. If the price of Bitcoin remains at $7,200, it means that the total revenue of the mining industry will return to about $3,600 (7200/2) after the halving. When the last Bitcoin price was around $3,600, the computing power of the entire network was only between 40E and 45E. This may put Bitcoin miners under unprecedented pressure, and eventually transmit the pressure to mining machine manufacturers.

Canaan's offering price was $9, with an initial supply of 10 million and a fundraising amount of $90 million. As of December 13, its price had fallen to $5.71, a drop of nearly 37%. This also shows that investors have considerable doubts about the future of the mining machine business.

Compared with Bitmain and Shenma Mining Machine, the decline in Canaan Creative's stock price may not attract more attention. Recently, Bitmain's Wu Jihan regained control of the company through a series of operations, and Zhan Ketuan seems to be unwilling to give up. On December 15, according to media reports, Shenma Mining Machine founder Yang Zuoxing was prosecuted by the judicial authorities for occupational embezzlement, mainly due to the intellectual property dispute involving Bitmain.

But judging from the current situation in the industry, many people have high expectations for the "halving market", and large-scale funds have been deployed. However, if the market does not appear as expected, it will probably put great pressure on the entire Bitcoin mining industry, and may even lead to unprecedented "mining accidents".