Popular Science | Panorama of the Mining Industry

Hardware for mining

In the early days of the Bitcoin network, it was profitable to mine Bitcoin using consumer-grade CPUs, however, as the Bitcoin network has grown to its current size, doing so is no longer practical.

Currently, mining machines in the Bitcoin ecosystem are dominated by Application-Specific Integrated Circuits (ASICs). For most other cryptocurrencies, Graphics Processing Units (GPUs) and Field Programmable Gate Arrays (FPGAs) are the main mining machine forms. There are also many cryptocurrencies that use the same hashing algorithm (SHA256) as Bitcoin, which are also compatible with Bitcoin's ASIC mining machines.

The landscape of the mining ecosystem

Below is a panoramic view of the mining ecosystem from chips to end users:

OEM

For example: Nvidia, AMD, Xilinx, Bitmain, and Canaan Creative all use TSMC for their core production lines.

Packaging, testing, assembly

Integrated circuit design and manufacturing

For GPUs, the top two manufacturers are Nvidia and AMD. For FPGAs, the top manufacturer is Xilinx. For ASIC chips, which are used specifically for cryptocurrency mining, the top three manufacturers are Bitmain, Canaan Creative, and Pangolin Miner (the manufacturer of the Whatsminer line of mining machines).

In addition to these three types of manufacturers, there are some other integrated circuit design companies in this industry, including: Yibit, Xindong Technology, Bitfury, Obelisk, and some other companies.

* Nvidia and AMD make GPUs for all use cases, not just mining. ** Market share estimates from Jon Peddie Research. *** Final valuation after Bitmain and Canaan failed to go public on the Hong Kong Stock Exchange. **** Valuation based on conversations with major miners and earlier IPO filings.

Miners and mines

Miners range from people mining with a single machine, small mining operations (5-10 machines), medium-sized farms (10-100 machines), large-scale farms (100-1,000 machines) to industrial-scale farms (1,000+ machines). The largest farms I’ve heard of so far run as many as 100,000 machines across multiple regions.

In addition to designing chips, some manufacturers also participate in mining themselves (such as Bitmain, Canaan Creative, and Pangolin). For example, Bitmain publicly discloses their own mining status every month.

Miners of all sizes can join a mining pool (described in more detail later), and if the mine is large enough, they can also mine solo - pooling only their own hash power to directly find blocks, without mixing it with other miners.

* A somewhat controversial point is that manufacturers of mining chips may use them for mining before selling them. However, if you actually have a profitable device, there is no reason to leave it sitting in a warehouse, and you may also use it for mining before selling it.

Mining pools (single-currency and multi-currency)

Some mining pools focus on mining specific cryptocurrencies (such as SparkPool, which focuses on Ethereum and Grin), while other mining pools have set up multiple mining pools covering all major cryptocurrencies (AntPool, F2Pool, CoinInPool, Slushpool, etc.). All of these mining pools started out focusing on mining a single cryptocurrency (usually Bitcoin) and later expanded to cover all forms of cryptocurrencies.

One of my favorite analogies about how mining pools work is to think of it like an office lottery pool. By pooling everyone’s tickets together, each person (miner) has a greater chance of winning a reward.

However, using a mining pool means trusting the mining pool - the exact share of computing power owned by each person and the reasonable income are recorded and distributed by the mining pool. To increase transparency, there are services like PoolWatch that track and compare reports from various mining pools.

Hash power market

In these markets, people can both sell their hashrate and/or buy hashrate — for any algorithm in any cryptocurrency. While there are many reasons why people buy hashrate, one of the main reasons is that buying hashrate is a gateway to owning cryptocurrency.

Many times people use computing power to speculate on various cryptocurrencies - for example, they want to purchase hash power suitable for SHA256 to mine BSV instead of Bitcoin (which is really a bad deal...)

Cloud Mining

The two largest companies in this space are Genesis Mining (USA) and Bitdeer (Asia). Also similar to what was mentioned above, one of the main reasons people use cloud mining services is that buying computing power is seen as a gateway to cryptocurrencies. In this way, people can use fiat currency to directly purchase Bitcoin or other cryptocurrencies without going through an exchange.

Smart Miner

Smart mining software like Honeyminer aims to optimize all of the above factors at the same time, so that ordinary consumers and professionals can earn as much as possible with the computing power they have. There are also two other similar products - HashFish and Cudo Miner.

In a short period of time, these products have gathered considerable computing power on the supply side.

Mining market size and revenue

On an annual basis, the cryptocurrency mining industry generates more than $8 billion in profits each year.

In all proof-of-work blockchains, profits come from block rewards and transaction fees included in each block. According to the latest mining reward data released by CoinMetrics on June 25, 2019, below is the weekly, monthly, and annual mining revenue of the mining industry.

In the world of cryptocurrency mining, Bitcoin still dominates, with the Bitcoin network alone generating 75% of mining revenue.

This also matches Bitcoin’s dominant market share today (July 1, 2019). According to CoinMarketCap, Bitcoin accounts for 60% of the market cap.

However, the overall profits generated by the mining industry are directly tied to the price of the cryptocurrencies it mines, so it in turn directly affects the cryptocurrency market (hence, it is difficult for Wall Street to understand the companies in this industry). More on this below.

Understanding the profitability of mining

The overall profits, costs, and profitability of mining industry participants are influenced by a few key factors.

Capital Expenditure (Capex)

For example, if you want to purchase 10,000 of the latest Antminer S17s produced by Bitmain at retail price, it will cost you $16 million. Large miners can purchase at special prices. However, when the demand for mining machines is so high that it is difficult to guarantee supply, the price discount will be small.

That’s before factoring in the cost of building the facilities that would take mining from a hobby to a truly professional, industrial-scale project.

Operating Cost (Opex)

For example, if you run 10,000 Bitmain S17 mining machines 24/7, at $0.05 per kWh, it will cost you $36,000 per day (about $13 million per year) in electricity - just to keep the mining machines running.

The average electricity bill varies greatly depending on the location of the mining machine and the source of electricity used:

Miners are naturally motivated to seek out the cheapest energy sources in the world, which is why Coinshares estimates that 75% of the electricity that powers the Bitcoin network comes from renewable sources, primarily hydropower.

In addition to the electricity costs required to keep the mining machines running, other uninterrupted operating costs include: heat dissipation, labor, maintenance, security and general facility operations. Generally speaking, it can be roughly estimated that the uninterrupted operating costs are 1.5 times the electricity costs.

Based on our example above of operating 10,000 Bitmain S17 miners, a rough estimate of the cost is:

• $16 million capital expenditure + $3 million (import taxes) + $4 million (facilities + security)
• $20 million operating costs (per year)
• $67 million in potential gains (based on today’s Bitcoin price)

Market factors

Miner Costs & Visible Supply

Hashrate

Bitcoin Price

My main takeaways

• We often overlook the important role that the mining industry and infrastructure hardware play in blockchain networks.
• Hash power = Cryptocurrency = Money. For many people, hash power is the key to entering the crypto world.
• Just as we saw the financialization of Bitcoin, I predict we will see a similar financialization of hash power.

Original link:

https://www.chrismccann.com/blog/crypto-mining-101-overview-and-landscape-of-the-mining-industry

Author: Chris McCann

Translation & Proofreading: Zeng Mi & A Jian

This article is authorized by the original author to be translated and republished by EthFans.