Bitcoin mining industry reshuffle: net profits drop sharply, miners flee

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From the deep mountains of Sichuan to the electronics market in Huaqiangbei, Shenzhen, the Bitcoin mining industry is experiencing a brutal "battle royale".

The small mine owner decided to sell the mine, return to the city and live a normal life.

The electronics market, which used to be bustling with mining machine stalls, is now deserted.

Those who work in the mining infrastructure business are beginning to miss the days when bargaining was the norm.

But that era seems to be fading away. What greets them is the cold reality - winter has really come.

Some practitioners believe that in the face of the cold winter, small and medium-sized miners will be out of the market before the end of this year, and the future will belong to giants.

In other words, the mining industry is about to usher in an era where capital is king.

01Winter is coming

"I am planning to sell two mining farms," ​​Luo Jun told a blockchain reporter.

He has three mining farms deep in the mountains of Daliang Mountain in Sichuan. They are not large in scale, with a total of tens of thousands of machines, most of which are hosted by customers.

"I quoted a price of 600,000 yuan for two mines, excluding the machines. A customer asked for 400,000 yuan, but I didn't sell it to him," Luo Jun said. "The cost was still 460,000 yuan."

After two years of living in the mountains and eating raw meat and drinking blood, he made a lot of money. Next, he plans to change his career and live a normal life.

The direct reason that prompted him to change his career was the arrival of the blockchain winter.

He found that the mining business this year was much more difficult than last year. "The gross profit margin dropped by 40% to 50%, and the net profit dropped by 30%. Moreover, the payback period was getting longer and longer, and the risks were getting higher and higher."

In the past, he had experienced two particularly frightening moments, one was the September 4th Incident, and the other was when rumors came in that the government was going to clean up the mines. At that time, he could hardly sleep all night and was extremely anxious.

But at that time, the income was still considerable, and he did not give up. Now, he can't hold on any longer.

"Opening a mine was originally a high-risk and high-return business, but now the high returns are gone and only high risks remain," said Luo Jun.

In addition to these, there are many other reasons that made him decide to change his career.

One of them is the issue of life safety - working in the mountains, it takes more than ten hours to drive out, and the roads are all muddy. This summer alone, he encountered three landslides.

"I'm afraid I will die on the road one day," said Luo Jun.

The local security problem also made him feel insecure. There have been many mining machine thefts around him.

Another reason for him to change his career was his family and girlfriend.

When he first started the mine, his family strongly opposed it. His parents told him, "Don't do it. Bitcoin is a pyramid scheme."

Ironically, "later, when I made money, they stopped objecting," Luo Jun said. But being away from his parents, he often worried about their health.

Because of the mining business, his girlfriend broke up with him.

"She thinks I'm unreliable, or maybe she doesn't understand this industry." Luo Jun told a blockchain reporter.

After opening the mine, he either chatted with customers or went to the mountains to handle affairs every day. He spent most of his time on the phone or driving, and rarely had time to accompany her.

"I don't know how to communicate with her. I can only tell her that this thing can make money, but I can't explain it thoroughly," said Luo Jun.

Luo Jun is still considering what to do after changing careers. He wants to open a chain supermarket or a hotel in Chengdu. Leaving the wilderness and returning to the crowd will make him feel at ease.

In Shenzhen's Huaqiangbei, more than 1,700 kilometers away from Liangshan, businesses selling mining machines are also experiencing a large-scale exodus.

In 2017, the price of Bitcoin skyrocketed, and the mining machine business in Huaqiangbei also became hot. The most famous electronics market is SEG, which is known as the "world's largest mining machine distribution center." Many mining companies have opened image stores here, and a saying is circulating in the industry: "To buy mining machines, go to SEG."

"At the peak, there were more than 180 counters selling mining machines here," Xiao Wu told a blockchain reporter.

While working here, she witnessed the closure of mining machine sales stalls and the decline of the market.

“There are not many people at SEG’s stall selling mining machines now. It is very quiet.” Xiao Wu said that especially in the past few months, many small mining machine sellers could not hold on any longer and have withdrawn their stocks one after another.

The fate of the Huaqiangbei mining machine market is a microcosm of the entire mining industry.

Over the years, the digital currency circle has formed an industrial chain that is complete, sophisticated, and has almost everything. In a sense, every link in the chain prospers and suffers together.

As of November 2, 2018, the total market value of global digital currencies was $20.56 billion, down 75.2% from its peak at the beginning of the year.

Now, Chen Xiaowu is also having a hard time. He is engaged in the infrastructure business of the mine.

The construction cost of the mine is calculated based on the number of machine positions, and the construction cost of one machine position is 500 yuan. "In the past, customers would come to us, but now we have to find customers ourselves," he said.

He believes that the price of Bitcoin determines everything. Bitcoin is now only over $6,400, down more than 60% from its peak of $20,000 last year.

"The cold winter for miners has really arrived, especially for small and medium-sized miners," he said.

02 Small and medium-sized mine owners are unlikely to be eliminated

"It is inevitable for small and medium-sized miners to be eliminated," Lao Wu, a well-known miner in the industry, told a blockchain reporter, "This step will basically be completed before the end of this year."

In Lao Wu's opinion, small mines with thousands or tens of thousands of machines cannot escape the fate of being eliminated.

“The big miners who survive will increase their computing power, and the entire market will be further reshuffled,” said Lao Wu. “The mining industry will enter an era of giants where capital is king.”

Several major mining machine suppliers around him are considering using the cost advantage of mining machines to switch to mining. In order to compete with the large mining farms behind these mining machine suppliers, small mining farms must follow suit to increase computing power and iterate machines.

"Because the core business model of mining is to compete with electricity prices and the purchasing cost per unit of computing power," said Lao Wu.

If the mining machines are not updated, the electricity cost per unit of computing power will exceed the value of the mined Bitcoins, and it is bound to be a loss.

Take a mining farm with 10,000 machines as an example. An S9 mining machine uses 40 kWh of electricity a day. If the electricity price is 0.4 yuan per kWh, that is 16 yuan. The electricity bill for 10,000 machines a day is 160,000 yuan, and 4.8 million yuan a month - calculated at the current Bitcoin price, this is equivalent to nearly 110 Bitcoins.

These 10,000 machines can only mine more than 130 bitcoins a month. After deducting the operating costs of the mine, they can't even make back the money they spent on buying the machines.

Lao Wu said that some mining farms that rely solely on personal funds or investment from an institution are now unable to survive.

Only with sufficient funds can we survive this cold winter. The era of giants is coming.

In extraordinary times, the behavior patterns of many mines are changing.

In the past, many mining farms would hoard coins. The miners would rather live frugally and go into debt than not let the bitcoins they had go unsold.

But now, many mining farms are selling coins because no one knows whether the price of coins will continue to fall.

In the dead of winter, the price war between mines has become increasingly fierce.

"The price of electricity has been pushed lower and lower recently. It used to be more than 40 cents, but now it is as low as 36 cents." Miner Wu Di told a blockchain reporter that mining machine hosting has become a red ocean.

Mining farms in different regions and of different sizes receive different electricity prices. Once a price war begins, profit margins will inevitably be further compressed, and mining farms that pay high prices for electricity will be eliminated first.

If a mine wants to survive, it not only needs sufficient funds, but may also need firm faith.

03Tokenize the computing power

Lao Wu believes that in the future, only three types of mines can survive

The first category is backed by mining machine manufacturers, such as Bitmain. In a bear market, they can get mining machines at the lowest cost, which gives them a unique advantage.

The second type is that the financiers are gray funds.

"Gray funds refer to funds that want to go abroad. If this money cannot go out, some people will choose to go out through mining," said Lao Wu.

These funds often do not care about the rate of return. In a bear market, the investors would rather lose some money; in a bull market, they may be able to earn several times more.

“If the static return you calculated is a 10-month payback period, after this period, even if you can’t get your money back in full, at least the money has been spent,” Lao Wu told a blockchain reporter.

The third category is mining farms that use innovative mining models.

Traditional mining requires individuals to purchase mining machines, find locations with cheap electricity, and build mining farms; or hand over mining machines to small and medium-sized mining farms for hosting, and users pay for electricity, maintenance, and subsequent management fees.

Lao Wu's emerging mining farm has already adopted a cloud mining model of computing power leasing. Users no longer need to consider issues such as electricity prices and mining site selection. Through the APP, they can directly rent the computing power of Bitcoin mining machines.

"We have 14 large-scale mining farms around the world. The level of cost control over electricity and mining machines, as well as the scale and standardization of the mining farms are all very high," said Lao Wu.

In this model, the mined coins are equally shared between the user and the mining farm. The user's mining income will be directly allocated to the personal account and can be withdrawn freely.

In addition to leasing computing power, his mining farm also issued a computing power coin, and the public chain is pegged to the computing power of Bitcoin.

"It is equivalent to tokenizing computing power, which is similar to the platform coin model," said Lao Wu.

He believes that in this way, the mining farm will digitalize itself and solve the liquidity problem of computing power assets in the secondary market.

"What really tests us is our ability to scale and control costs," he said.

The hustle and bustle of the Spring and Autumn Period and the Warring States Period gradually subsided.

After this round of reshuffle, the blockchain world will surely usher in an era where Bitcoin computing power is more concentrated.

It now seems that a decentralized world will become more and more like an unattainable utopia.

The general trend of the world is that after a long period of division, there will be unification, and after a long period of unification, there will be division. Will the world of blockchain also be like this?

Source: A Blockchain