What will miners come to halving with, and who will survive after?

The most anticipated event of the coming year in the Bitcoin industry is still the halving - planned for Mayreduction of the reward for the found block from 12.5 to 6.25 BTC. Since commissions for transactions on the network account for a very small fraction of the income of miners, in fact they will receive half as much.

How industry players prepare for the planevent and a possible drop in cash flow? ForkLog magazine tried to figure out how the miners are preparing to meet the upcoming event, and how it threatens them.

Forewarned is forearmed

A notable feature of last year wasalmost continuous increase in hashrate and, accordingly, mining difficulty. This was the result of not only increasing the number of new pieces of equipment for cryptocurrency mining, but also the transition to more efficient models.

Back in early 2019, JPMorgan Chase expertsnoted that the cost of mining bitcoin exceeds its market price - $ 4060 against about $ 3600. This mining break-even level was overcome with the start of the rally in April and did not fall to it until now.

In the summer, experts at Coin Sharecalled a higher breakeven bar for mining BTC - $ 5700. In this figure, they included not only the standard cost of electricity for calculations ($ 0.05 per kWh), but also the depreciation of equipment (for a period of 18 months), as well as operating expenses of 15% of the total costs.

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But since May of last year, bitcoin has not even fallenclose to this level. Mining throughout the year turned out to be cost-effective enough to start re-equipping with new and more powerful installations, preparing for halving.

It is significant that since August in the secondary marketprices have begun to plummet based on the hash of the network in recent years - Antmainer S9 - the most popular earlier flagship Bitmain. The correlation with the decline in the price of bitcoin, albeit with a time lag, was clear and understandable: the profitability of mining on S9 was falling.

According to Kaboomracks (brokermining equipment, working mainly in the North American market), back in August, the price of the former flagship Bitmain was at $ 450. Then it started to fall along the mining profitability trajectory, but when this indicator, along with cryptocurrency quotes, stabilized, the price of S9 continued to decline to levels of $ 90-60.

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According to Chinese media, local miners alsoactively got rid of S9. A dealer in used mining equipment operating in Sichuan said it sold 30,000 obsolete units from August to November. In November, the Antminer S9j 14.5m selling price dropped to $ 113, and a few days later - already to $ 98.

One of the managers of a mining farm in Sichuan told the media that at the end of November, Bitmain launched 10,000 S9j 14.5m units from one of its enterprises for $ 100 on the secondary market.

At the same time, mining on S9 is still profitable, although not as much as on the new flagships.

Source: f2pool.com

It is worth considering that experts rate the averagethe electricity tariff used by miners is $ 0.04 per kWh, and $ 0.05 is used for calculations. Chinese media claim that in Sichuan in the rainy season you can buy electricity at a price of $ 0.015 per kWh.

But in September, this period ended, and, probably, miners began the transition to more efficient equipment in anticipation of a reduction in remuneration, in which old models will be unprofitable.

For Chinese miners, transparent information is not publicly available, but the situation can be traced to their Western colleagues.

In recent months, several Western mining companies have purchased large quantities of new generation ASIC miners:

• Argo Blockchain received 10,000 Antminer T17 units, changing the order from 5,000 AS17 S17s;
• MGT Capital purchased 320 Antminer T17 Pro and 1,100 Antminer T17;
• Riot Blockchain received 4,000 pieces of the Antminer T17 Pro.

At whose expense is the banquet?

The Block estimates the aggregateminers' revenue for the past year amounted to $ 5 billion. The main costs of the industry are related to the payment of electricity consumed. At the moment, the bitcoin network consumption level is at the level of 80-90 TWh per year, depending on the hash rate fluctuations. It is clear that this indicator was lower last year, but these figures give energy costs $ 4-4.5 billion (based on $ 0.05 per kWh).

Even minus the rest of the costs, the miners' profit looks sufficient to replace the most obsolete equipment with more efficient equipment in anticipation of a reduction in profitability.

But according to Iterative Capital partner LeoZhang, major miners are actively cooperating with credit organizations, including in the field of decentralized finance, to expand the business and upgrade equipment.

For example, the largest mining company inCanada BitFarms also used borrowed funds to expand its business. The firm operates five farms in Quebec. Access to cheap hydropower (according to the company, $ 0.04 per kWh) and a cool climate (saving on cooling) provide convenient conditions for the mining business. According to information on the site, the cost of bitcoin mining in the third quarter amounted to $ 3482 per coin.

Back in early 2019, BitFarms hadthe total processing power of 208 PH / s with equipment consisting mainly of Antminer S9. Over the past year, the company acquired 13,300 next-generation miners: a mix of Antminer S17 Pro, Innosilicon T3, Avalon A10 and Whatsminer M20S.

Today, BitFarms has an installed capacity of about 813 PH / s (about 0.8% of the network hash), increasing the rate for the year by approximately 391%.

The company financed the purchase of equipment through a loan of $ 20 million at 10% per annum, provided by the American investment company Dominion Capital.

Loan repayment term - 24 months. The obligations of BitFarms to Dominion Capital are:

• $ 4.6 million for 2020;
• $ 17.1 million for 2021.

In the financial report for the third quarter of last year, the company assured that the available funds and future income will be sufficient to ensure current activities and payment of debts.

However, at the end of the quarter, working capitalBitFarms amounted to $ 0.6 million, and operating cash flow for the period - $ 1.5 million. For the nine quarters remaining until the end of 2021, the company will receive, under the same conditions, $ 13.5 million. Loan obligations amount to $ 21.7 million.

Of course, the company has increased computing powerin the fourth quarter and probably slightly increased income, but to cover the deficit of $ 8.2 million in debt obligations, it should almost double.

But in May, the reward for the mined block and the income of the miners will definitely be halved.

At the same time, according to the same Leo Zhang, the break-even price of bitcoin for miners is now at $ 6500. His rating is based on information from miners.
This means that after the halving, Bitcoin must rise above $13,000 for mining companies, even uncredited ones, to be financially stable.

Bet on growth! And if you don’t shoot?

It seems that it is precisely the growth of bitcoin that mostminers and made a bet. Earlier after halving, the first cryptocurrency switched to parabolic growth, up to a historic high of $ 20,000 at the end of 2017, so the miners' expectations look justified. But many experts warn that the upcoming halving of remuneration for the block may go according to a different scenario than the two previous ones.

Cryptanalyst Willy Wu noted that, unlikeIn 2012 and 2016, Bitcoin is for the first time approaching a reduction in the block reward against a bearish balance of power, and so far nothing has changed. The chief strategist of CoinShares investment company, Meltem Demirors, is confident that a sufficiently developed derivatives market, which did not exist before, will not allow Bitcoin to grow after halving.

CoinMetrics analysts believe thatBitcoin's price movement during the upcoming reduction in block rewards may even repeat the Litecoin halving scenario - the expectation of growth and decline. It is noteworthy that the creator of Litecoin, Charlie Lee, has the same opinion.

The financial situation of the mining industry afterwe will be able to estimate the reduction in revenue in just a few months - according to the hash of the network and the reports of public companies in the industry. But we can assume the consolidation of production by large players and a further increase in the share of Chinese miners in hashrate - halving will occur on the eve of the rainy season in Sichuan and a drop in electricity prices in the region most important for the industry today.

Andrey Pleschenko