1/ The Bitcoin mining FUD is back.
Here's a thread on a few (of many) reasons why Bitcoin mining is *not* doomed:
Here's a thread on a few (of many) reasons why Bitcoin mining is *not* doomed:
2/ Bitcoin mining has become extremely competitive on two levels:
1) Hardware manufacturing
2) Mining as an operation
1) Hardware manufacturing
2) Mining as an operation
3/ On hardware manufacturing:
Over the last 5 years, ASIC replacement cycles have lengthened significantly. In the early days, they were short, with designs obsolete within months. Companies like Bitmain could iterate rapidly since mining was lagging behind the latest tech node.
Over the last 5 years, ASIC replacement cycles have lengthened significantly. In the early days, they were short, with designs obsolete within months. Companies like Bitmain could iterate rapidly since mining was lagging behind the latest tech node.
4/ Ex: Two years ago, Bitmain's Antminer S9 was the industry leader, 3 x more performant than the industry average. Today, it has no competitive edge.
5/ Compared to the few months it took Bitmain to launch a next generation miner a few years ago, present day cycles allow for plenty of time for competitors to get to market, which has allowed several OEMs to enter in the process.
6/ New manufacturers are now competing against incumbents, while old ones struggle to stay afloat with the commoditization of hardware.
At nearly every stage of the hardware supply chain, the competition is lowering the risk of monopolies.
This a promising sign for Bitcoin.
At nearly every stage of the hardware supply chain, the competition is lowering the risk of monopolies.
This a promising sign for Bitcoin.
7/ (There does remain a high level of concentration at the foundry level, but as ASIC lifecycles continue to lengthen and efficiencies at the node level plateau, the bargaining power of foundries will also likely diminish.)
8/ So what's the miner hardware opportunity?
Assuming 2 year hardware depreciation and a trillion dollar Bitcoin network value over 5 years, miners should not be willing to pay more than $7.5 billion for equipment annually.
Assuming 2 year hardware depreciation and a trillion dollar Bitcoin network value over 5 years, miners should not be willing to pay more than $7.5 billion for equipment annually.
9/ While the largest mining manufacturers have reported EBITDA margins > 50%, their margins are likely to settle at or near the 30% for traditional semiconductor and equipment manufacturers, yielding an industry EBITDA of $2.25 b.
10/ If the equity market were to value them at 10x EBITDA, the total Enterprise Value attributable to mining equipment manufacturers would be roughly $20 b.
Discounting to today’s $150 b in Bitcoin network value, the total EV attributable to mining OEMs shouldn't exceed $5 b.
Discounting to today’s $150 b in Bitcoin network value, the total EV attributable to mining OEMs shouldn't exceed $5 b.
11/ On mining as an operation:
As the industry has professionalized, mining operations have changed substantially. Mining data centers are now industrial-scale facilities with management and servicing on par with traditional cloud data centers.
As the industry has professionalized, mining operations have changed substantially. Mining data centers are now industrial-scale facilities with management and servicing on par with traditional cloud data centers.
12/ Contracts often are long term and built for multiple hardware cycles requiring significant upfront capital spending and power supplies ranging in the hundreds of megawatts.
Electricity is a critical consideration in the economics of mining facilities
Electricity is a critical consideration in the economics of mining facilities
13/ Historically, most large mining farms have set up their operations in China for reasons of which are diminishing in importance.
14/ Because Asian foundries supply most of the chips for mining hardware, the shorter deployment times, shipping, and overhead costs has made China a logical location.
15/ Now that design cycles are lengthening, however, the competitive dynamics are shifting from geographical proximity and rapid deployment to product reliability and energy costs.
16/ Chinese miners have historically cut deals with power-plant owners and local municipalities to access cheap electricity. Mining farms have proliferated in Sichuan, for example, attracted by the access to cheap electricity from its hydroelectric power stations.
17/ As more global energy is devoted to mining Bitcoin, access to cheap energy will become further distributed.
It will be harder to obtain large amounts in any specific region and regions that have historically capitalized on energy arbitrage opportunities will no longer.
It will be harder to obtain large amounts in any specific region and regions that have historically capitalized on energy arbitrage opportunities will no longer.
18/ Countries around the world, including the US, are now offering extremely competitive electricity rates, with low cost stranded renewables and natural gas peaker plants becoming a particularly attractive avenue for deployment.
19/ While considered a risky, volatile but highly profitable business today, mining should evolve to resemble the traditional commodities industry over the long term.
20/ ASIC lifecycles will be long enough that miners will have far greater predictability on their cash flows. In a mature derivatives market, miners will be also be able to hedge against bitcoin’s volatility risk, ensuring sufficient cash flows to fund ongoing operations.
21/ The greater predictability will attract a new pool of more conservative, risk averse players who today would even consider mining bitcoin.
These players will pump major $$$ into it. (think investment banks and traditional peaker plants)
These players will pump major $$$ into it. (think investment banks and traditional peaker plants)
22/ Ultimately, deeper capital markets, longer hardware cycles, lower than expected profitability thresholds, and dampened price volatility should provide significant fuel to spike an unprecedented demand to mine bitcoin.
cc @MartyBent
cc @MartyBent
23/ In times of geopolitical uncertainty and financial market volatility, converting electricity into a monetary asset could take on new importance.
Bitcoin mining will be the ultimate path to direct exposure to this new monetary world order.
Bitcoin mining will be the ultimate path to direct exposure to this new monetary world order.
