Has the mining market reached a turning point? Bitmain's 200,000 mining machines are ready for action

If anyone is most familiar with Bitmain’s mining plans, it is probably the cryptocurrency mining operators in the country’s southwestern provinces.

According to local mining farm operators, Bitmain has deployed about 200,000 mining equipment in the area, hoping to gain a competitive advantage by taking advantage of the low electricity costs brought about by excess hydropower generation capacity in the summer.

Sources said that although the rainy season in the southwestern part of China (including Sichuan and Yunnan) will not arrive until May, Bitmain has already reached agreements with some mining farms to deploy its mining equipment in order to prepare for the rainy day and prepare in advance. Although it is not clear which proof-of-work (PoW) cryptocurrencies Bitmain will mine, they will deploy some of the latest mining machine products this time, including AntMiner S11 and AntMiner S15, as well as some older mining machine models (such as AntMiner S9i/j). According to the marking information on Bitmain's online store, the latest mining machines including S11, S15 and T15 are currently "sold out".

Although Bitmain's main source of income is the sale of mining equipment rather than independent mining, in the current market environment, it is still an opportunity that cannot be ignored to make early arrangements before the flood season arrives in the southwest region of China.

The S9j and S11 miners are now retailing on Bitmain’s website for $400 and $500 respectively, and if Bitmain can sell all its inventory, the total of 200,000 units of these two miners will be worth around $80 million to $100 million. Importantly, this estimate does not include the S15 miner, which sells for $1,000.

According to the mining profit index tracked by f2pool, the world's third largest mining pool operator, under current market conditions, it is safer to mine by yourself than to sell S9j, S11 and S15 mining machines. The index shows that based on the current price of Bitcoin and the base electricity cost of $0.05 per kilowatt-hour, the current daily profit of a single S9j, S11 and S15 mining machine is $0.87, $1.8 and $2.88 respectively.

Although it is not clear where Bitmain can eventually obtain cheap electricity, according to some mining farm operators in the southwest of China, the average electricity price cost during the summer flood season is only US$0.037 per kilowatt-hour. If this price is configured in the f2pool mining profit index equation, the average daily profit of each S9j, S11 and S15 mining machine will increase to US$1.29, US$2.24 and US$3.38 respectively.

Even assuming that the 200,000 mining devices deployed by Bitmain are all low-end S9j mining machines, this mining volume will bring Bitmain a profit of US$7.7 million per month.

At present, foreign media have asked Bitmain about this matter, but the company’s spokesperson refused to comment on it.

Is the market starting to recover?

Bitmain's move to expand its operations marks a shift in the cryptocurrency market.

Last year, the entire cryptocurrency market plummeted, causing more than 600,000 Bitcoin miners to shut down their mining operations and sell second-hand mining equipment (such as AntMiner S9) at low prices. With the reduction in mining activities, Bitmain's mining machine business has also been greatly affected.

Bitmain disclosed in a blog post on October 9, 2018 (the information can be found on the Internet Archive website) that the hash rate (computing power) generated by all Bitcoin miners using the SHA265 mining algorithm is about 2,339 quadrillion hashes/s. Assuming that all the hash rate of Bitmain's self-mining comes from AntMiner S9 - that is, the hash rate of each mining machine is about 14 trillion hashes/s, this means that they had about 170,000 machines running mining at the time. (1 quadrillion hash equals 1000 trillion hash).

But as of March 5, 2019, Bitmain’s hash rate has dropped to 1,692 quadrillion hashes. If we still base this on the above assumptions, this means that Bitmain has removed about 50,000 mining machines from the shelves in the past few months, and the number of mining machines in operation at the beginning of March was about 120,000.

Currently, the hash rates of Bitcoin and Bitcoin Cash are 44,973 quadrillion hashes and 1500 quadrillion hashes respectively, which means that in March, the hash rate of Bitmain mining machines accounted for 3.6% of the total hash rate of the entire cryptocurrency network based on the SHA265 mining algorithm.

Interestingly, the mining market is quietly changing, as excess electricity generated by hydropower stations in the southwest of China may reduce electricity costs to $0.037 per kilowatt-hour, which is bound to attract a large number of profit-seeking miners to the region. Assuming that Bitmain uses all the latest AntMiner S11 mining machines (each with a hash rate of 19.5 trillion hash), deploying 200,000 devices means that Bitmain will obtain 3,800 quadrillion hash computing power.

According to data from Blockchain.info, the current Bitcoin hash rate is about 48,000 quadrillion hash/s. Based on the above assumptions, Bitmain's early deployment of the mining market will allow it to obtain 7.9% of the hash rate of the entire network. Of course, it is still impossible to determine at this stage what the hash rate of the entire Bitcoin network will reach during the upcoming flood season, but some people estimate that due to the deployment of Bitmain and other miners, the Bitcoin hash rate may rise to 70 quintillion hashes/s, higher than the historical high of 60 70 quintillion hashes/s.

Now, the "eggs" have been put into the basket

In fact, the proprietary mining business that once accounted for a significant portion of Bitmain’s revenue is no longer as popular as it used to be and now accounts for only a small portion of its total revenue.

According to the financial performance data disclosed by Bitmain when it applied for an initial public offering (IPO) on the Hong Kong Stock Exchange in September last year, the proportion of its self-operated business revenue in 2017 had dropped from 20.3% in 2015 to 7.9%. After entering 2018, this proportion has shrunk by half again to only 3.3%.

At the same time, Bitmain's business has become increasingly dependent on the sale of mining equipment, with the proportion of its mining machine sales revenue to total revenue in 2017 increasing from 78.6% in 2015 to 80.5%, and in the six months ending June 30, 2018, this proportion even soared to 94.3%.

However, the cryptocurrency bear market has had a huge impact on Bitmain’s performance, especially in the second half of last year. According to reports, based on Bitmain’s undisclosed financial data, their net loss in the third quarter of 2018 reached $500 million.

At the same time, as of June 30, 2018, Bitmain has opened 11 mining farms in Sichuan, Xinjia and Inner Mongolia, and "stored" 200,000 mining equipment. Some of these mining farms are used for Bitmain's own mining, while others provide hosting services for other miners and are operated independently from Bitmain's existing mining farms.

In addition, Bitmain previously revealed that its self-mining hash rate was about 1692 quintillion hashes/s in July 2018. Roughly speaking, they should have deployed about 120,000 devices to run mining operations at that time.