Depth | The dry season is approaching, the analysis of Bitcoin mining industry chain

Summary

Bitcoin is an alternative asset worthy of attention. Because of its high return on investment, good liquidity, and low correlation with other assets, Bitcoin is more like an alternative investment target than it is intended to become a global currency. Bitcoin mining is the way to get bitcoin from the “source”. The so-called "mining", that is, using the computer as the "mining machine" to solve the encryption problem given by the bitcoin system to compete for the accounting rights of the bitcoin book, the transaction is packaged into the block, the block is connected before and after, forming a "chain" . The Bitcoin system will issue block rewards to miners who receive the billing rights. Bitcoin has about 1 block every 10 minutes, and the current miners are able to pack 1 block per chain and get 12.5 bitcoin rewards. Mining is the way of issuing bitcoin. Mining is an investment in Bitcoin, and the rate of return is considerable.

The revenue from bitcoin mining is mainly affected by the difficulty of mining and electricity costs. Due to the difficulty of mining the bitcoin (determining the unit mining revenue) and the price of the coin are the same for all miners, the miner’s mining revenue is only related to the calculation of the mining machine. The more mine income. The main impact on mining costs is the power consumption and electricity bill of the mining machine. In addition, the energy consumption ratio (W/T) of the mining machine is also an indicator worthy of attention. The same mining machine, the mining revenue is the same, but the energy consumption is smaller than the mining machine, the electricity bill is less, that is, the mining revenue is theoretically higher.

Bitcoin mining has formed an industrial chain. In addition to mining, there are also mines, mining machine manufacturers, mining pools, cloud computing platforms and other formats worthy of attention. As a computing power producer, mining machine manufacturers have absolute right to speak in the industrial chain; miners buy computing power from mining machine manufacturers, paying attention to currency price, mining difficulty and mining machine power consumption; miners will host mining machines in mines, mines The construction of the field is highly non-standard, and it is inseparable from the local supervision; the miners and the cloud computing platform will integrate the mining machine power into the mining pool; the cloud computing platform will “retail” the mining machine power to investors and improve The mobility of computing power. The development of the entire industry chain is very similar to the IT development process.

As the dry season comes, the bitcoin mining power will continue to rise. It is known that the second-generation 7-nanometer chip mining machine S17, S17 Pro contains about 144 chips, and a 12-inch 7-nanometer wafer can cut about 3,000 ASIC chips, assuming that these wafers are mainly used for Manufacturing 7-nano mining machine S17 Pro (56T), at the end of the year, Bitcoin can jointly produce about 1.04 million mining machines; assuming that the mining machines were officially launched, sold out and used for mining in early 2020, the entire network will be calculated. Increase by 58.24EH/s. The act of placing high orders reflects the confirmation of the mining machine market by the leading mining machine manufacturer, and the optimism about the future market. In addition, due to the low electricity cost during the wet season, the Southwest China Mine has attracted 60% of Bitcoin's entire network. After the end of the wet season in October, there will be many mining machines moving from the southwest to the northwest, and the vacancy rate of the Northwest Mine. Will decline.

Bitcoin mining machine manufacturers have a technical moat. We are optimistic about the investment opportunities of mining machine manufacturers in the mining machinery industry chain. First of all, the mining machine manufacturer's chip design and industrialization capabilities have a considerable degree of moat. Although the production capacity of Bitcoin mining machine manufacturers is greatly affected by the chip yield, but in the end, the biggest impact on its performance is the dramatic change in bitcoin prices. Mining machine manufacturers have the desire to expand new business, with the help of existing chips. Design experience, mining machine manufacturers are expected to copy successful experience into the artificial intelligence business. Second, in the entire bitcoin mining industry chain, mining machine manufacturers are the closest to the traditional financial market. Third, in the bitcoin mining industry chain, the mining company's business has less financial attributes and faces less regulatory pressure.

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In October, the southwestern region of China ended its half-year flood season. The region attracted the bitcoin miners with its low-cost electricity, and it has 60% of the total network. After that, the miners will have to move to the northwestern region where electricity costs are more expensive, and the cost of mining has soared. At the same time, although the bitcoin price once exceeded 10,000 US dollars, but in a considerable part of the time below this price, mining revenue faces greater uncertainty. Despite this, bitcoin prices have more than doubled compared to the 2018 low, and miners' mining enthusiasm has soared. Bitcoin's total network computing power has exceeded 80EH/s, a record high. This report aims to explore investment opportunities in the Bitcoin mining industry chain at a time when currency prices are unstable and the dry season is approaching.

A format of the market. Third, in the bitcoin mining industry chain, the mining company's business has less financial attributes and faces less regulatory pressure.

Catalyst: The price of the currency has risen further; the yield of miners has increased.

Risk warning: regulatory policy uncertainty, blockchain infrastructure development is not up to expectations.

1. Why pay attention to bitcoin and mining industry chain?

1. Bitcoin ROI is amazing, liquid, and low in correlation with other assets. It is an alternative asset worthy of attention. In 2008, the mysterious person named "Satoshi Nakamoto" released "Bitcoin: A Peer-to-Peer Electronic Cash System", explaining the blockchain-based electronics Currency – the construction of bitcoin. In the past ten years, because of its high return on investment and good liquidity, Bitcoin is more like an alternative investment target worthy of attention than its goal of becoming a global currency. 1) High ROI, strong volatility and speculative value. On January 9, 2009, the first block of Bitcoin was dug up. According to CoinMarketCap (the same below), at the time of writing this report (2019.8.30), the price of Bitcoin was $9,514, and the return on investment since its appearance. (ROI) exceeds 6932%. In addition, Bitcoin has strong volatility. For example, in 2017, Bitcoin rose from $1,000 to $13,000, and fell to $3,800 at the end of 2018. For both sides, there is greater speculative value.

2) The market value is large. The market value is 170.4 billion US dollars (about 1.2 trillion yuan), accounting for 69.1% of the market value of all cryptocurrencies (2,529 kinds), which is the only cryptocurrency with a market value of more than 100 billion US dollars. This market value exceeds well-known brands such as McDonald's, Citigroup, PayPal, Starbucks, etc., close to Guizhou Moutai (1.4 trillion yuan) and other well-known A-share listed companies (Note: only 6 companies with a stock market value of more than one trillion).

3) Good liquidity. The daily trading volume is 16.4 billion US dollars (about 180 billion yuan), equivalent to 40% of A shares (wind, 2011.5). There are 20,280 7/24-hour cryptocurrency exchanges worldwide, most of which list Bitcoin as the subject of the transaction. In addition, multiple exchanges offer bitcoin long and short futures contracts. For example, the US Commodity Futures Trading Commission (CFTC) approved the licensed commodity exchanges Chicago Mercantile Exchange (CME), the Chicago Board Options Exchange (CBOE), and the Cantor Exchange to provide bitcoin futures; the New York Financial Services Regulatory Authority also approved The exchange Bakkt provides physical settlement of bitcoin futures contracts; the US Securities and Exchange Commission is also reviewing multiple Bitcoin ETF listing applications.

4) Low correlation with other assets. Another important advantage of Bitcoin is its low correlation with other assets (such as stocks, bonds, derivatives and gold), which gives it a safe-haven property compared to other assets, especially when geopolitical conflicts escalate. It is often used as a tool to hedge the risk of currency depreciation.

2. Mining is a way to obtain bitcoin from the “source” and at low cost. The traditional electronic payment method relies on the third party (such as a bank) that the transfer party trusts. The typical process is that the bank writes down the transfer amount in the bank's account at the sender of the transaction, and the transaction recipient is in the bank's account. Add the relevant amount. Bitcoin is committed to becoming a peer-to-peer electronic cash system. The way to realize value transmission is to witness the transfer transactions between users by all users on the whole network to prevent double payment of funds. It is a distributed maintenance account of the whole network. The so-called "mining", that is, using the computer as the "mining machine" to solve the encryption problem given by the bitcoin system to compete for the accounting rights of the bitcoin book, the transaction is packaged into the block, the block is connected before and after, forming a "chain" .

1) Mining is the way in which bitcoin is issued. The Bitcoin system will issue block rewards to miners who receive the billing rights. Bitcoin has about 1 block every 10 minutes. The difficulty of mining is dynamically adjusted. Each time the 2016 blocks are excavated, an adjustment will be made. The adjustment is based on the block time of the previous 2016 blocks. If the average time of the previous cycle is less than 10 minutes, the difficulty will be increased. If it is greater than 10 minutes, the difficulty is reduced. The purpose is to ensure that the system is stable every 10 minutes to produce a block, so the difficulty adjustment time is about 2 weeks (2016 * 10 minutes), all of which are open source code regulations.

Each bit of the block system rewards 50 bitcoins, which is halved every four years. In November 2012 and July 2016, respectively, the halving was carried out. The current block reward is 12.5 bitcoins. It is expected that the next halving will occur in May 2020. That is, the current global Bitcoin miners will receive a total of about 1800 bitcoin block rewards.

Bitcoin is “issued” in this way, with a number of approximately 21 million. As of August 31, 2019, 1,791 bitcoins had been dug up. In addition to the block rewards, the miner will also receive a handling fee paid by the sender of the transaction. In theory, the smallest unit of bitcoin in 2140 will be dug up, and the miners will only receive transaction fees.

According to Coinshares, bitcoin miners received $5.5 billion in revenue in 2018, of which $5.2 billion was block revenue (97%) and $300 million was mined ($3%).

Current miners are able to obtain a commission fee of approximately 1.7% of the block award from each block. Bitcoin's block rewards and transaction fees for the past 24 hours were 1913 BTC and 34.04 BTC, respectively, for a total of approximately $1,879.

2) Mining can get bitcoin at low cost. In December 2017, bitcoin prices hit a record high, approaching $20,000, and then turned sharply. In November 2018, it fell to about $6,000, but during this period Bitcoin's overall network computing power has been rising. Until November 2018, when the low of $6,000 appeared, the bitcoin computing power began to decline. In theory, when the price of bitcoin falls, the income of miners will decrease, and the computing power of the whole network should be reduced. So why is there such a gap?

A considerable part of the miners' actual mining cost is relatively low. The current price of the mainstream miner ant S9 in the bear market in 2018 fell from about 10,000 yuan at the beginning of the year to about 1,000 yuan. If the mining machine is started at a lower price, There are cheap sources of electricity, even if the price of the currency drops to 6,000 US dollars, it can still barely support, but many mining machines have chosen to shut down and stop mining because of the higher mining cost or more pessimistic expectations of the currency price.

But bitcoin prices fell below $6,000, and the calculations finally entered the downtrend channel. It also shows that a considerable number of miners are unprofitable at around $6,000. To some extent, “$6,000” is probably the cost line for most miners. At the time of writing, bitcoin prices have risen to around $10,000, compared to miners who can only buy bitcoin from the secondary market for $10,000. Get bitcoin.

3) Mining is an investment behavior. Buying bitcoin in the secondary market, the current cost price is about 10,000 US dollars, but if you take the mining method, you have the opportunity to get a higher rate of return. Assume that on August 25, 2019, the Avalon mining machine A911 (19.5T, 1750W) was purchased at a price of 3050 yuan. The price of the currency was 72,952 yuan, the income per T was 1.8 yuan, and the electricity cost was 0.3 yuan/kwh. The net income can reach 78 yuan, and the return period is 179 days.

Note: T(TH/s) is a unit of mining machine calculation power, which means that the mine machine can perform 10^12 hash calculations per second. 1EH/s=10^18H/s; 1PH/s=10^15H/s; 1TH/s=10^12H/s; 1GH/s=10^9H/s; 1MH/s=10^6H/s; 1KH/s = 10^3H/s.

 

2. What factors will affect Bitcoin mining revenue?

1. The main factors affecting the income of miners are: currency price, mining difficulty, and the computing power that I own. Currency price: The price of the currency is the “ultimate factor” that affects the income of miners. In the final analysis, the mainstream means for miners to obtain income is to sell the coins they have dig, whether in the short-term or long-term after digging into the currency. The core factor that attracted the soaring power of 2018 (from 9 EH/s to 50 EH/s) was the madness of the 2017 price (from $1,000 to $18,000), which led to a larger computing power in November 2018. The decline (from 52EH/s to 36EH/s) is also a long bear market for bitcoin in the first 11 months of 2018 (from $13,000 to $6,400), and the main factor that has led to a recovery in computing power is the rise in the price of 2019.

Difficulty in mining: Another factor affecting the income of miners is obviously the amount of bitcoin that can be dug, which is directly related to the ratio of its computing power to the total network computing power. One factor related to the overall network computing power is the difficulty of mining. The higher the computing power of the whole network, the more difficult it is to mine, so that the system can achieve the goal of “about 1 block every 10 minutes”. Here, there is a relationship of "the block time is equal to the difficulty *2^32/the whole network computing power", that is, "the block time * the whole network computing power = the difficulty * 2 ^ 32.

Specifically, for a miner,

Daily mining income

= the number of bitcoins dug * currency price

= (the computing power / full network computing power) * number of sunrise blocks * currency price

= (the computing power / full network computing power) * (all day time / time required to get 1 block) * currency price

= Calculated power * All day time * Currency price / (Drilling difficulty * 2 ^ 32)

= the calculated power * unit mining income

That is, unit mining revenue = all day time * currency price / (digging difficulty * 2 ^ 32)

Note: The unit of measurement for “the computing power owned” and “unit mining revenue” is usually referred to as “TH/s”.

Therefore, it is known that the mining difficulty and the mining machine's own calculation power, even if you do not know the "out of the block time and the full network computing power", you can calculate the daily mining revenue, and then calculate the daily mining net income and return cycle . It can also be seen that the mining difficulty of Bitcoin's entire network (which determines the unit mining revenue) and the currency price are the same for all miners. The miner's mining revenue is only related to the calculation power of the mining machine. The greater the force, the more the mining revenue.

2. The factors affecting the cost of miners are mainly the purchase price of mining machines, the power consumption of mining machines, and the unit electricity costs.

Mine machine power consumption and energy consumption ratio (mine machine power / mining machine power, unit W / T): mining machine power will directly determine the electricity cost of mining. Although the energy consumption ratio does not directly determine the electricity bill, it is also an important indicator. The reason is that the same mining machine, the mining revenue is the same, but the energy consumption is smaller than the mining machine, the electricity bill is less, that is, the mining revenue is theoretically higher.

Unit electricity fee: Due to the low electricity bill during the wet period, China Sichuan has attracted 60% of the Bitcoin network.

According to the Southwest Power Supply Bureau, the local area is divided into three periods: the flood season, the dry season and the peace period. Among them, the duration of the flood season is about May 25 to October 25, the flat water period is from April 25 to May 25 and October 25 to November 25, and the dry season is from November 25 to the next year. April 25th. During the wet season, the electricity price is about 0.24-0.26 yuan / kWh. Compared with the low-water period and the electric enthalpy of 0.3-0.37 yuan / kWh, it has a boost to the miners' income. It is also extremely low in the world. .

3. What other formats are worth paying attention to in the mining industry chain?

The mining industry has formed a clear industrial chain and ecology. In addition to mining, other formats in the industry chain are also worthy of attention: (1) The mining machine manufacturer is the original supplier of computing power. The miner's usage currency, from the mining machine manufacturer to buy mining machines, to obtain computing power; (2) the mine is the physical custodian of computing power. The miners will host the mine in the mine (mainly distributed in northwest and southwest China); (3) the miners can choose to directly connect the calculation power to the mine or sell it to the cloud computing platform. Among them, 1) the function of the mining pool is to collect the miners' power and ensure the income of the miners; 2) The role of the cloud computing platform is to withdraw funds for the miners. In practice, mainstream miners and mines charge French currency (some illegal mines are cryptocurrencies for tax avoidance), and the computing power of the cloud computing platform is denominated in French currency, but for convenience and compliance, The cryptocurrency actually collected by some cloud computing platforms. In general, the legal currency is still the means of payment for the mining industry chain, and the cryptocurrency exists only as a mining revenue.

(1) Mining machine manufacturers: the computing power producer has absolute right to speak in the industrial chain.

As a computing power producer, mining machine manufacturers are the source of the bitcoin mining industry chain. Several of the world's top bitcoin mining machine manufacturers are located in China, and three of them have submitted prospectuses to the Hong Kong Stock Exchange (but have expired), and will continue to sprint IPOs in the future (both are considered to be listed in the US). The miner is essentially a chip designer, but the chip is designed to be used for “mining”, and this business also provides a lot of cash flow for miners.

The performance of mining machine manufacturers is highly correlated with the market, so the volatility is strong. To a certain extent, this is why the three major bitcoin mining machine manufacturers cannot be listed in Hong Kong. Stimulated by the bull market in 2017, for the six months ended June 30, 2018, Bitcoin's semi-annual revenues were close to 2017's full year, and billions of revenues were more than doubled in 2017. However, for the whole year of 2018, the bear market price has fallen, and the sustainability of the profitability of the three mining machine manufacturers has been greatly affected. A number of mining machine manufacturers have chosen to transform into AI chip developers, and have achieved certain results (this report is still based on discussion of mining machine chips).

In terms of market share, regardless of the statistical caliber of the three manufacturers, it is based on calculation power, mining machine sales or mining machine sales revenue. It can be seen that Bitumin’s market share is above 60% and the highest is 74.5%. The share is about 6.2%-20.9%, and the share of Yibang is about 3.7%-11%. The market share of other bitcoin mining machine manufacturers in the world is about 7.9%-14.8%. It can be said that domestic manufacturers have obvious advantages in this field.

The mainstream brands and models currently concerned by the market mainly include Bit Continental Ant S9/T9/S17/S17 Pro/T17, Jianan Zhizhi Avalon A1041/A851/A841, Core Dynamic Technology T2T/T3, Shenma Mining Machine M10 /M10S/M20/M20S/M21/M21S, Yibang Wing Bit E11/E11++/E12/E12+, etc. In 2018 and 2019, the Shenma mining machine market share has increased significantly, and is expected to become the second brand in the industry.

The current mainstream mining machine is Ant S9, which is owned by Bitland. Its market share is about 60%. The other major brands are Core Dynamics Technology and Shenma Mining Machinery. According to the Bitland Prospectus data, in 2017, Ant S9 accounted for 60% of Bitcoin mining machine shipments. In the short term, due to insufficient supply of mining machines, ants S9 will not withdraw from the market. But with the arrival of Bitcoin halving, miners are more inclined to buy less efficient mines.

In the mining machine part of the bitcoin mining industry chain, it should also be mentioned that the three mining machine manufacturers are mainly responsible for the design of fabless integrated circuits (IC), Samsung, TSMC and other shopping malls are responsible for manufacturing, Star Branch Jinpeng, PTI (Licheng Technology), SPIL, ASE, Changjiang Electronics and other manufacturers are responsible for packaging, testing chips, as well as assembly, warehousing, logistics and other links. Different mining machine manufacturers have different voice rights to upstream and downstream, which will affect them to manufacturers. The proportion of prepaid payment, which affects its fund scheduling.

We are optimistic about the investment opportunities of mining machine manufacturers in the mining machinery industry chain. 1) The chip design and industrialization capabilities of mining machine manufacturers have a considerable degree of moat. Although the production capacity of Bitcoin mining machine manufacturers is greatly affected by the chip yield, but in the end, the biggest impact on its performance is the dramatic change in bitcoin prices. Mining machine manufacturers have the desire to expand new business, with the help of existing chips. Design experience, mining machine manufacturers are expected to copy successful experience into the artificial intelligence business to promote the development of China's semiconductor and artificial intelligence industry. 2) In the entire bitcoin mining industry chain, mining machine manufacturers are the closest to the traditional capital market (three manufacturers have submitted prospectus). Some leading mining machine manufacturers have accumulated more financing experience. 3) In the bitcoin mining industry chain, the mining company's business has a small financial attribute, mainly product sales, and faces less regulatory pressure.

(2) Mine: The construction situation is closely related to local policies.

China's mines are mainly distributed in the northwest (such as Xinjiang, Inner Mongolia) and southwest (such as Yunnan and Sichuan). Among them, Xinjiang's computing power accounts for about 25% of the whole network, and Sichuan is about 50%. Bit China, which is mainly engaged in the design and sales of mining machine chips, also owns the mine business. According to its prospectus, these mines are mainly distributed in Sichuan, Xinjiang and Inner Mongolia, the largest of which is located in Inner Mongolia.

According to a report released by CoinShares, a cryptocurrency research institute in June 2019, 48% of the world's cryptocurrency mining activities took place in Sichuan Province, China, where renewable energy accounts for up to 90%; 12% of mining activities are distributed in China. In the region, renewable energy accounts for about 50% of the total; in general, 74.1% of bitcoin mining activities use renewable energy, which is four times the average of all industries in the world. Coinshares further pointed out that bitcoin mining can “turn waste into treasure”, turning renewable energy projects into profit, making the uneconomic activities in the past profitable and beneficial to the development of the energy industry.

The power of the Northwest Mine is relatively stable, and there is no distinction between abundant water, dry water and flat water. However, if the weather is too cold in winter (such as around January), the policy does not allow new mines, which may delay the start of such mines.

The regulatory policies faced by virtual currency mining activities are not clear, which has created certain uncertainty for the investment in the mine. At present, in addition to the two documents issued by the Internet Finance Risk Special Rehabilitation Office Leading Group in January 2018 and the Development and Reform Commission in April 2019, there is no document on the level of national regulatory agencies that specifically refers to cryptocurrency mining.

The attitude of the above two documents on Bitcoin mining tends to "guided withdrawal" and "not allowed to enter." Specifically,

(1) The Mutual Gold Risk Remediation Office requires all localities to actively coordinate relevant departments within the jurisdiction, and take measures to comprehensively adopt measures such as electricity price, land, taxation and environmental protection to guide relevant enterprises to orderly withdraw bitcoin mining activities and request local rectification. The office will report the situation of “mining” enterprises within the jurisdiction before the 10th of each month. The power consumption situation is the main content that needs to be reported, specifically to enjoy the preferential land price or rent, the implementation of electricity prices and other subsidies.

(2) The “Industrial Structure Adjustment Guidance Catalogue (2019, Draft for Soliciting Opinions)” issued by the National Development and Reform Commission in April will include the virtual currency “mining” activities in the “eliminated” industry. The deadline for comments on the above documents is May. On the 7th, it divided the industry into three categories: encouragement, restriction and elimination. Among them, the elimination industry mainly refers to non-compliance with relevant laws and regulations, does not have safe production conditions, seriously wastes resources, pollutes the environment, and needs to be eliminated. Process, technology, equipment and products.

Previously, in December 2018, the National Development and Reform Commission and the Ministry of Commerce jointly issued the "National List of Market Access (2018 Edition), which contains two categories of prohibitions and permits. For the prohibition of entry, market entities are not allowed to enter, the administrative agency If the application is not approved or approved, the relevant procedures may not be handled. The document is directly linked to the latest edition of the Catalogue of Industrial Structure Adjustment Guidance. Specifically, the Negative List of Market Access (2018 edition) prohibits investment in the Catalogue of Industrial Structure Adjustment Guidance. The phase-out project. At present, the official version of the Industrial Structure Adjustment Guidance Catalogue (2019) has not been released. If it still includes the virtual currency “mining” activities in the “eliminated” industry, the market players are not allowed. Invest in such activities.

At the implementation level of local governments, some local governments have proposed to encourage artificial intelligence and big data development. For example, in September 2018, the Sichuan Provincial Government issued the “Sichuan Province New Generation Artificial Intelligence Development Implementation Plan”. In the sense that the mine is indeed a computing power and data computing center, some mines may be built and started in the local area with such documents.

We believe that mines are not suitable for investors to participate in, unless they have relevant power resources.

(3) Mining pool: collecting computing power, for the benefit of miners

As mentioned earlier, the probability that a miner digs into Bitcoin is positively related to the ratio of his or her computing power to the total network computing power. At the moment when the computing power is high (at least 80EH/s, equivalent to 5.9 million Ant S9 mining machines with a computing power of 13.5T), the probability of miners who have less computing power to dig bitcoin is very small. The pool has increased the probability of miners gaining bitcoin rewards through collective computing power. After that, the mining pool will distribute the mining compensation based on the calculation power of the miners of the mining pool, and has the function of smoothing the income of the miners.

In the second year after Bitcoin went online (2010), the world's first mining pool, SlushPool, appeared; in 2013, China's first mining pool, F2Pool (fish pond), went online and began to provide services. After that, AntPool and BTC.com , viaBTC, BTC.TOP, coin printing pool, etc. have gradually become well-known mining pools. Bitcoin pools are highly concentrated. The first seven mine pools have nearly 80% of the total network.

The mine's revenue source is relatively simple, only one access service fee, which is deducted from the bitcoin rewards and transaction fees excavated from the mine pool, which is generally 1%-5% of the bitcoin revenue. In other words, the mine pool charges a service fee in the form of cryptocurrency. Therefore, the main factor affecting the business model of the mining pool is the bitcoin price, in addition to its calculation of the proportion of the total network computing power. Since the income of the mining pool is bitcoin, when the ratio of the calculation power of a mining pool to the total network is relatively fixed, the fluctuation of the currency price has a crucial impact on it. Specifically, when the mining pool needs to pay the rent, electricity and other expenses in the currency, it is necessary to convert the bitcoin income into legal currency. At this time, if the price of the bitcoin falls, the mining pool will be greatly negatively affected.

In some mine service fee settlement modes (such as PPS, PPS+, FPPS), even if the mine itself finds an effective block, it will pay the miners. That is to say, under the foregoing circumstances, the mining pool bears the risk of digging into the currency and has the meaning of “advancing” bitcoin. If the miners themselves have more computing power and the demand for bitcoin is less for the mine pool, the power to select the mine pool is weaker.

We are optimistic about the following mining pools: 1) strong marketing ability, good at acquiring miners' resources; 2) strong security protection; 3) sufficient financial strength.

(4) Cloud computing platform: retail computing power, reducing mining threshold

The cloud computing platform will split the computing power, “retail” to investors, lower the threshold of mining, improve the liquidity of “computing power”, and enhance the financial property of “computing power”. Investors in the cloud computing platform do not have to go through the cumbersome steps of “buying a mining machine (and hosting the mining machine in a suitable mine)”, and can participate in the mining process anytime and anywhere. The risk point is that after the cloud computing platform receives the investor funds, it does not use the funds for mining, change the use of funds, or even run the road. The pain points similar to fund custody exist in many aspects of digital currency investment.

In 2013, the first cloud computing platform Genesis Mining was launched. In 2015, the sales of the computing power nest were larger, and the computing powers sold the computing power. In July 2018, cloud computing platforms such as Genesis Mining and Hashflare announced changes and suspension of computing contracts. In December 2018, BitDeer, the Chinese cloud computing platform, went live, claiming to be the first cloud computing platform to realize real power cutting and transfer. In the middle of 2018, the British cloud mining company Argo Blockchain was approved and listed on the London Stock Exchange under the ticker symbol ARB. At present, the well-known cloud computing platforms on the market include Bit Deer, VeryHash, RHY (Chinese business is connected by the new three-board listed company online 835727 agent), and Di Yi.

These computing platforms are generally online in the bear market. At this time, the computing power owner has the motive to sell the computing power and return the legal currency. However, in the bull market, the computing power owner will have a tendency to reluctantly sell. At this time, the cloud computing platform is facing the pressure of acquisition power. You can only purchase the mining machine yourself to get the power.

Some of these cloud computing platforms allow users to choose their own mining pools (but if investors choose a mining pool that cooperates with the cloud computing platform, they may be able to obtain fee reductions), and some only dock a mining pool, and users are not allowed to The mine pool is directly connected.

We are optimistic about the following cloud computing platforms: 1) strong compliance; 2) sufficient financial strength; 3) sufficient computing resources.

4. Prospect of dry season: the supply of mining machine is in short supply; the vacancy rate of the mine is expected to decline

(1) The supply of mining machines is in short supply, the computing power continues to rise, and the mining machine manufacturers urgently place orders in November 2018. The price of bitcoin has dropped to about 3,200 US dollars. Although the price has rebounded, it is still less than the history reached in 2017. Half of the high (about $20,000), and in May 2019, the price has more than doubled since the end of 2018. Some miners' 7nm chips have low yield and limited production capacity. Benefiting from the rise in the price of the currency and the limited production capacity of the mining machine, sales of well-known mining machines such as Huaqiang North are selling well. Compared with the downturn in the mining machine market at the end of 2018, the trend of warming in 2019 is obvious.

Bitcoin prices have risen and fallen sharply, and miners' chips have been going on for half a year from tape to finished products. In the absence of a full grasp of the future currency price, the producer of bitcoin computing power – mining machine manufacturers are difficult to measure the mining machine back to the cycle, the attitude of mining machine production will be cautious to avoid stocking, but In the bear market that has continued throughout the year, there is pressure to clear inventory (some manufacturers experienced this in 2018).

We noticed that on June 19th, two new S9 series models were released in Bitland. Among them, S9 SE has a computing power of 16 TH/s, and S9 K has 13.5 TH/s and 14 TH/s models. The S9 series is the mainstream model in the current bitcoin mining market. The behavior of Bitcoin's continued sale of the S9 series proves to some extent that Bitcoin miners believe that the current market has warmed up and is a good time to clear inventory (S9 chip format) Is 16nm).

In addition, since July, Bitcoin has scheduled 30,000 wafers in the third and fourth quarters to the foundry TSMC, and has added 20,000 additional wafers. The additional orders also include 16nm wafers. It is known that the second-generation 7-nanometer chip mining machine S17, S17 Pro contains about 144 chips, and a 12-inch 7-nanometer wafer can cut about 3,000 ASIC chips, assuming that these wafers are mainly used for Manufacturing 7-nano mining machine S17 Pro (56T), at the end of the year, Bitcoin can jointly produce about 1.04 million mining machines; assuming that the mining machines were officially launched, sold out and used for mining in early 2020, the entire network will be calculated. Increase by 58.24EH/s. The act of placing high orders reflects the confirmation of the mining machine market by the leading mining machine manufacturer, and the optimism about the future market.

(2) Mining machine manufacturers expand artificial intelligence business to cope with currency price fluctuations

Bitcoin, Jianan Zhizhi and other global leading bitcoin mining companies have earlier tried to “copy” their advantages in ASIC chip design to other businesses, such as the development of artificial intelligence (AI) chips. Helping it to get rid of its dependence on the mining business, and reduce the correlation between its business income and currency price fluctuations, is also beneficial to China's semiconductor industry.

(3) The vacancy rate of the mine during the wet season is high, and the vacancy rate of the mine during the dry season is expected to decline.

Subject to the cautious attitude of mining machine manufacturers, the poor rate of filming and the wait-and-see attitude for future currency prices, the current supply of mining machines is insufficient. In addition, in 2018, in the face of domestic strict regulatory environment, hundreds of thousands of mining machines went to sea and flowed to Iran. In other places, the Sichuan mine in the 2019 flood season did not have a situation in which the position was hard to find. On the contrary, the vacancy rate was higher.

Another reason that is easily overlooked is that bitcoin prices have risen sharply in 2017, from $1,000 to nearly $20,000, stimulating the mining enthusiasm of a large number of miners. Many mines started construction at this stage, but in 2018, bitcoin immediately Entering the bear market, plus 2019, the mining capacity is limited. In addition, the 2019 flood season was later than 2018; in June 2019, earthquakes in parts of Sichuan caused some rivers to be cut off, and some mines moved the mines to Yunnan. Together, these factors have resulted in a higher vacancy rate in the 2019 mines compared to 2017 and 2018.

It should be noted that since the end of the flood season, the miners are less likely to obtain electricity in the dry and dry periods in the southwestern region (power is limited, difficult to distribute), and the mining machine has to be moved to the northwest, and there will be 10 on the way. -20% of the mining machine is depleted. Therefore, miners who have purchased new and less energy-efficient mining machines (such as Ant S17 and Shenma M20) are more likely to directly host the mining machine in the northwest.

During the dry season, the vacancy rate of the northwest mine will decrease, and even the situation that “the aircraft is hard to find” will appear. In addition, since new models such as 7nm are more sensitive to hardware conditions such as mine temperature, we expect that with the upgrading of mining machines, mine management needs to increase the temperature control level, for example, from using negative pressure fans to using Equipment changes such as air conditioners, compressors and liquid cooling. In addition, due to fierce competition, mine management needs to be more intelligent and transparent to enhance customers' trust in themselves.

Investment Advice

1. Different from market cognition, we found that the focus of Bitcoin's entire network computing power (more than 60%) is still in China, and the Sichuan low-water period in the Sichuan flood season is very low, which adds a footnote to this conclusion. In addition, although mining energy consumption is relatively large, more than 70% of Bitcoin mining uses renewable energy, and most of them are “disposable water” that is not connected to the grid. It is not a high-energy industry with nowhere. Employment, consumption and economic development also have a certain pulling effect. It is necessary to pay attention to the implementation of the policies of the subsequent levels of government to “eliminate” the mining industry. 2. Bitcoin mining has formed a clear industrial chain: mining machine manufacturers – miners – mines / mining pools – cloud computing platform – cloud computing power investors. The survival of each ring of the industry chain as a business model is closely related to the price of Bitcoin. Among them, a number of Chinese mining machine manufacturers have designed the industry's leading mining machine chips, and tried to show a blueprint in the traditional capital market. In recent years, Bitian, Jianan, and other companies have tried to accumulate in the mining business. Capital advantages and ASIC capabilities have been “expanded” into the artificial intelligence business, and some achievements have been made; the core of the mine as a business model is the ability to integrate local resources, which requires “one-on-one discussion”, and the scale of its experience is copied. The core of the mining pool is also resource connection. The team with more computing resources and business operation experience has more competitive advantages; the cloud computing platform will standardize and split the mining power to make “computing power” Becoming a kind of financial product has improved its liquidity and lowered the threshold of mining. The biggest impact on its business model is its own financial strength and the regulatory pressure it may face due to its business characteristics biased towards financial business .

3. In the first 11 months of 2018, the price of bitcoin continued to fall, from about 13,000 US dollars to 6,000 US dollars. The mining power of the whole network still rose. Until the price of the currency fell to about 6,000 US dollars, the computing power began to decline. This shows that at around 6,000 US dollars, there are still many miners who are profitable, while others choose mining machines and exit the mining market, which indicates that the miners' mining costs are in a state of differentiation . Among them, in the bear market, the electricity bill has a significant impact on the mining decision of the miners . In November 2018, an important reason for the decline of mining machine computing power was the global mining center, the dry season of Sichuan, and the mining cost of miners increased sharply. In the 2019 flood season, the currency price and the calculation power are flying together, and the mining industry chain has recovered across the board, and opportunities in various formats have become prominent . According to our analysis, in the first half of 2019 , the bull market push and the new round of delivery of mining machine manufacturers, the vacancy rate of the Sichuan mine has been reduced, and the bitcoin net computing power has been 51EH from May 31 . /s increased to 62.6EH/s on June 30 , an increase of 22.7% , and is expected to grow further.

4. We are optimistic about the investment opportunities of mining machine manufacturers in the mining industry chain. First of all, the mining machine manufacturer's chip design and industrialization capabilities have a considerable degree of moat. Although the production capacity of Bitcoin mining machine manufacturers is greatly affected by the chip yield, but in the end, the biggest impact on its performance is the dramatic change in bitcoin prices. Mining machine manufacturers have the desire to expand new business, with the help of existing chips. Design experience, mining machine manufacturers are expected to copy successful experience into the artificial intelligence business to promote the development of China's semiconductor and artificial intelligence industry. Second, in the entire bitcoin mining industry chain, mining machine manufacturers are the closest to the traditional financial market. Some leading mining machine manufacturers have accumulated more financing experience. Third, in the bitcoin mining industry chain, the mining company's business has a small financial attribute, mainly product sales, and faces less regulatory pressure.

risk warning

1. Regulatory policy uncertainty. At present, the blockchain is in the early stage of development. There are certain uncertainties in the management of blockchain technology, project financing and tokens in various countries around the world. Therefore, there is uncertainty in the development of industry company projects. 2. Blockchain infrastructure development is not up to expectations. Blockchain is an important technical direction to solve the privacy protection problem. At present, blockchain infrastructure can not support high-performance network deployment. Decentralization and security will have some restraint on high performance, and blockchain infrastructure will not be developed. Reach the expected risks.

This article is selected from the report released by Guosheng Securities Research Institute on September 1, 2019. The dry season is approaching, and the bitcoin mining industry chain continues to pick up. For details, please refer to the relevant report.

Author: Song Jiaji

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