In-depth | As the dry season approaches, an analysis of the entire Bitcoin mining industry chain

The income from Bitcoin mining is mainly affected by the difficulty of mining and electricity costs. Since the mining difficulty (which determines the unit mining income) and the price of Bitcoin are the same for all miners, the mining income of miners is only related to the computing power of their mining machines. The greater the computing power, the greater the mining income. The main factors affecting the mining cost are the power consumption and electricity costs of the mining machine. In addition, the energy consumption ratio (W/T) of the mining machine is also an indicator worthy of attention. Mining machines with the same computing power have the same mining income, but mining machines with a smaller energy consumption ratio have lower electricity expenses, which means that the mining income is theoretically higher.

Bitcoin mining has formed an industrial chain. In addition to mining, there are also mining farms, mining machine manufacturers, mining pools, cloud computing platforms and other industries that deserve attention. As the producer of computing power, mining machine manufacturers have absolute voice in the industrial chain; miners purchase computing power from mining machine manufacturers, paying attention to the price of coins, mining difficulty and mining machine power consumption; miners host mining machines in mining farms, and the construction of mining farms is highly non-standard, which is inseparable from the local regulatory strength; miners and cloud computing platforms connect mining machine computing power to mining pools; cloud computing platforms "retail" mining machine computing power to investors, improving the liquidity of computing power. The development of the entire industrial chain is extremely similar to the IT development process.

With the arrival of the dry season, the computing power of Bitcoin mining will continue to rise. It is known that Bitmain's mining machines S17 and S17 Pro, which use the second-generation 7-nanometer chips, contain about 144 chips. A 12-inch 7-nanometer wafer can cut out about 3,000 ASIC chips. Assuming that this batch of wafers is mainly used to manufacture the 7-nanometer mining machine S17 Pro (56T), Bitmain will be able to manufacture a total of about 1.04 million mining machines by the end of the year; assuming that this batch of mining machines is officially launched, sold out and used for mining in early 2020, the computing power of the entire network will increase by 58.24EH/s. The act of placing high-value orders reflects that Bitmain, a leading mining machine manufacturer, has confirmed the recovery of the mining machine market and is optimistic about the future market. In addition, due to the low electricity costs during the flood season, China's southwest mining farms have attracted 60% of the computing power of the entire Bitcoin network. After the flood season ends in October, many mining machines will be moved from the southwest to the northwest, and the vacancy rate of the northwest mining farms will decrease.

Bitcoin mining machine manufacturers have a technological moat. We are optimistic about the investment opportunities of mining machine manufacturers in the mining machine industry chain. First of all, the chip design and industrialization capabilities of mining machine manufacturers have a considerable degree of moat. Although the production capacity of Bitcoin mining machine manufacturers is greatly affected by the chip tape-out yield, in the final analysis, the biggest impact on their performance is the drastic changes in Bitcoin prices. Mining machine manufacturers have the desire to expand new businesses. With the help of existing chip design experience, mining machine manufacturers are expected to replicate successful experiences in artificial intelligence business. Secondly, in the entire Bitcoin mining industry chain, mining machine manufacturers are the closest to the traditional financial market. Third, in the Bitcoin mining industry chain, the financial attributes of mining machine manufacturers' business are relatively small, and they face less regulatory pressure.

In October, the six-month flood season in southwest China ended. The region attracted Bitcoin miners with cheap electricity at that time, accounting for 60% of the total network computing power. After that, miners will have to move to the northwest region where electricity is more expensive, and the mining cost will rise sharply. At the same time, although the price of Bitcoin once exceeded $10,000, it was below this price for a considerable period of time, and the mining income faced great uncertainty. Nevertheless, compared with the low point in 2018, the price of Bitcoin has rebounded by more than 2 times, and the enthusiasm of miners for mining has been high. The total network computing power of Bitcoin has exceeded 80EH/s, setting a record high. This report aims to explore investment opportunities in the Bitcoin mining industry chain at a time when the price of the currency is unstable and the dry season is approaching.

Third, in the Bitcoin mining industry chain , the financial attributes of mining machine manufacturers’ business are relatively small, and they face less regulatory pressure.

Catalyst: Further increase in coin price; improvement in the yield rate of mining machine manufacturers.

Risk warning: regulatory policy uncertainty and blockchain infrastructure development failing to meet expectations.

2) Large market value. Its market value is 170.4 billion US dollars (about 1.2 trillion yuan), accounting for 69.1% of the market value of all cryptocurrencies (2,529 types), and it is the only cryptocurrency with a market value of more than 100 billion US dollars. This market value exceeds well-known brands such as McDonald's, Citigroup, PayPal, and Starbucks, and is close to well-known A-share listed companies such as Kweichow Moutai (1.4 trillion yuan) (Note: There are only 6 A-share companies with a market value of more than one trillion yuan).

3) Good liquidity. The daily trading volume is 16.4 billion US dollars (about 180 billion yuan), equivalent to 40% of A-shares (wind, 2019.5). There are 20,280 cryptocurrency exchanges in the world that trade 24 hours a day, and most of them list Bitcoin as a trading target. In addition, many exchanges offer long and short futures contracts for Bitcoin. For example, the U.S. Commodity Futures Trading Commission (CFTC) has approved licensed commodity exchanges Chicago Mercantile Exchange Group (CME), Chicago Board Options Exchange (CBOE) and Cantor Exchange to offer Bitcoin futures; the New York Financial Services Regulatory Authority has also approved the exchange Bakkt to provide physically settled Bitcoin futures contracts; the U.S. Securities and Exchange Commission is also reviewing the listing applications of multiple Bitcoin ETFs.

4) Low correlation with other assets. Another important advantage of Bitcoin is its low correlation with other assets (such as stocks, bonds, derivatives and gold, etc.), which makes it have certain safe-haven properties compared to other assets. Especially when geopolitical conflicts escalate, it is often used as a tool to hedge the risk of fiat currency depreciation.

2. Mining is a way to obtain Bitcoin from the "source" at a low cost. Traditional electronic payment methods rely on a third party (such as a bank) that both parties to the transfer trust. The typical process is that the bank deducts the transfer amount from the account opened by the sender of the transaction in the bank and adds the relevant amount to the account of the recipient of the transaction in the bank. Bitcoin is committed to becoming a peer-to-peer electronic cash system. The way it realizes value transmission is that all users of the entire network witness the transfer transactions between users to prevent double payment of funds. It is a distributed ledger maintained by the entire network. The so-called "mining" is to use a computer as a "mining machine" to solve the encryption questions given by the Bitcoin system to compete for the right to record the Bitcoin ledger, and to package the transactions into blocks. The blocks are connected to form a "chain".

1) Mining is the way Bitcoin is issued. The Bitcoin system will issue block rewards to miners who obtain the right to record accounts. The entire Bitcoin network produces one block approximately every 10 minutes. The mining difficulty is dynamically adjusted. It will be adjusted every 2016 blocks mined. The basis for the adjustment is the block time of the previous 2016 blocks. If the average block time in the previous cycle is less than 10 minutes, the difficulty will be increased. If it is greater than 10 minutes, the difficulty will be reduced. The purpose is to ensure that the system stably produces one block every 10 minutes. Therefore, the difficulty adjustment time is about 2 weeks (2016 * 10 minutes). All these rules are stipulated in the open source code.

The system rewards 50 bitcoins for each block, and this reward is halved approximately every four years. Halvings occurred in November 2012 and July 2016, respectively. The current block reward is 12.5 bitcoins, and the next halving is expected to occur in May 2020. That is, the global bitcoin miners will receive a total of about 1,800 bitcoins in block rewards every day.

Bitcoin is "issued" in this way, with a total of about 21 million. As of August 31, 2019, 1,791 bitcoins have been mined. In addition to block rewards, miners will also receive transaction fees paid by the sender. In theory, the smallest unit of Bitcoin will be mined in 2140, and miners will only receive transaction fees.

According to Coinshares, Bitcoin miners earned a total of $5.5 billion in revenue in 2018, of which $5.2 billion was block reward revenue (97%) and $300 million was miner fee rewards (3%).

Currently, miners can earn about 1.7% of the block reward in fees from each block. The block reward and transaction fees of the entire Bitcoin network in the past 24 hours were 1913 BTC and 34.04 BTC respectively, totaling about $1879.

2) Mining can obtain Bitcoin at a low cost. In December 2017, the price of Bitcoin hit a record high, approaching $20,000, and then took a sharp turn for the worse. In November 2018, it fell to about $6,000, but during this period, the computing power of the Bitcoin network has been rising. It was not until November 2018, when the low point of $6,000 appeared, that the computing power of Bitcoin began to decline. In theory, if the price of Bitcoin falls, the income of miners will decrease, and the computing power of the entire network should be reduced. Why does such a gap occur?

The actual mining costs of a considerable number of miners are relatively low. The price of the current mainstream mining machine Ant S9 fell from more than 10,000 yuan at the beginning of the year to around 1,000 yuan during the bear market in 2018. If you buy a mining machine at a lower price and have a cheap source of electricity, even if the price of the currency drops to US$6,000, it can still be barely supported. However, many mining machines have chosen to shut down and stop mining due to the high mining costs or more pessimistic expectations for the currency price.

However, the price of Bitcoin fell below $6,000, and the computing power finally entered a downward channel, which also shows that a considerable number of miners are unprofitable at around $6,000. "$6,000" may be the cost line for most miners to some extent. At the time of writing this report, the price of Bitcoin has rebounded to around $10,000. Compared with investors who can only buy Bitcoin at a price of $10,000 from the secondary market at this time, miners may be able to obtain Bitcoin at a low cost.

3) Mining is an investment behavior. The current cost of buying Bitcoin in the secondary market is about $10,000, but if you adopt the mining method, you have the opportunity to get a higher rate of return. Assuming that on August 25, 2019, you bought an Avalon mining machine A911 (19.5T, 1750W) at a price of 3,050 yuan, the currency price was 72,952 yuan, the income per T was 1.8 yuan, the electricity fee was 0.3 yuan/kwh, the daily net income could reach 78 yuan, and the payback period was 179 days.

Note: T (TH/s) is a unit of mining machine computing power, which means that the mining machine can perform 10^12 hash calculations per second. 1EH/s=10^18H/s; 1PH/s=10^15H/s; 1TH/s=10^12H/s; 1GH/s=10^9H/s; 1MH/s=10^6H/s; 1KH/s=10^3H/s.

Mining difficulty: Another factor that affects miners' income is obviously the number of bitcoins they can mine, which is directly related to the proportion of their computing power to the total network computing power. A factor related to the total network computing power is mining difficulty. The higher the total network computing power, the greater the mining difficulty, so that the system can achieve the goal of "about 1 block every 10 minutes". There is a relationship here that "block time is approximately equal to difficulty * 2^32/total network computing power", that is, "block time * total network computing power = difficulty * 2^32.

Specifically, for a miner,

Daily mining income

=Number of Bitcoins mined*Coin price

= (computing power owned/computing power of the entire network) * number of blocks generated per day * coin price

= (computing power owned/computing power of the entire network) * (full day time/time required to produce 1 block) * coin price

= Hashrate*Full-day time*Coin price/(Mining difficulty*2^32)

=Hash power owned*unit mining income

That is, unit mining income = full day time * coin price / (mining difficulty * 2^32)

Note: The unit of measurement for "computing power" and "unit mining revenue" here is usually "TH/s"

Therefore, if the mining difficulty and the computing power of the mining machine are known, even if the "block time and the computing power of the entire network" are unknown, the daily mining income can be calculated, and then the daily mining net income and payback period can be calculated. It can also be seen that since the mining difficulty of the entire Bitcoin network (which determines the unit mining income) and the coin price are the same for all miners, the mining income of the miner is only related to the computing power of its mining machine. The greater the computing power, the greater the mining income.

2. The factors that affect the cost of miners are mainly the purchase price of the mining machine, the power consumption of the mining machine, the unit electricity cost, etc.

Mining machine power consumption and energy consumption ratio (mining machine power consumption/mining machine computing power, unit is W/T): Mining machine power consumption will directly determine the electricity cost of mining. Although the energy consumption ratio does not directly determine the electricity cost, it is also an important indicator. The reason is that mining machines with the same computing power have the same mining income, but mining machines with a smaller energy consumption ratio have less electricity expenses, which means that the mining income is theoretically higher.

Unit electricity cost: Due to the low electricity cost during the flood season, Sichuan, China has attracted 60% of the computing power of the entire Bitcoin network.

According to the Southwest Power Supply Bureau, the local area is divided into three periods throughout the year: flood season, dry season and normal water season. The flood season lasts from May 25 to October 25, the normal water season is from April 25 to May 25 and October 25 to November 25, and the dry season is from November 25 to April 25 of the following year. The electricity price during the flood season is about 0.24-0.26 yuan/kWh, which is compared with the electricity price of about 0.3-0.37 yuan/kWh during the dry season and thermal power generation, which has a boosting effect on miners' income and is also extremely cheap worldwide.

(I) Mining machine manufacturers: the producers of computing power, who have absolute say in the industry chain

As the producer of computing power, mining machine manufacturers are the source of the Bitcoin mining industry chain. Several of the world's largest Bitcoin mining machine manufacturers are located in China, three of which have submitted prospectuses to the Hong Kong Stock Exchange (but all have expired), and may continue to rush for IPOs in the future (all are rumored to be considering listing in the United States). Mining machine manufacturers are essentially chip designers, but the chips they design are specifically used for "mining", and this business also provides mining machine manufacturers with considerable cash flow.

The performance of mining machine manufacturers is highly correlated with the market, so it is highly volatile. To a certain extent, this is the reason why the three major Bitcoin mining machine manufacturers cannot be listed in Hong Kong. Stimulated by the bull market in 2017, Bitmain's half-year revenue in the six months ending June 30, 2018 was close to the full year of 2017, and Ebang's revenue was more than 1 times the full year of 2017. However, 2018 was a bear market throughout the year, and the price of Bitcoin fell all the way, which greatly affected the sustainability of the profits of the three mining machine manufacturers. Many mining machine manufacturers have chosen to transform into AI chip developers and have achieved certain results (this report still focuses on discussing mining machine chips).

In terms of market share, regardless of whether the three manufacturers use computing power, mining machine sales volume or mining machine sales revenue as the statistical basis, it can be seen that Bitmain's market share is above 60%, with the highest reaching 74.5%. Canaan Creative's market share is approximately 6.2%-20.9%, and Ebang's is approximately 3.7%-11%. The market share of other global Bitcoin mining machine manufacturers is approximately 7.9%-14.8%. It can be said that domestic manufacturers have obvious advantages in this field.

The mainstream brands and models that the market is paying attention to at present include Bitmain Antminer S9/T9/S17/S17 Pro/T17, Canaan Creative Avalon A1041/A851/A841, Innosilicon T2T/T3, Shenma Miner M10/M10S/M20/M20S/M21/M21S, Ebang Ebit E11/E11++/E12/E12+, etc. In 2018 and 2019, Shenma Miner's market share increased significantly and is expected to become the second brand in the industry.

The mainstream mining machine in the current market is Antminer S9 under Bitmain, which has a market share of about 60%. Other brands with a relatively large share include Innosilicon and Shenma Mining Machine. According to the prospectus of Bitmain, Antminer S9 accounted for 60% of the shipment of Bitcoin mining machines in 2017. In the short term, Antminer S9 will not withdraw from the market due to insufficient supply of mining machines. However, with the arrival of Bitcoin halving, miners are more inclined to buy mining machines with lower energy efficiency.

In the mining machine manufacturer part of the Bitcoin mining industry chain, it is also necessary to mention that the aforementioned three mining machine manufacturers are mainly responsible for fabless integrated circuit (IC) design, Samsung, TSMC and other shopping malls are responsible for manufacturing, and manufacturers such as STATS ChipPAC, PTI (Licheng Technology), SPIL, ASE, and Changdian Technology are responsible for packaging and testing chips, as well as assembly, warehousing, logistics and other links. Different mining machine manufacturers have different say in the upstream and downstream, which will affect the proportion of their prepayments to manufacturers, thereby affecting their capital scheduling.

We are optimistic about the investment opportunities of mining machine manufacturers in the mining machine industry chain. 1) The chip design and industrialization capabilities of mining machine manufacturers have a considerable degree of moat. Although the production capacity of Bitcoin mining machine manufacturers is greatly affected by the chip tape-out yield, in the final analysis, the biggest impact on their performance is the drastic changes in Bitcoin prices. Mining machine manufacturers have the desire to expand new businesses. With the existing chip design experience, mining machine manufacturers are expected to replicate successful experiences in the artificial intelligence business and promote the development of my country's semiconductor and artificial intelligence industries. 2) In the entire Bitcoin mining industry chain, mining machine manufacturers are the closest to the traditional capital market (three manufacturers have submitted prospectuses). Some leading mining machine manufacturers have accumulated a lot of financing experience. 3) In the Bitcoin mining industry chain, the financial attributes of mining machine manufacturers' business are relatively small, mainly product sales, and they face less regulatory pressure.

(II) Mining sites: Construction status is closely related to local policies

China's mining farms are mainly distributed in the northwest (such as Xinjiang and Inner Mongolia) and southwest (such as Yunnan and Sichuan). Xinjiang's computing power accounts for about 25% of the total network, and Sichuan accounts for about 50%. Bitmain, whose main business is the design and sales of mining machine chips, also has mining farms. According to its prospectus, these mining farms are mainly distributed in Sichuan, Xinjiang and Inner Mongolia, with the largest one located in Inner Mongolia.

According to a report released by cryptocurrency research firm CoinShares in June 2019, 48% of the world's cryptocurrency mining activities take place in Sichuan Province, China, where renewable energy accounts for 90%; 12% of mining activities are distributed in other parts of China, where renewable energy accounts for about 50%; overall, 74.1% of Bitcoin mining activities use renewable energy, which is four times the global average for all industries. Coinshares further pointed out that Bitcoin mining can "turn waste into treasure", turn renewable energy projects from loss to profit, and make activities that were previously considered uneconomical profitable, which is conducive to promoting the development of the energy industry.

The power supply of the Northwest mines is relatively stable, with no distinction between high water, low water and normal water. However, if the weather is too cold in winter (such as around January), the policy does not allow the construction of new mines, which may delay the start of such mines.

The regulatory policies facing virtual currency mining activities are not clear, which has caused certain uncertainties in mining farm investment. At present, except for the two documents issued by the Leading Group of the Special Rectification Office of Internet Financial Risks in January 2018 and the National Development and Reform Commission in April 2019, the national regulatory agency has not yet issued any documents specifically mentioning cryptocurrency mining.

The attitudes of the above two documents towards Bitcoin mining tend to be "guiding exit" and "forbidding entry". Specifically,

(1) The Internet Finance Risk Management Office requires all localities to actively coordinate with relevant departments within their jurisdiction, take multiple measures, and adopt comprehensive measures such as electricity prices, land, taxation, and environmental protection to guide relevant companies to orderly withdraw from Bitcoin mining activities, and requires local management offices to report the relevant information of "mining" companies within their jurisdiction before the 10th of each month. Power consumption is the main content that needs to be reported, including the enjoyment of preferential land prices or site rentals, the implementation of electricity prices and other subsidies, etc.

(2) The “Guidelines for Industrial Structure Adjustment (2019 version, draft for comments)” issued by the National Development and Reform Commission in April listed virtual currency “mining” activities as “eliminable” industries. The deadline for soliciting comments on the aforementioned document was May 7. It divided industries into three categories: encouraged, restricted and eliminated. Among them, the eliminated industries mainly refer to backward processes, technologies, equipment and products that do not comply with relevant laws and regulations, do not have safe production conditions, seriously waste resources, pollute the environment, and need to be eliminated.

Previously, in December 2018, the National Development and Reform Commission and the Ministry of Commerce jointly issued the Negative List for Market Access (2018 Edition), which contains two types of items: prohibition and permission. For the prohibited items, market entities are not allowed to enter, administrative agencies will not review and approve them, and they are not allowed to handle relevant procedures. This document directly links to the latest version of the Guiding Catalogue for Industrial Structure Adjustment. Specifically, the Negative List for Market Access (2018 Edition) prohibits investment in obsolete projects in the Guiding Catalogue for Industrial Structure Adjustment. At present, the official version of the Guiding Catalogue for Industrial Structure Adjustment (2019 Edition) has not yet been released. If it still lists virtual currency "mining" activities as "obsolete" industries, market entities will not be allowed to invest in such activities.

At the implementation level of local governments, some local governments have proposed to encourage the development of artificial intelligence and big data. For example, in September 2018, the Sichuan Provincial Government issued the "Implementation Plan for the Development of New Generation Artificial Intelligence in Sichuan Province". In a sense, mining farms are indeed computing power and data computing centers, and some mining farms may use such documents to build and start operations locally.

We believe that mining farms are not a suitable business for investors to participate in unless they have the relevant electricity resources.

(III) Mining pools: Collecting computing power to provide a guarantee for miners’ income

As mentioned above, the probability of a miner mining Bitcoin is positively correlated with the proportion of his computing power to the total network computing power. At a time when computing power remains high (once exceeding 80EH/s, equivalent to 5.9 million Ant S9 mining machines with a computing power of 13.5T), the probability of miners with less computing power mining Bitcoin is very small. Mining pools increase the probability of miners receiving Bitcoin rewards by pooling computing power. Afterwards, mining pools will distribute mining rewards based on the computing power contribution of miners in the mining pool, which has the function of smoothing miners' income.

In 2010, the second year after Bitcoin went online, the world's first mining pool SlushPool appeared; in 2013, China's first mining pool, F2Pool, went online and began to provide services to the outside world. Since then, AntPool, BTC.com, viaBTC, BTC.TOP, and Biyin Mining Pool have gradually become well-known mining pools. Bitcoin mining pools are highly concentrated. The top 7 mining pools have nearly 80% of the computing power of the entire network.

The revenue source of mining pools is relatively single, with only one access service fee, which is deducted from the Bitcoin rewards mined by the mining pool and the transaction fees obtained, generally 1%-5% of the Bitcoin revenue. In other words, the mining pool charges service fees in the form of cryptocurrency. Therefore, the main factors affecting the mining pool's business model are not only the proportion of its computing power to the total network computing power, but also the price of Bitcoin. Since the mining pool's income is Bitcoin, when the proportion of a mining pool's computing power to the total network computing power is relatively fixed, the fluctuation of the currency price has a vital impact on it. Specifically, when the mining pool needs to use legal currency to pay for rent, electricity bills and other expenses, it needs to convert the Bitcoin income into legal currency. At this time, if the price of Bitcoin falls, the mining pool will be greatly negatively affected.

In some mining pool service fee settlement modes (such as PPS, PPS+, FPPS), even if the mining pool finds a valid block, it will pay the miner. In other words, in the above situation, the mining pool bears the risk of not being able to mine coins, which means "advance payment" of Bitcoin. If the miner has more computing power and has less demand for the mining pool to advance Bitcoin, the motivation to choose the mining pool is weak.

We are optimistic about the following mining pools: 1) have strong marketing capabilities and are good at acquiring miner resources; 2) have strong security protection capabilities; 3) have sufficient financial strength.

(IV) Cloud computing power platform: retail computing power, lowering the threshold for mining

The cloud computing power platform splits the computing power and "retails" it to investors, which lowers the threshold for mining, improves the liquidity of "computing power", and enhances the financial attributes of "computing power". Investors in the cloud computing power platform do not need to go through the tedious steps of "purchasing mining machines (and hosting mining machines in suitable mining sites)", and can participate in the mining process anytime and anywhere. The risk point is that after receiving the funds from investors, the cloud computing power platform does not use the funds for mining, changes the purpose of the funds, or even runs away. Similar pain points of fund hosting exist in many links of digital currency investment.

In 2013, the first cloud computing platform, Genesis Mining, was launched. In 2015, the accelerated return on investment contracts of Hash Nest were sold in large quantities, and the owners of computing power sold their computing power one after another. In July 2018, cloud computing platforms such as Genesis Mining and Hashflare announced the modification and termination of computing power contracts. In December 2018, the Chinese cloud computing platform BitDeer was launched, claiming to be the first cloud computing platform to achieve real computing power cutting and allocation. In mid-2018, the British cloud mining company Argo Blockchain was approved to be listed on the London Stock Exchange with the stock code ARB. At present, well-known cloud computing platforms on the market include BitDeer, VeryHash, RHY (China business is represented by the New Third Board listed company Internet Online 835727), Waiyi, etc.

These computing power platforms are generally launched in a bear market, when the owners of computing power have the motivation to sell computing power and recover fiat currency; but in a bull market, the owners of computing power will be reluctant to sell, and the cloud computing power platforms will face the pressure of acquiring computing power and can only purchase mining machines on their own to obtain computing power.

Some of these cloud computing platforms allow users to choose their own mining pools (but investors may be able to obtain fee reductions if they choose a mining pool that has cooperated with the cloud computing platform), while others are only connected to one mining pool and do not allow users to connect directly to the mining pool.

We are optimistic about the following cloud computing platforms: 1) strong compliance capabilities; 2) sufficient financial strength; 3) sufficient computing resources.

The price of Bitcoin has fluctuated greatly, and it takes half a year for mining machine manufacturers to produce chips from tape-out to finished products. Without full confidence in the future price of Bitcoin, mining machine manufacturers, the producers of Bitcoin computing power, find it difficult to calculate the payback period of mining machines. They will remain cautious in the production of mining machines to avoid stockpiling enough inventory, but face the pressure of clearing inventory in the bear market that lasted almost the entire year (some manufacturers experienced this in 2018).

We noticed that Bitmain released two new S9 series models on June 19, including the S9 SE with a computing power of 16 TH/s and the S9 K with 13.5 TH/s and 14 TH/s. The S9 series is the mainstream model in the current Bitcoin mining market. Bitmain's continued release of the S9 series proves to some extent that Bitcoin mining machine manufacturers believe that the current market has recovered and it is a good time to clear inventory (the S9 chip format is 16nm).

In addition, since July, Bitmain has booked 30,000 wafer production capacity from TSMC for the third and fourth quarters, and then added 20,000 wafers. The additional orders also include 16-nanometer wafers. It is known that Bitmain's mining machines S17 and S17 Pro, which use the second-generation 7-nanometer chips, contain about 144 chips. A 12-inch 7-nanometer wafer can cut out about 3,000 ASIC chips. Assuming that this batch of wafers is mainly used to manufacture 7-nanometer mining machines S17 Pro (56T), Bitmain will be able to manufacture about 1.04 million mining machines by the end of the year; assuming that this batch of mining machines is officially launched, sold out and used for mining in early 2020, the computing power of the entire network will increase by 58.24EH/s. The act of placing high-value orders reflects that Bitmain, the leading mining machine manufacturer, has confirmed the recovery of the mining machine market and is optimistic about the future market.

(II) Mining machine manufacturers expand artificial intelligence business to cope with currency price fluctuations

Bitmain, Canaan Creative and other global leading Bitcoin mining machine companies have previously tried to "copy" their advantages in ASIC chip design to other businesses, such as the research and development of artificial intelligence (AI) chips. This will help them get rid of their dependence on the mining machine business, reduce the correlation between their business income and currency price fluctuations, and benefit my country's semiconductor industry.

(III) The vacancy rate of mines is high during the flood season, but is expected to decrease during the dry season

Due to the cautious attitude of mining machine manufacturers, poor tape-out rates and wait-and-see attitude towards future coin prices, mining machines are currently in short supply. In addition, in 2018, facing the strict domestic regulatory environment, hundreds of thousands of mining machines went overseas to Iran and other places. During the flood season in 2019, the Sichuan mines did not have a shortage of machine slots. On the contrary, the vacancy rate was high.

Another reason that is easily overlooked is that in 2017, the price of Bitcoin soared from $1,000 to nearly $20,000, stimulating the enthusiasm of a large number of miners to mine. Many mines started construction during this period, but in 2018, Bitcoin immediately entered a bear market, and in 2019, the production capacity of mining machines was limited. In addition, the flood season in 2019 was later than that in 2018; the earthquake in some parts of Sichuan in June 2019 caused some rivers to stop flowing, and some mines moved their mining machines to Yunnan. These factors together resulted in a higher vacancy rate in mines in 2019 compared with 2017 and 2018.

It should be noted that after the flood season ends, miners in the southwest are less likely to obtain electricity during the normal and dry seasons (limited electricity and difficult to distribute), so they have to move their mining machines to the northwest, and 10-20% of the mining machines will be lost on the way. Therefore, miners who have purchased newly launched mining machines with relatively low energy efficiency (such as Antminer S17 and Shenma M20) are more inclined to directly host their mining machines in the northwest.

During the dry season, the vacancy rate of the Northwest mining farms will decrease, and even a situation of "hard to find a machine position" will occur. In addition, since new models of mining machines such as 7nm are more sensitive to hardware conditions such as mining farm temperature, we expect that with the upgrading of mining machines, the management of mining farms will need to improve the level of temperature control, for example, from using negative pressure fans to using air conditioners, compressors and liquid cooling equipment. In addition, due to fierce competition, mining farm management needs to be more intelligent and transparent to enhance customer trust.