Computing power surges: Bitcoin is trading sideways, and altcoins are basically out of business. Now the only way to enter the market is to mine?

Yuhong cut another handful of leeks, but accidentally predicted a trend correctly: computing power returned, mining pools expanded, and miners flocked in.

Yuhong's XMX, with the first computing power coin in the entire network as a gimmick, has changed its appearance and made a voice to the outside world again. Holding XMX can obtain BTC mining income and buyback deflation dividends, "providing ordinary users with low-threshold digital asset primitive accumulation and efficient digital asset selection configuration."

These all seem wonderful, but the reality is a game of leeks being slaughtered by sickles. Yuhong made a comeback at the end of June, and XMX suddenly soared from almost zero. After several rounds of shocks, it has now fallen by three quarters of its high point. This is still the premise that XMX has been doing well. The addition of computing power and repurchase and destruction have not been able to stop XMX from falling.

XMX/BTC trading pair, Yuhong surged after its comeback at the end of June

Mining does make money, but buying XMX does not make money.

Since the beginning of this year, the computing power of the entire Bitcoin network has doubled and is still on the rise. Mining and investing in mining machines have once again become a hot topic.

Recently, there have been frequent news reports about institutions setting up mining pools, such as Blockstream, OK pool, Yi Lihua’s Xiongbing Mining, etc.

Institutions are rushing to enter the market, so where are the opportunities for ordinary people?

Hash rate surges

As we all know, the emergence of ASIC mining machines has made mining more professional, and miners have emerged as a profession. Miners no longer choose to mine at home, but instead integrate their own mining machines together, set up mining farms in places with cheaper electricity prices, and mine on a large scale.

At the same time, mining pools gather computing power together, no matter how much, everyone mines together, and the final profit is distributed according to the proportion of computing power added. According to the size of computing power, the top five mining pools are BTC.com, F2Pool, AntPool, Poolin, and Huobi.pool.

The revenue of mining farms and mining pools fluctuates with the price of Bitcoin. Last year, the price of Bitcoin hit bottom, and there was no cheap electricity during the dry season, so the computing power of the entire network fell to the bottom. The BTCC mining pool, which once accounted for 15% of the computing power of the entire network, also chose to shut down in November last year.

However, as the price of Bitcoin has risen, the total computing power and mining difficulty have doubled from the beginning of the year to now, and the price of mining machines has continued to rise, but there is still a shortage of supply.

Halving the investment?

Obviously, a bear market is not a good time to invest in mining, because the price of coins is too low, even to the shutdown price of some mining machines. That is, the electricity bill for starting up the machines is not enough to cover the profits earned from mining, and the payback period for mining machines is even more distant.

This is the shutdown price list of various mining machines given by F2Pool in November last year, that is, the mining cost of each mining machine. The price of the currency was around 28,000 at that time. We can see that some models of mining machines have almost no profit.

Putting aside the cost of mining machines, if you mine for the purpose of hoarding coins, it is better to buy coins directly in a bear market. But it is different in a bull market. The price of coins has been hyped up, and the cost of mining may be only half of the price of coins. For old miners who already have mining machines, the bull market is more comfortable.

The payback period of a mining machine is determined by the price of the mining machine and the daily mining income of the mining machine. If you are a novice miner, you must also consider the cost of the mining machine. In a bear market, the income is low and the payback period is far away. In addition, the market is sluggish and the price of coins may fall again and again. Investing in mining machines in a bear market is a test of your mentality. In a bull market, the payback period of mining machines is short and the income is high, but the FOMO mentality prevails, the price of mining machines will skyrocket, and the price of coins is also at risk of bursting the bubble.

In the bull market of 2017, an Antminer S9 that usually sells for 3,000 yuan was sold for 30,000 yuan, which is enough to show that the mining machine market is equally crazy.

There is an interesting thing: the payback period of the mining machines currently on the market ranges from 200 to 300 days. However, there are still more than 200 days before the Bitcoin halving. The profit may be cut in half as soon as the mining machine pays back.

Nearly 200% annualized mining machine investment

At present, the more popular mining machines include Shenma (M20s, M21, M10), Antminer (S17, T17, S9, T9), Innosilicon (T2T, A9, A8), Avalon (852, A1047, A910, A841), Ebit (E10, E9), etc. Even the same model of mining machine has different computing power versions.

When buying a mining machine, of course, you also need to consider the cost-effectiveness. The cost-effectiveness of a mining machine lies in the energy efficiency ratio, that is, how much energy is consumed per unit of computing power. The lower this value is, the better. The lower it is, the more energy-saving it is.

In addition, the price of mining machines is also an indicator that needs to be referred to when purchasing mining machines. The following table shows the price, energy efficiency ratio, expected output, annualized income and expected payback time of currently popular mining machines.

Mining machine payback period, for reference only

The calculation formula for the estimated output of the mining machine is as follows, which is based on the total network computing power of 75EH/s, the Bitcoin price of 80,000, the electricity fee of 0.35, and the machine is turned on for 24 hours a day.

Payback time = mining machine price / expected output. The payback time is an ideal situation, assuming that the network computing power and coin price remain unchanged, but the price of mining machines will also fluctuate with market conditions.

Annualized return = expected output × 365 / mining machine price. Of course, there are still more than 200 days before the halving, and the real annualized return will not be that high. 100%, or nearly 200% annualized return, is already incomparable to most financial products.

However, some people think that the annualized return on investment in mining machines needs to be deducted from the cost of the mining machines, which is unnecessary. Because mining machines are physical entities and assets, even second-hand mining machines can be resold. Even when the market is good, the price of second-hand mining machines may be higher than when they were first purchased. This is also the essential difference between investing in mining machines and investing in cloud computing power.

What are the advantages of buying now?

Choosing to buy a mining machine now is of course based on the bullish expectations for BTC. Litecoin will be halved on August 5, and the price of the currency has been rising since February this year, and the hype of halving has lasted for half a year. Now there are more than 8 months before Bitcoin halving, and judging from the price, Bitcoin has not yet been hyped for halving.

As mentioned above, for new miners, a bear market is not suitable for mining because the returns are too low, and a bull market is not suitable for mining because the bubble is too big. It is best to start mining when the market is just starting to heat up.

The last time Bitcoin was halved was in 2016, and the price of the currency maintained an upward trend after the halving until the big bull market in 2017. So in order to welcome the next bull market, you can deploy mining machines in advance.

Bitcoin price, 2016-2017

The mining machine market and Bitcoin prices are completely linked, which is easy to understand. At present, Bitcoin has not yet experienced FOMO sentiment, nor have mining machines. Back then, a 14T Ant S9 mining machine was hard to come by at 20,000 or 30,000 yuan, so the price of mining machines may also rise in the future, which is also the reason for investing in mining machines now.

At present, the increase in the total network computing power and the decline in Bitcoin prices are the issues that mining machine investors are more worried about.

The chart below shows the total Bitcoin network computing power from 2018 to the present, which has increased more than seven times, which will inevitably affect the returns.

Bitcoin network computing power, December 2018 to present

But computing power will not increase without reason. All increases in computing power are driven by the surge in Bitcoin. From the Bitcoin computing power and price chart below, we can clearly see the linkage between the two.

Bitcoin price and network computing power, 2017-present

The game relationship between miners will make everyone in the Bitcoin system pursue maximum benefits. From October 2017 to October 2018, the price of Bitcoin rose from 6,000 to 19,000 and then fell back to 6,000, but the computing power has been rising, indicating that even if the price of the currency fell during this period, it did not fall below the mining cost price.

The two waves of computing power surges in early 2018 and recently, which are the direction of the red arrow in the above figure, have a very obvious pattern, that is, the computing power grows linearly rather than exponentially. This is because the chip supply capacity is limited, and chip companies such as Samsung and TSMC can only supply a limited share to mining machine manufacturers. It also takes time from order to delivery, which restricts the growth of the computing power of the entire network.

The computing power will not increase exponentially, and each increase in computing power is caused by a surge in Bitcoin. The biggest impact of the increase in computing power on miners is to extend the payback period by a few days.

The final profit of miners is the income from Bitcoin mining minus fixed expenses such as electricity and management fees. Miners will seek to sell at the peak of Bitcoin price. More stable mining machine investors can choose hedging to reduce the risk of Bitcoin price fluctuations. Selling future income during mining can hedge the risk of future decline in Bitcoin price.

Black swan event of mining machine

Mining machines can be said to be the most conservative investment product in the cryptocurrency world, but accidents can still happen and there is a possibility that they will become a pile of scrap metal.

Mining accidents are one of them. Mines usually choose places with cheap electricity. Sichuan is currently in the flood season, and due to its low hydropower costs, it has become a treasure land for mines. In order to use the cheapest electricity prices, mines are even built directly near small hydropower stations. However, natural disasters such as floods, earthquakes, and mudslides are a knife hanging over the heads of miners. They cannot be predicted or avoided. If they are encountered, it will be a disaster.

A few days ago, a sudden mudslide disaster occurred in Wenchuan County, Aba Prefecture, Sichuan Province due to heavy rain, causing damage to some mining farms and a slight decrease in the computing power of the entire network.

The Mine

As mentioned before, the mining machine market and Bitcoin are linked, so a black swan event for Bitcoin is a black swan event for the mining machine market. National policies, hacker attacks, whale crashes, and any other events that can cause a sharp drop in Bitcoin prices will cause a disaster in the mining industry.

Technological breakthroughs will have a negative impact on the previous generation of mining machines. The introduction of high-performance chips is a dimensionality reduction attack on outdated mining machines. In the middle of last year, Canaan Creative and Bitmain successively launched 7nm chips, which reduced the energy efficiency of 16nm by more than 50%. However, due to the high price of mining machines with 7nm chips and a long payback period, mining machines with 16nm and 28nm chips are still competitive.

It is rumored that Bitmain has placed an order for 50,000 16nm and 7nm wafers from TSMC, and it is expected that 600,000 mining machines will be produced in the second half of this year. If these mining machines enter the market, high-efficiency mining machines will have even less room to survive.

After the halving, the mining industry ushered in a big baptism

After the Litecoin halving, the computing power of the entire Litecoin network dropped sharply, and the same phenomenon will occur in the Bitcoin halving.

Litecoin network computing power

The rule of halving revenue is set in stone. In order to increase profits, miners must either choose cheaper electricity prices or choose more energy-saving (lower energy efficiency) mining machines.

The replacement of the old with the new is a historical law, but after the halving, the old mining machines do not necessarily have to be sold as scrap metal. They can continue to be used when the price of the currency rises to a certain level and reaches the startup price of the old mining machines.

How to invest?

The normal process is to buy a mining machine, find a good mining farm, and then join a mining pool to mine. But now the cryptocurrency industry is full of various businesses, so many managed mining farms and managed mining pools also sell mining machines part-time. In order to avoid suspicion of advertising, I will not list them here. Those who want to enter the market can do their own homework.

As for which mining machine to buy, it depends on your risk tolerance. From the mining machine payback period in the above figure, we can see that mining machines with high energy efficiency ratios are priced low. Although the daily income is also relatively low, the payback period is shorter than that of low-efficiency mining machines (new generation) because low-efficiency mining machines are priced too high.

However, the service life of low-efficiency mining machines will be longer. The service life here refers to the financial life, that is, due to the low energy efficiency of the mining machine, the shutdown coin price will be lower. In the future, when the competition in the mining machine market is more intense, high-efficiency mining machines will be the first to be eliminated.

With a quick-in, quick-out mentality, it is safer to buy cheap, high-efficiency mining machines now. If you are planning for the long term, you should choose a new generation of mining machines with a longer financial lifespan.

There is also a very popular concept, cloud computing. Cloud computing has no physical mining machines, which is equivalent to free mining. The concept of no cost and low threshold may attract many people, but since there are no physical mining machines, there will be many pitfalls. A large number of funds have been selling empty words and dreams of getting rich quickly for a year under the guise of cloud computing.

Purchasing cloud computing power is actually like purchasing financial products. There are risks involved, and the price of computing power will definitely be higher than the average level of the physical mining machine market. Be cautious of cloud computing power products that claim to be risk-free, high-yield, and that you can get dividends by inviting friends to join.