Death of a Miner

Large mining pools are still opening new mines, but small miners can hardly even afford to wear pants.

On November 16, Bitmain opened a Bitcoin mine in East Wenatchee, Washington, equipped with more than 8,000 mining machines, with a total power consumption of about 12 megawatts. All mining facilities are expected to cost $20 million. The price of Bitcoin was around $5,600 on that day. On November 20, Giga Watt, a US-based Bitcoin mining company, filed for bankruptcy protection in the Federal Court for the Eastern District of Washington, claiming that its assets were less than $50,000 and that it owed nearly $70 million in debt to creditors. The price of Bitcoin was $5,106 on that day. On November 22, a miner said in an interview with CCTV Finance Channel that "nowadays second-hand mining machines are equivalent to a pile of scrap copper and iron. 20,000 mining machines are equivalent to a loss of more than 100 million yuan." The price of Bitcoin was about $4,516 on that day. On November 25, Liao Xiang, the founder of Lightning Miner, posted a price list of various mining machines on Weibo, with the text "The currency market is ruthless, but there is love in the world. Cash is paid for mining machines. 10 yuan per kilogram." The price of Bitcoin was $3,738 on that day.

Since the BCH hash rate war ignited the fuse of the sharp drop in the price of the currency, the price of Bitcoin has plummeted from more than 6,000 US dollars to a low of 3,632 US dollars. The falling price of the currency once hit the bottom line of the price that some mining machines were shut down.

Here we can roughly estimate what the so-called shutdown price of Bitcoin mining machines is. Simply put, the "shutdown price" refers to the price of the currency below which miners' mining income is not enough to cover the operating costs of the mining machine, that is, "mining income = mining expenses".

Daily mining income = daily mined bitcoins * current coin price;

Daily mining expenditure = electricity cost * (mining machine power/1000) * 24;

The current mining reward is 12.5 bitcoins per block, and a block is mined every ten minutes, which can generate a total of 1,800 BTC per day. The current network computing power is 36.8563E. Taking the Antminer S9 with a computing power of 14T and a power of 1460W as an example, an S9 mining machine can produce 1800*14/36856300=0.0006837 bitcoins per day. Substituting the above formula, if the comprehensive electricity fee is calculated at 0.45 yuan, we can calculate that under the current network conditions, the minimum shutdown price of the S9 mining machine is 23,062 yuan, and the coin price on November 25 was very close to this price. For small miners who use city electricity to mine, the shutdown price may be higher.

We plug the electricity cost of 0.6 yuan/kwh into the above formula again, and the shutdown price we get is 30,750 yuan. Since November 21, the price of Bitcoin has been lower than this shutdown price. A reporter from the Beijing News interviewed a mine owner who owns hundreds of mining machines. He said, "The current market situation is very bad. Big miners may still have the strength to survive the crisis and even prepare to buy at the bottom. But for more small players like me, turning on the machine means losing money." The mine owner knows that many small players have chosen to shut down their mines. "Some of them are waiting for the opportunity to pick up, but more people choose to sell their mining machines and find other ways out."

Speaking of crises, the cryptocurrency market had already experienced two rounds of bull and bear markets in 2011 and 2013. Did the miners at that time also encounter the same difficulties as today?

The bonus period of Bitcoin mining is gone forever

In 2011, the computing power of ordinary CPUs could no longer meet the needs of miners, and GPU mining began to enter the market. In February 2011, the price of Bitcoin exceeded $1 for the first time. In June, the price of Bitcoin once climbed to around $30. However, this bull market did not last long. After reaching its peak on June 9, the price of Bitcoin began to plummet. By the end of 2011, the price of the currency reached the lowest value since May, $2.1. Surprisingly, $2.1 was about RMB 13.23 according to the exchange rate at that time, which was far from the shutdown price of GPU mining.

The shutdown price here is calculated using the data of the 5970 GPU graphics card that was widely used in 2011. The computing power of the 5970 graphics card is about 700MH, and the power consumption is 300W. At that time, the computing power of the entire network was about 8.2437T. The mining reward of a block is 50 BTC, and 7200 bitcoins can be generated in a day. So the output of a GPU graphics card is 7200*700/8243700=0.61137 bitcoins; if we put it into the above formula and calculate the comprehensive electricity fee at 0.45 yuan, we can calculate that under the network conditions at that time, the lowest shutdown price of the 5970 GPU was about 5.3 yuan.

In the bear market of 2011, thanks to the high mining rewards that had not yet been halved, even if the price of the currency was cut in half again, it was enough to support miners to continue to make profits. So in the bear market of 2013, can the mining market still make money when the mining rewards are halved?

The calculation process is the same as above. The price trough after the sharp drop of Bitcoin this time occurred in April 2014. Therefore, we take the Antminer S1, which began mass production and sales in December 2013, as an example. We can roughly calculate that the shutdown price of S1 is about RMB 419.545. At that time, the lowest price of Bitcoin was US$403.328, and the exchange rate of US dollar to RMB on that day was 6.15.

At first glance, this result is simply unreasonable. The price also plummeted by more than 60%, and even plummeted by 92.5% in 2011. However, the previous two times did not fall below the shutdown price of the mining machine. By 2018, when the price of the currency fell by 80.5%, the miners had already begun to spend more than they earned.

If you think about it carefully, this situation is not without reason. First, during the previous two low tides, the mining rewards before and after the first halving greatly guaranteed the profits of miners; second, the mining computing power has grown exponentially in the past 8 years, and the price of Bitcoin also experienced such a surge 15 years ago, so the price growth rate can keep up with the computing power growth rate, which can naturally guarantee the mining income.

In 2011, on the second anniversary of Bitcoin, the computing power of GPU mining reached 120MH/S, an increase of nearly 9000% compared with the CPU era; in February 2014, the third-generation mining chip was launched, and the Bitcoin mining machine world entered the T-level era. Three years ago, the computing power of the entire Bitcoin network was only a few dozen T. But 15 years later, although the growth rate of mining machine computing power is still exponentially increasing, the growth rate of Bitcoin prices during the same period is not that fast, resulting in a continuous decline in mining revenue ratio.

Based on the above two reasons, miners survived the first two crises of the cryptocurrency circle intact. Today in 2018, we are still facing changes in the mining industry, but it is obvious that the bonus period of Bitcoin mining is gone forever.

Changes in the mining machine market

The proof-of-work mechanism is a great attempt by Satoshi Nakamoto to ensure fairness in mining. However, its nature of pursuing fast and good results is constantly pushing the mining machine market to strive for higher, faster and stronger directions.

Since 2009, Bitcoin mining equipment has evolved from the 1KH/S CPU mining era to the 2010 era when miner ArtForz first realized personal OpenCL GPU mining, and then to the 1TH/S ASIC mining machine era. It took only four years for the mining industry to develop.

In 2013, the genius young man Friedcat opened his ASIC mining machine era. At that time, he was launching spot USB mining machines that were quieter than Avalon and more stable than FPGA, occupying most of the market; then in July and August 2013, he launched the 13G blade mining machine and 10GMini mining machine with higher computing power. In November 2013, Friedcat 38G BOX mining machine was launched, and its computing power was more than three times that of the previous generation of mining machines. However, the time for genius to appear is always short. At the end of 2013, Antminer began to become the most powerful competitor in the market.

At the end of 2013, the price of Bitcoin dropped from over $1,000 to $700 in an instant, and then began a journey of continuous decline. A number of mining machine manufacturers such as Dove, Dragon Mine and Shenyu, which were active at the time, began to disappear; the once popular mining legend Fried Cat also gradually withdrew from the mining circle amid the failure of mining machine research and development and the theft of computing power. However, the mining machine business, which was spawned by the crazy rise in the price of coins and the continuous entry of miners, did not stagnate.

Wu Jihan, who would later become a mining tycoon, said: "The low price of coins is often a good thing for the mining industry. Only competitive manufacturers can survive." He said this and did it.

In April 2014, Antminer S2 was put into mass production and sales; in July 2014, Antminer S3 was launched; in October 2014, Antminer S4, a 2T mining machine, was launched; in December 2014, Antminer S5 was put into mass production. Bitmain, which iterated four versions in one year, successfully brought the mining machine market into the T-level era and officially established its position in the mining industry.

But now that the mining market is almost saturated, can anyone create the miracle of Bitmain again? In my opinion, it is difficult.

On the 28th of last month, Canadian mining company Fortress Blockchain released its third-quarter financial report, showing a loss of $1.16 million, with mining revenue falling 37% from $741,000 in the second quarter to $463,900. It turns out that even professional mining companies can hardly escape the fate of shrinking profits, let alone create miracles. Even Bitmain itself is actively seeking transformation and listing.

From the perspective of the research and development and production of mining machines. With the continuous development of technology, the efficiency of Bitcoin mining machines has been steadily improving. In 2018, 7nm mining machines have become a battleground. In the third quarter of this year, Canaan Creative took the lead in mass production of 7nm mining machines; in November, Bitmain also officially released the Antminer S15 and T15 equipped with self-developed 7nm chips.

It is understood that 7nm chips are already the most advanced chip technology at present, which means that more transistors can be packed into smaller chips, so as to obtain higher computing power per unit area. The computing power of Canaan Creative's Avalon A9 series mining machines based on 7nm chips reaches up to 30T, and the maximum computing power of Antminer S15 is 28T, which is nearly doubled compared with the previous generation of mining machines. However, as the chip manufacturing process approaches the physical limit, Moore's Law is gradually failing, and the growth rate of mining machine computing power seems insignificant compared with the growth of mining difficulty and the computing power of the entire network.

Even in 2018 when the bear market came, the difficulty of Bitcoin mining increased from 1.9T at the beginning of the year to a maximum of 7.45T; the computing power of the entire network quadrupled from 15EH/S to 60EH/S in November.

The long-term low price of bitcoin and the bottleneck of mining machine computing power growth mean that mining profits are at risk, and miners will also face the continuous halving of mining rewards. The bonus period of Bitcoin mining has passed, and the survival prospects of retail miners may become increasingly severe.

The death of small miners in the bear market

The BCH hash rate war in mid-last month once again reminded us that for Bitcoin, which also uses the SHA256 algorithm for mining, the specialization of mining and the centralization of hash rate are inevitable trends. This can be confirmed by Baked Cat and Bitmain, whose mining pools once exceeded the "red line" of 51%.

In the computing power market, mining machine manufacturers and large mining farms have inherent advantages. Regardless of how much capital they have to withstand risks in a bear market, their low mining machine costs and preferential electricity are beyond the reach of retail miners. Even in a bull market, in order to seek cheaper electricity bills, most miners choose to host their mining machines in professional mining pools and pay electricity and management fees regularly. Retail miners, especially those who entered the market when the price of the currency soared in 2017, faced the cost price of the Antminer S9 of 30,000 yuan per unit and the high monthly electricity bills. They were able to barely make a profit when the price of the currency soared, but at this stage, they are the first group of people to be cleaned out.

On December 3, the difficulty of Bitcoin mining was reduced by 15.1%, which was the second largest reduction in Bitcoin’s ten-year history. Some media estimated that this reduction was the result of nearly 400,000 mining machines being offline. In fact, since the beginning of November, the computing power of the Bitcoin network has been declining. In just one month, the computing power has dropped by 44.2%. With the reduction of the computing power of the entire network, the difficulty of mining has also been reduced significantly for three consecutive times for the first time in history.

As retail miners gradually withdraw, large miners who are still able to start mining are enjoying the benefits brought by the significant reduction in computing power and mining difficulty. Under the current network conditions, the shutdown price of Antminer S9 has dropped to RMB 21,088. According to Tencent's "Qianwang", at the end of November, Bitmain just placed an order for 50,000 mining machines for hosting in a mine near Shihezi, Xinjiang; at the same time, Canaan Creative also placed an order for 10,000 units in the region.

The withdrawal of retail miners provides an opportunity for large capital to enter the market and buy at the bottom. In the bear market, the reshuffle of computing power has undoubtedly made these small miners the biggest victims, and the mining machines that were reluctantly sold by small miners have flowed into large mining farms in batches, becoming a tool for them to continue to accumulate capital.

In fact, to be honest, even if retail miners survive the cold winter, the future may not be easy. Under the bottleneck of chip manufacturing technology, mining machines with difficult computing power and energy consumption ratio are the first hurdle to squeeze the profits of small miners; the mining rewards that will be halved in 2020 are the second hurdle; and the continued expansion of large mining farms that continue to accumulate wealth will bring about an increase in the computing power of the entire network, an increase in mining difficulty and unaffordable electricity costs...

So to some extent, the death of small miners is actually an inevitable choice for market development, and the bear market is just a catalyst.