BIT­COIN HALV­ING IN THE MIDST OF PAN­DEMIC TO FA­VOR CHI­NESE MIN­ERS

AMBCrypto Weekly - - News -

Bit­coin min­ers gen­er­ated a to­tal of $387 mil­lion in rev­enue for March 2020. Cu­mu­la­tively, min­ers have earnt over $12.5 bil­lion in rev­enue be­tween 2018 and 2020. Hence min­ing has be­come an in­creas­ingly com­pet­i­tive in­dus­try. With the 3rd bit­coin halv­ing around the cor­ner, China re­mains the dom­i­nant player and its share might in­crease post-halv­ing.

Cur­rently, the top 5 min­ing pools for Bit­coin (BTC.com, F2Pool, Poolin, An­tPool, and Vi­aBTC) all be­long to China and 64% of hashrate comes from these pools. Fur­ther, about 50% of the hashrate from these top 5 pools come di­rectly from Sichuan prov­ince, with the rest spread out over other re­gions.

Ad­di­tion­ally, Bit­main, a top min­ing equip­ment man­u­fac­turer based in China, con­trols two min­ing pools, BTC.com and An­tPool, and to an ex­tent Vi­aBTC. To­gether Bit­main con­trols over 37% [44%] of the Bit­coin hashrate. How­ever, this has dropped from 40% and above and is mainly due to the prob­lems be­ing faced by the com­pany.

Be­ing the big­gest player in the in­dus­try also means be­ing able to with­stand ma­jor drops in hashrate. Take, for ex­am­ple, the re­cent plunge in Bit­coin price, which re­duced the hashrate from 123 EH/s to 93EH/s. An­tpool was hit the worst, a 30% drop in hashrate was ob­served dur­ing this crash. F2Pool han­dled the crash rel­a­tively bet­ter with only a 14% drop in its hashrate con­tri­bu­tion.

Chi­nese min­ers still use Bit­main’s fa­mous An­tpool S9 min­ers since the elec­tric­ity costs are rel­a­tively less and hence these older rigs can pro­duce prof­its, pro­vided the price re­mains above the break-even point. How­ever, the Black Thurs­day showed that when the price dips below this point, these ma­chines will no longer stay com­pet­i­tive/prof­itable, hence, caus­ing min­ers to switch them off. The re­sult of this can be ob­served in the hashrate drop men­tioned above.

Ethan Vera, the Head of Fi­nance at Luxor pool men­tioned in an in­ter­view with AMBCrypto that,

“The higher ef­fi­ciency you have, the bet­ter chance you have stay­ing in busi­ness, so min­ing rigs like S9 are near the bot­tom of that. Un­less you have sub 1.5 cents power, so a good por­tion of them will most likely fall-off the net­work.”

How­ever, he also men­tioned that there were re­gions with low or vir­tu­ally free elec­tric­ity ar­eas where these rigs could still op­er­ate and that this was a mi­nor­ity of them.

Speak­ing with AMBCrypto, Thomas Heller, the Global Busi­ness Direc­tor of F2Pool stated that the drop was sig­nif­i­cantly due to the avail­abil­ity of newer min­ing ma­chines with the F2Pool. The drop in other min­ing pools was due to the use of older min­ing equip­ment like the Ant­miner S9. Speak­ing about the third halv­ing, which is slated on May 12, Heller added

“A lot of peo­ple ex­pect a huge num­ber of ma­chines to switch off at the halv­ing but if Bit­coin price is at $9,000, I don’t think it is go­ing to be as huge as peo­ple ex­pect it to be.”

He also ex­plained that there will be ma­chines go­ing off­line but China will not be as af­fected, this time, as they were dur­ing the March 12, price drop and owes this to the higher elec­tric­ity cost.

Since the early days of Bit­coin, China has been at the fore­front, es­pe­cially when it comes to man­u­fac­tur­ing min­ing equip­ment. Al­though the de­vel­op­ment of ASIC min­ers was done largely by hack­ers, the de­vel­op­ment and man­u­fac­ture of a full-scale ASIC miner were by But­ter­fly Labs [BFL] based in the US. BFL had prob­lems de­liv­er­ing in 2011 and by 2012 Chi­nese firms like Avalon and ASCImin­ers took con­trol of the ASIC man­u­fac­tur­ing game.

BitFutry [based in the Nether­lands] also en­tered the game dur­ing the same time, how­ever, rad­i­cal im­prove­ments in man­u­fac­tur­ing ASIC came with the com­pe­ti­tion of pro­duc­ing low elec­tric­ity con­sum­ing de­vices. At one point in time, Bit­main con­trolled over 80% of the min­ing equip­ment mar­ket, al­beit it re­duced dras­ti­cally due to the prob­lems faced by the com­pany over go­ing pub­lic.

The take­away from this is that China was in the right place and at the right time. China has man­aged to stay ahead of the com­pe­ti­tion and its share will grow post halv­ing due to the fol­low­ing rea­sons,

Cheap elec­tric­ity

Rel­a­tively small OpEx

Sup­ply chain and avail­abil­ity of min­ing equip­ment

Elec­tric­ity cost is in­cred­i­bly im­por­tant to min­ers as it con­sti­tutes 95% of the ex­penses in­curred by a typ­i­cal miner. Hence, min­ers with cheap elec­tric­ity tend to cope bet­ter with price crashes than those with higher elec­tric­ity costs. Hence elec­tric­ity costs play one of the piv­otal roles in de­ter­min­ing the price floor or a break-even price for min­ers. Thus, for the lat­ter group, the break-even price will be con­sid­er­ably lower. An­other as­pect that de­ter­mines the break-even cost is the equip­ment be­ing used.

A miner with cheap elec­tric­ity does not need an up­grade to the lat­est min­ing equip­ment as this would cre­ate un­nec­es­sary ex­penses and thus re­duce the RoI. How­ever, for a miner with higher elec­tric­ity costs, the miner has to up­grade his min­ing rig to stay com­pet­i­tive. Hence, the breakeven cost for this group would be higher. Gen­er­ally, the min­ers in the east, like in China, who have ac­cess to cheap elec­tric­ity will have a com­pet­i­tive edge over the ones op­er­at­ing in the west.

The chart shows this vari­a­tion of break-even prices based on in­creas­ing elec­tric­ity costs. An S9 miner min­ing at $0.030 KWh would have the same break-even cost as a miner min­ing with the lat­est S17 miner at $0.07 KWh. Hence, even dur­ing Black Thurs­day, most of the Chi­nese min­ers were not as badly af­fected as the min­ers in the US or Europe. How­ever, the ones in the West def­i­nitely felt the brunt and which in turn caused some to even shut down min­ing till it be­came prof­itable.

Since 95% of the ex­pense for a miner is elec­tric­ity, min­ers with ac­cess to cheap elec­tric­ity wouldn’t need to com­pete with other min­ers by pur­chas­ing new equip­ment, hence dras­ti­cally re­duc­ing other ex­penses.

Ale­jan­dro De La Torre, the Vice Pres­i­dent at Poolin added that,

“the rainy sea­son is about to start in Sichuan prov­ince, which will lower the elec­tric­ity costs so the min­ing farm op­er­a­tors [in China] are in a very good po­si­tion.”

In ad­di­tion, Ale­jan­dro men­tioned that due to a com­bi­na­tion of halv­ing, COVID, and the avail­abil­ity of newer min­ing rigs to the Chi­nese min­ers will in­crease the hashrate con­cen­tra­tion in China, at least tem­po­rar­ily.

Hence, af­ter the third halv­ing, the “wet sea­son” cou­pled with mas­sive amounts of in­ex­pen­sive and ex­ces­sive hy­dropower for min­ers to use, the con­cen­tra­tion of Bit­coin min­ing will in­crease in China.

China is the hub for elec­tronic goods in the world and due to in­ex­pen­sive la­bor, min­ing equip­ment man­u­fac­tur­ers ex­pe­ri­ence a ma­jor ad­van­tage by just be­ing lo­cated in China.

Ad­di­tion­ally, min­ers will have faster ac­cess to min­ing equip­ment due to well-con­nected sup­ply chains, this would also pro­vide the Chi­nese min­ers an un­fair ad­van­tage as min­ers lo­cated in dif­fer­ent parts of the world need to in­cur time de­lays and over­head ex­penses like im­port duty.

2020 is also the per­fect time to ex­plain, how China could siphon more con­trol over Bit­coin hashrate. Due to the lock­down, the sup­ply chain has halted and min­ers who are in other parts of the world can­not ac­cess the lat­est equip­ment. These up­grades are, how­ever, avail­able to in­land min­ers.

The lock­down is act­ing as a dou­ble-edged sword, as it could push other min­ing equip­ment man­u­fac­tur­ers to on-board/cap­ture con­sumers and spark in­no­va­tion thereby re­duc­ing re­liance on Chi­nese min­ing equip­ment.

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