The way to survive in the mining circle: walking a tightrope between coin price and computing power

If it weren’t for the recent plunge in Bitcoin and the news that mining machines were being sold by the pound going viral online, few people would have paid attention to a group in the blockchain field - the mining circle.

Different from the blockchain and cryptocurrency circles that wander between cool technology and intoxicating finance, the mining circle appears low-key and mysterious. They connect the blockchain and cryptocurrency circles. The BCH hard fork requires them to provide computing power, and they are the last support when BTC plummets. They contribute to the blockchain industry and share responsibilities, but rarely speak out.

What kind of group is the mining circle? How is their survival status? How much impact does the sharp drop of Bitcoin have on them? With these questions, Ostrich Blockchain's "Crypto Intelligence Bureau" invited Yu Yang, the founder of Mining Ocean Club, and Wu Yanjun, a strategic partner of Haru Capital, to talk to us about the survival of the mining circle.

1. Small mines with a managed electricity price of more than 0.4 can no longer afford it

Speaking of the mining industry, Wu Yanjun said that the entire PoW industry includes three major industries: mining machines, mining farms, and mining pools. The cost structure of this industry includes mining machine costs, electricity costs, hosting costs, and commission costs.

When (Bitcoin) fell below 5,000 some time ago, due to the dry season, some customers had higher electricity costs, resulting in a large number of mining machines being taken off the shelves.

Yu Yang also learned that the situation is similar. Many small mines have managed electricity prices above 0.4, and they can no longer bear it. The average managed electricity price in Chengdu is now 0.37 to 0.38.

In terms of mine distribution, hydropower is more common in Yunnan and Chengdu. Thermal power generation is concentrated in Xinjiang, Inner Mongolia, Gansu, Ningxia, Qinghai, etc. State Grid electricity has the highest cost.

The conditions in the mines in the north are relatively good, with complete facilities, but the conditions in the southwest are relatively harsh, with dense mountains and old forests.

2. Listed companies deploy mining to make up for insufficient cash flow

In the current mining industry, it is difficult to attract investors for small machines, but large machines are not a problem. Yu Yang believes that if this trend continues, it is very likely that in half a month, miners may not even be able to pay for electricity with the coins they mine, and 50% of the mines will have to shut down.

At present, the power companies have not yet realized the pressure from the mines, and the cost of electricity is still rising. Under such circumstances, many large institutions are entering the market, including funds, traditional large capital, listed companies, and overseas companies.

Many large coin holders have begun to shift their perception of coins to computing power. Many people have a superficial understanding of mining, or have no perception of it. All they know is how many coins you have. But in the mining circle, everyone knows how much computing power you have.

For many companies with poor cash flow, such as those with a long supply chain, mining is actually a way to provide a continuous and stable cash flow. The mining pool settles your account every day and you earn money every day. Listed companies deploy mining business to make up for the cash flow business.

More listed companies are planning to invest in mining, probably because they realize that computing power is the foundation of all blockchains.

3. The two variables of currency price and computing power affect dynamic income

Traditional finance cannot understand the operation of the mining circle, so it is difficult for them to recognize the corresponding business model. Even many traditional investors still view mining from a purely speculative perspective.

From many perspectives, Yu Yang believes that mining does represent a new direction. Many companies have difficulty in raising funds through listing and in making profits in the early stages, and these companies can rely on this method to persist until they make profits.

As big data develops, its value becomes higher and higher, and it becomes easier to make more money. However, it will be more difficult in the early stages. This difficult period can be overcome by mining.

However, digital assets are still off-balance sheet. For traditional investors, they will only see less and less assets when they look at the financial statements. There should be a way that both the fiat currency standard and the currency standard can accept. Yu Yang's Mining Association is also thinking and researching.

At a conference hosted by the Mining Association next month, one of the directions they are exploring will be announced.

The two cognitive logics of currency standard and legal currency standard are different. Yu Yang said that for miners, you are based on currency standard when mining. For traditional investors, what they want to see is that I invested one million, how much is my return, how much can I turn into. They will not understand how many coins I have generated. This is the contradiction between the two cognitions.

Kuanghai will study a way to make these traditional investors who accept the fiat currency standard understand the logic of the mine. That is, if I invest in a mine, how much should my return be? The traditional investment is such a cognition that the rise and fall of the coin price determines how much my return is, and the difficulty level affects how much my coin price is. These two variables affect my dynamic income.

Since 2018, some miners have adopted hedging to offset the risk of price fluctuations. However, there is currently no other way to avoid the risk of difficulty fluctuations. Therefore, the return on investment in mining is still a dynamic return.

The Mining Association will announce a financial tool at its December conference. They have joined forces with asset management companies including several major investors to work out a method that both parties can accept.

The traditional capital market’s definition of digital assets and accounting standards will still take time and are unlikely to work in the short term.

From the perspective of technology investment alone, Wu Yanjun believes that mining farm investment is meaningful because investing money can create better technology, which can produce more computing power with less electricity.

Yu Yang said that there will be some miners in the mining industry who buy their own chips, build their own mining machines, and mine by themselves instead of selling them. He thinks that making their own mining machines will become a trend in the future.

4. There is great room for future industry development, and there will be no systemic risks in short-term fluctuations

Both Yu Yang and Wu Yanjun believe that the entire industry will continue to develop and will not bring systemic risks due to short-term fluctuations in Bitcoin prices.

This industry is still in its early stages and there is still a lot of room for development. Yu Yang firmly believes this.

When asked about the room for development, Yu Yang said that it is precisely the invalid calculations that make BTC valuable for storage.

Competition keeps the BTC network in a healthy state. Slack miners will be eliminated. This ensures the stability and reliability of the BTC network and lays the foundation for trust. The value of gold comes from the high cost of obtaining it. If gold is easy to mine, it will not be valuable.

So when most people have this understanding, the market will begin to mature. Yu Yang believes that by then, the return on investment will drop to 10% per year.

5. Selling coins at high prices, currency loans are suitable for low-level pledge

In the first half of this year, many miners did not sell coins, but in the current bear market, many miners have started OTC.

In this regard, Yu Yang said that when the price is high, miners will not cash out. Recently, the price has fallen, and miners are a little panicked, but they are mostly doing currency loans. However, the interest is too high, ranging from 18% to 30% per year, and the mortgage is 75% off. Those who mortgaged early may have been liquidated in this wave of falling market. Of course, even if the price falls below the cost, big miners will continue to mine, because the cost is a dynamic thing.

Yu Yang said that CoinLoan is suitable for low-level pledge, because the risk will disappear when the price of the currency rises later. Generally, the funds of CoinLoan companies are not their own. So they also need to close their positions quickly and repay the money to the investors. They need to sell the currency quickly and repay the money to the investors.

Wu Yanjun believes that the current situation is that the computing power is indeed decreasing significantly. However, it actually has a self-regulating mechanism, that is, if a large number of miners remove their machines, the computing power will be reduced and the difficulty will decrease.