The idea of this article is to share a global vision of the crypto-mining market, the issues and trends that are transforming this market. It’s based on few years of intense experimentation and exchange in the crypto-mining space by the Sesterce Group and myself and introduce what we call at Sesterce the Mining 2.0
Back to basics, back to BTC mining !
After two years of altcoin mining experimentation, the market seems to be more and more conservative and is back to BTC crypto-mining and this for few reasons :
The first reason is a market trends, from the beginning of 2018 to today the bitcoin dominance surge from 37.8% to 66.3%, at the same time the total market cap has melted from 815B$ to 238B$ about today. Thoses two factors have mechanically reduced the interest and return on investment of altcoin mining with a market value of these coins that has dropped sharply.
The second of these reasons is the lack of fundamental value of these altcoins, many of these projects have shown their limits over the past few months and have sometimes been stopped. This case is all the more accentuated on Altcoin POWs, which sometimes have no fundamental value if not generated profit via mining. With two such different business models (Profit via mining and profit via the value proposition of these projects) many of them have been lost and have seen their miners suffer huge losses once the rate of these crypto-currencies has fallen as a result of panic movements by miners who are selling their assets.
Another of the fundamental reasons, as a consequence of the two previous ones, is the behaviour of manufacturers in this declining market. Driven by a desire for profit, they are increasingly abandoning the altcoin market in order to concentrate on the Bitcoin Mining market. We can illustrate this point with two recent events. First of all, the outright cancellation of the GRN1 (GRIN Miners) by Obelisk and the delays of several months on the G32 (Grin Miners) or the STU-U6/U8 series by StrongU. At the same time we are seeing a rush from the main manufacturers on increasingly efficient bitcoin mining models with real innovation on the chips of these miners (Notably the S17 series from Bitmain or the M20S from Whatsminer)
The halving is an event recurring every 210 000 blocks on the bitcoin blockchain that decrease the block rewards provided to miners by two. This is a very important event for miners because it directly impacts their sources of income, namely these rewards on the blocks. The next one will take place in 6 months, so it is important to analyse the different possible scenarios around this halving. Here are some ideas for reflection.
We have already experimented two halving, both of which have given very powerful upward trends with multiplier factors ranging from 2 to 20 of the price of bitcoin over the two years following these halving. We are therefore entitled to ask ourselves what the next scenario will be, logically we will respond with a significant market increase. But some analysts believe that the latter in view of the exposure of the cryptos market will be different and we could also see a stagnation or even a sudden drop in price in the event of the capitulation of the miners. Without going into the details of the technical analysis, let us explore an upward and then downward scenario:
In the event of a decline in the price of bitcoin, bitcoin mining OPEXs will be too high for most miners, and we will see them stop their miners. This drastically reduces the average hashrate. We could thus fall into a loop of falling prices and hashrate until we fall to a floor price as we saw in the last bear market of 2018. The interesting dynamic to observe in such a scenario is how the distribution of the remaining hashrate will evolve. And it is therefore highly likely that the largest mining infrastructures with very low electrical costs and very high scale effects will be the only ones still profitable enough to be able to continue mining. Thus we will have a quasi-monopolistic market distribution as we can see today in the precious metals market. These structures will make very large profits but the value of Bitcoin’s decentralization will be questioned and it will then be very difficult in the event of a rise in prices for smaller and more B2C miners to enter the market as these structures will be more and more efficient.
In the case of a price increase of at least a factor of 2 as we have seen in previous halving, we could have more and more miners with a greater distribution of hashrate between the miners and a greater decentralization. Thus we would have a “win-win” situation where small and large miners could find each other. But to this several conditions are necessary, the first is that of a correlated increase in the difficulty of mining at the prices, and not a too strong increase with market anticipation. In this case the distribution will be much more restricted and we could find ourselves in the same situation as the first scenario. The second is the evolution of mining technologies and the efficiency of chips (the development of 7nm chips can raise this question). If this evolution is too strong, today’s miners will end up with obsolete equipment and if they do not take advantage of a very low electrical cost they will also find themselves in a delicate situation.
Industrialisation of the market
Today, one of the major trends in the market is the industrialization of the market, we are moving from a fundamentally B2C and decentralized model to a fully industrialized model that plays on the effects of scale at all stages of the value chain. From energy sourcing to infrastructure management, including the purchase of machines and the optimization of air flows.
This is possible through several factors. Bitcoin has successfully proven its value over the past 10 years as more and more large-scale investors enter the mining market. They are able to see this investment as portfolio diversification and are able to set up a real financial framework around their investments. Thus they see longer term on their ROI periods and set up mining parks which in the long term are so optimized that it is impossible for B2C players to compete with them.
The second factor is a major problem on the nature of this market that has pushed back B2C players. The reality of the difficulty of managing miners (Noise, Stability, etc.) requires real technical skills, which gradually discourages many of these actors. This highlights a fund problem in this market: From the beginning it has been a question of B2C players in a B2B market. This reality has been masked until now because the profitability was high enough to mask this missmatch. But the more competitive this market becomes, the more difficult it is to ignore this major problem. Thus we have a rearrangement of market reality with B2B players in a B2B market. This missmatch can also be put forward under the prism of the relationship to risk. It is very difficult for a B2C player using part of his savings to mine to see his investment go up in smoke in case of unprofitability, where B2B players are much more prepared for high-risk vehicles and are much more able to measure it and integrate it into their forecasts.
Industrial Mining Models
To illustrate this point, we can take the case of several entities operating in this industrial market and highlight the different forms they take.
- The first type of entity is private investment companies operating a mining fleet. The example that has made a lot of noise lately is Layer1 backed by Peter Thiel working on a multi-million dollar mining park in Texas. This model is quite simple, creating pools of private investors capable of injecting large agglomerated investment tickets into a single mining facility operating entity.
- The second type are public investment companies listed on stock exchanges. This model seems to be quite widespread in Canada with actors like Hut8Mining (Working closely with BitFury) or the best-known BitFarms very active in the Quebec region of Canada. This model allows everyone to take a share in these structures through an IPO, which act as bitcoin portfolios because most of them limit the resale of Bitcoin as much as possible and finance their expansion through more traditional models such as debt.
- The third type are investment companies linked to ASICs manufacturers, which are very present in China, particularly these very large infrastructures are an integral part of the business models of the largest ASICs manufacturers, enabling them to make huge economies of scale with very low equipment manufacturing costs and taking advantage of a very advanced mining eco-system in China. Recently an interesting event occurred with the expansion of the Bitmain mining park in Texas.
Keys to detect a good crypto-mining ecosystem
The more mature the market becomes, the more we can detect ecosystems that are playing their part and seem to be becoming nerve centres of mining around the world. Let’s try to see now how we can detect these ecosystems. :
- The first element to take into account is the cost of KW in the region, with the industrialization of mining we are moving into a real energy game and the real difference is this cost. it is therefore essential to base your investment on this and to be sure to be able to ensure a cheap, stable electrical cost over several years with the different electricity companies.
- The second is regulation and the state’s position on mining, it is very important in the long term to study the government’s position on mining to ensure that it can exploit its investment over several years.
- The third are CAPEX and OPEX, in industrial mining models we often talk to our partners and investors in CAPEX/MW, this data allows us to have a global idea of the price that will cost us in infrastructure and field each usable MW. Often correlated to CAPEX we have to take into account OPEX (Maintenance costs, labour costs, etc.).
- The fourth important parameter is the maturity of the eco-system. What I mean by this is to know the average level of manpower on mining, whether in infrastructure construction, the presence of maintenance centres around the facilities or the experience of the various institutional players with mining. As a result, despite an electricity cost that could be considered quite high today, Sichuan province in China remains the most advanced mining ecosystem today.
We can illustrate this with some examples of a really interesting ecosystem to follow in the coming years. First of all, the most advanced and the one that currently concentrates the most mining power is Sichuan in China, which remains a sure bet. A second interesting one is the Ural region in Russia with more and more actors present and an interesting proximity to China to allow to set up infrastructures quickly, the electricity cost is also low. The third is Kazakhstan and the Central Asian countries which seem very favourable to mining with very low electricity costs but also lower CAPEX by a factor of 2 with China and a factor of 4 with Canada or the United States on average. The third is Canada with a large number of players in the Quebec region with much appreciated stability and low electricity costs. The fourth is therefore Texas and globally the United States with very high investments in industrial-scale mining farms, these regions also enjoy very low electricity costs and great stability.
Sesterce trends for 2020
To conclude this presentation on Mining 2.0 and the new era of mining, it seemed important to me to present the evolution of Sesterce and how we are responding to these changes internally.
The first thing was the opening of Sesterce Investment an entity allowing us to work and position ourselves on these industrial investments in mining in the various ecosystems mentioned above. This through our network of partners around the world and Sesterce’s experience in the distribution of miners allows us to position ourselves very competitively on different infrastructures and grow in this game of industrialization of mining.
But the second and most important thing for me is to remain very faithful to our mission: Open and simplify the crypto-mining investment world to everyone
Thus the idea will be to continue to simplify and open up these industrial opportunities to as many people as possible through an increasingly simple and efficient user experience and through relevant investment vehicles such as the possibility of hosting, cloud mining but also and above all our major project for the coming year a tokenization of these mining infrastructures.
In conclusion, this presentation is an opportunity for me to do what we call with several partners and internally Mining 2.0, a profound change in the nature of the mining market, the development of a mature eco-system and a hyper-industrialization of the activity. Sesterce’s challenge today is to penetrate as much as possible this market, which naturally tends to centralize, and find intelligent ways to open it up to as many people as possible.