The computing power is rising and the mining circle is recovering. What is different about this "flood season"?

Since the price of Bitcoin returned to $10,000 some time ago, the atmosphere of "bull market is coming" has become extremely strong. Although the price of Bitcoin has faced volatile adjustments recently, the arrival of the delayed rainy season has finally made the mining circle, which has swept away the shadow of downtime losses and regulatory obstacles, become lively again.

Thanks to the recent surge in the price of the currency, mining capacity has also surged, and the total computing power of the Bitcoin network has recently exceeded its historical peak in October 2018, exceeding 66EH/s at one point, setting a new high in computing power, and more than doubled from the low at the end of November last year. According to Bitinfocharts data, as of press time, the total computing power of the BTC network has reached 57.58EH/s.

BTC.com data further shows that the 14-day average computing power from May 18 to May 31 increased to 53.36EH/s, close to the previous highest level of 53.33EH/s in the difficulty cycle. The average computing power from June 14 to June 27 hit a new peak of 56.77EH/s in the historical Bitcoin difficulty cycle.

Corresponding to the increase in computing power, the difficulty of Bitcoin mining is also rising. After the latest difficulty adjustment, the current Bitcoin mining difficulty has reached 7.93T, which has exceeded the historical peak of 7.454T last year and increased by 46% compared with the end of last year. In addition, according to data from BTC.com, there are still 8 days before the next difficulty adjustment. It is expected that the mining difficulty will increase by another 8.72%, or it will enter the 8T mark for the first time, reaching 8.63T.

According to the shutdown coin price table, when the comprehensive electricity fee is calculated at 0.4 yuan, as of press time, the current coin price is 9870.3 US dollars (about 67714.2 yuan). Except for the Antminer S7, the other 12 of the 13 BTC mining machine models in the table have not reached the shutdown coin price. The mining machines Shenma M3+, Avalon A741 and Antminer T9 that were eliminated in the cold winter last year are expected to make a comeback in this round of market.

The dynamic balance between computing power and coin price is still being adjusted. After the "cryptocurrency winter" in 2018, the sharp drop in coin price caused miners and mining farms without electricity price advantages to shut down and leave the market. The computing power and mining difficulty were adjusted accordingly to make room for the "survivors". There is a consensus on the layout of mining farms during the flood season. The low electricity price has brought space for miners to earn excess profits, and has begun to attract new entrants to join. The mining machines that have been silent for a long time are running and roaring again.

After experiencing the delay and shortening of the previous flood season, doubts about overcapacity in mining farms, the silence due to regulatory risks, and the return boosted by this round of coin price increases, looking back over the past month, this "flood season" seems to be different from what everyone imagined.

The flood season is full of twists and turns

Shenyu once lamented in a Weibo post on June 18: "This year's hydropower mining has been plagued by disasters. First, there was no rain and no water, which was much later than in previous years. Recently there were heavy rains and today there was an earthquake. Alas."

After experiencing the grand occasion of last year's flood season, it has long been a consensus for mining farms to plan for the flood season, especially after the cold winter of the sharp drop in the price of coins, coupled with the halving of Bitcoin, miners and mining farm owners are eager to make up for the losses caused by the sharp drop in the price of coins from the low electricity prices. Although this year's electricity price is not higher than last year, or even cheaper, when faced with uncontrollable factors such as the delay of the flood season, a large number of mining machines that were planned for the flood season in advance are still unable to start mining and generate income, which in turn brings about the dilemma of oversupply in mining farms.

Coindesk reported that according to a report released by blockchain research company Coinshare, as of the beginning of this month, 50% of the world's Bitcoin computing power came from Sichuan Province. The flood season was delayed by nearly a month, resulting in some local mines running less than half of their mining equipment in the past month. According to BTC.com data, the computing power has increased by more than 10EH/s from the beginning of April to now, while before the flood season in mid-May, the Bitcoin computing power only increased by about 2EH/s. Miner Lao Hu is one of the mine owners who deployed many new mines before the start of this round of flood season. The scale of his self-operated mine this time is 50,000 loads. He told Caijing.com Chain Finance: "In fact, we basically had no customers in April at the beginning, and we had a bumpy road. After several twists and turns, we finally recruited enough investors before the official start of the flood season on May 25." The situation of over-supply of new mines in the early stage was alleviated with the arrival of the flood season and the rise in coin prices. However, the mines are not resting on their laurels as the flood season arrives. Supervision issues are particularly sensitive during this period, and their impact is gradually deepening as regulatory actions are implemented.

In the "Guidelines for Industrial Structure Adjustment (2019, Draft for Comments)" issued by the National Development and Reform Commission on April 8 this year, "virtual currency mining" was included in the elimination category. Although many industry insiders have commented on the draft for comments, there has been no substantive action so far, and the release of regulatory signals cannot directly affect the development of the mining industry at this stage.

Unlike the initial optimism, judging from the recent trends in the mining circle, policy risks are often mentioned in hot topics, and their actual impact seems to be greater than expected. Among them, the first to bear the brunt is Ganzi, Sichuan, where "building a mine near the river for the convenience of purchasing electricity nearby" was exposed. Subsequently, because the mines and projects were suspected of illegal construction, the mines in the area were subject to a thorough investigation and illegal cleaning by the regulatory authorities. At present, the procedures for future approval and compliance seem to be difficult to adapt to the layout of mines and the rhythm of mining during the flood season. This is undoubtedly a bad news for miners and mines who have finally waited for the flood season. Weng Ziyao, co-founder of Maoqiu Technology, once said in a recent offline event that the mines in Ganzi area are currently in a state of large-scale shutdown.

The official document for soliciting opinions from the National Development and Reform Commission has not yet been released, and the market is continuing to wait and see. The mining farms that had previously gone to Iran due to policy factors have also recently fallen into a sanctions crisis. According to Sina Technology, in the early morning of June 28, Iranian state television reported that due to a surge in electricity consumption, Iranian authorities have seized about 1,000 Bitcoin mining machines in two abandoned factories.

In comparison, the impact of earthquake factors is very limited for mining machines and mines that have just been put into operation.

Since June, the China Earthquake Networks Center has reported several earthquakes in Sichuan. Earthquakes have been frequent in Changning and Gong counties of Yibin recently. The most recent one was a magnitude 3.3 and 3.1 earthquake that occurred in Gong and Changning counties of Yibin, Sichuan on the evening of June 30. Other earthquakes also occurred in Neijiang, Aba Prefecture, Liangshan Prefecture, Ganzi and Mianyang in Sichuan.

Chen Lei, secretary-general of the Peking University Blockchain Club, told Caijing.com Chain Finance that the earthquake actually had limited impact on the mining farms, as the intensity and scope of the earthquake were not large, and the distribution of mining farms in the southwest region was wide and dispersed enough.

Colin3, a miner currently working in Mianyang, Sichuan, also said that earthquakes are only a low-probability event, and that the mines will not consider earthquakes as the main consideration, and the electricity price is the most important. Based on multiple factors such as construction cost, time, and convenience, most mines in Sichuan are built with steel structures, which do not have the ability to resist earthquakes and disasters. Colin3 said that there may be super large companies that pay attention to these issues, but even if this kind of geological disaster is taken into consideration, it may not be avoided because the construction method of the mines generally does not change.

Mine layout focuses on the whole year rather than abundant water ?

Although miner Lao Hu's mine investment promotion was barely completed just before the start of the flood season, he also said that this does not mean that all mines have the same investment promotion situation during the flood season. Each mine is different. Some mines have been established for two or three years. If their business conditions have been reliable, they may have been fully booked long ago during this flood season. Some new mines may not have filled up their positions yet.

Regarding this type of mine that only mines during the flood season, Yu Yang, COO of the Mine Ocean Association, said, "The focus in the past two years will be on the whole year." The reason why he said "all year round" and not just the flood season is mainly because new machines have been used in the past two years, and the electricity costs account for a smaller proportion.

Chen Lei also expressed a similar view. He believes that the layout of some mines will pay more attention to the whole year instead of just the flood season. The reason is: first, the previous generation of mining machines is entering the end, and the new machines have a higher tolerance for electricity costs. There may not be so many second-hand machines in the next flood season; secondly, new mining machines, especially those represented by seven-nanometer mining machines, have higher requirements for the overall operating environment and are more sensitive and delicate. The disadvantages of hydropower are unstable power supply, generally small single scale, difficult to implement high-standard infrastructure, and high humidity. These will seriously affect the operating efficiency and service life of new mining machines, so the number of new machines in the flood season will not be too large.

Electricity costs are closely related to the performance of the mining machine itself. Mining machines with high computing power and low power consumption have a better chance of outperforming the dry season, thus achieving continuous mining and even lasting until the next flood season. However, correspondingly, these mining machines often cost more. The high cost of mining machines is unbearable for retail miners. Although power consumption has decreased, the mining income and electricity cost savings can only be exchanged for high machine costs in a longer period. The mining cycle becomes longer and the actual income is far away, which means greater investment risks for them. The infrastructure of the mine itself is also limited by the construction cost and scale of the mine.

Miner Colin3 said that retail miners are more willing to purchase mining machines with low unit prices and short payback periods. Especially during the flood season when electricity prices are low, Colin3 said:

"As long as there is a little profit, there will be people mining. This is the law of the market: if there are people selling mining machines, there will be people buying them, and if there are people buying them, there will be people mining. This is a process of continuous iteration of machines. Mining machines with low computing power are sold to people with low electricity prices until people with low electricity prices can no longer mine, and the mining machines are eliminated. Those who can support mining throughout the year either use graphics cards (because graphics card machines consume less power and can better withstand the increase in electricity costs), or use mining machines with high computing power, or are those mining farms supported by large capital."

Earlier in March this year, during the CoinIn China Tour, Zhu Yu, co-founder of CoinIn Mining Pool, also predicted that the 2019 flood season might be the last battle for 180W/t machines. Zhu Yu said that low electricity prices are always the core competitiveness. If the price of the currency rises by 50% in the future, the 180W/t machine can safely survive the flood season. The future computing power is likely to exceed 60E, but the 70E computing power is constrained by many factors, such as insufficient electricity, insufficient space, insufficient machines, and high computing power and rising electricity prices.

At the end of last year, the price of Bitcoin experienced a bear market trough. When Yu Yang was interviewed by Caijing.com Chain Finance at that time, he said that he believed the trend of the mining circle in the future would be "retail investors exiting and large investors entering". The scale advantage of large mining companies is not only reflected in the ability to get lower electricity prices to survive the cold winter, but also in the ability to concentrate resources in terms of machine, site and personnel maintenance to improve output efficiency.

Those mines and miners that have gained the ability to continue to survive in the bear market, in addition to mining and hoarding coins at a lower cost and expanding the layout of mines in advance during this period, have more abundant cash flow and can bear more risks. Therefore, they have further occupied an advantageous position in this round of computing power competition, and their scale advantage has been continuously strengthened.

Mining machine production capacity is full of contradictions

Steven Mosher, global sales and marketing director at Canaan Creative, told Coindesk that the recent surge in Bitcoin prices has led to high demand and a shortage of mining machines. “It seems to be back to the situation in the third and fourth quarters of 2017, with demand three times the supply.”

In the same report, Shenzhen MicroBT CEO Yang Zuoxing added another important reason why the industry supply is difficult to meet the demand for mining machine production capacity, that is, the supply of chips that can be provided by upstream suppliers is limited. "The growth of Bitcoin's computing power cannot keep up with the pace of price increase," Yang Zuoxing said, "production capacity is the bottleneck."

The rise in the price of coins has led to a strong demand for mining machines, and the imbalance between the capacity and demand of mining machines has become more obvious. With the replacement of new mining machines, especially the launch and support of high-computing mining machines, people can't help but wonder how much of a boost it will have on the growth of mining machine capacity and computing power this year.

However, by comparing the computing power and mining difficulty in October 2018 and now, it can be found that the computing power growth is not as expected. The peak computing power in 2018 was close to 60EH/s, which is not much different from the current computing power level.

According to the top 20 popular mining machines, half of them were released in the second half of 2018, 9 models were released in the first half of this year, and 7 of them were released in April.

According to the official website of the mining machine, all SHA256 mining machines including the latest S9 SE (16T) and S9k (13.5T) of Antminer have been sold out, and the delivery date of Antminer S17 (53T) and T17 (40T) is in September this year. The delivery of Shenma mining machine M20s (68T) and M21s (56T) orders is even scheduled for November.

In line with Yang Zuoxing's view, some industry insiders believe that it is indeed difficult to increase the computing power of the entire network, mainly because it is difficult to obtain chips. Take Bitmain as an example. According to the industry insider, Bitmain ranks 16th on TSMC's chip supply ranking list (the top ten are occupied by mobile phone manufacturers). Chips tend to be supplied to manufacturers with stable demand for 12 months, and the demand of mining machine manufacturers is too closely related to the price of coins, so it is impossible to maintain a stable demand for chips. The main reason why the mining machines launched by mining machine suppliers are divided into multiple computing power versions (such as 42, 46, 47, 50 or 56T mining machine products) is that in addition to the difficulty in obtaining chips, their yield rate is also questionable. In addition, the tape-out efficiency is not optimistic. For example, the same 7nm chip has regressed to produce products with power consumption of 60j, 70j or even 80j per ton.

Regarding the production capacity of mining machines, Chen Lei also said that the current production capacity of mining machines is generally determined when the manufacturer placed an order for chips three to six months ago. The manufacturer's production capacity response is generally delayed, and it is currently entering the difficulty adjustment stage. As the BTC price goes up, it will continue to grow slowly and may approach or even exceed 100EH/s. "Of course, the premise is the Bitcoin price. If the price is high enough, new computing power will flow in."

In addition to the production capacity of new mining machines, the second-hand mining machine market is also facing a situation of supply exceeding demand. With the reduction of electricity prices and the increase of currency prices, many mining machines that were previously eliminated have reappeared on the market. As the demand increases, the chaos in the second-hand mining machine market has also been amplified.

The main problems include:

1. Good and bad mining machines are sold together, and some machines even have viruses or are too old and have a high failure rate.

Mr. Zhang, a miner, said that he bought 500 second-hand Antminer S9 mining machines during the flood season. He had started the layout long before the flood season, but he has only put more than 200 machines on the shelves so far, with a failure rate of over 40%. In addition to being difficult to repair, some mining machines carry viruses that can even be contagious, especially when one's own repair skills are not mature, and they need to be sent back for repair, which is time-consuming and laborious. In addition, Mr. Zhang also said that some of these old machines, such as Antminer T9+ or S9, have even experienced two flood seasons, and some are still running during the dry season. The machines have long been aging, and they may still be able to mine if they are not moved. Once they are transferred and moved, the failure rate becomes extremely high.

2. The later operation and maintenance is difficult, the time cost of maintenance during the flood season is high, and the later maintenance results cannot be guaranteed.

The process of returning a faulty mining machine for repair is not easy, especially during the flood season, when all second-hand machines have appeared on the market and the repair market has become extremely hot. During this extremely limited flood season, repairs have to face the treatment of waiting in line. Not only do you have to pay for the machine repair, but you also have to pay for the electricity bill of the mine and bear all the losses yourself. The 24-hour warranty provided by the mining industry is actually not very effective for some retail investors. In addition to not being able to test the machine in time, even if you can test it, a small number of machines often do not receive corresponding compensation. The small amount of repair fees returned is of no help to the time and cost of transportation and repair, as well as the mining income lost during the period.

3. The mining industry has no credibility guarantee, mining machines change hands frequently, and there is room for private freight charges to make profits between the mining industry and logistics.

Second-hand mining does not actually need to take over the physical machines. It only needs to obtain the information of the mining machines to trade. The machines may change hands many times during the process, and the second-hand mining itself may not have touched the machines at all, let alone the so-called warranty. In addition, even if the price of the mining machine is negotiated properly, there is still room for price increase in the logistics link. The bargaining power of packaging fees and freight is in the hands of second-hand mining and physical companies. When the number of mining machines involved increases, the profit space is also difficult to estimate.

Colin3 said that basically if you buy a second-hand machine, it all depends on luck, and the second-hand mining industry actually has no credibility at all.

In this regard, Chen Lei believes that the pitfalls of second-hand mining machines are a typical example of industry chaos, with inconsistent quality of practitioners, lack of industry standards, and vague supervision. At the same time, there is room for profit, so naturally there are good and bad players mixed together. We still have to look at it in the long term. The industry will definitely move towards standardized division of labor, large-scale deployment, and professional operation and maintenance.

For the flood season, it seems that the unchanging rule is: as long as you can buy cheap mining machines and find cheap mining sites, you can win. In fact, from supervision and industry standards to electricity prices and mining machine sales, miners are facing new challenges and a constant battle with the price of coins.

Author: Xi Xixi

Source: Caijing.com Chain Finance