Messari Daily Brief: The Perfect Mining Storm

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PoW Mining Market Disruptions

Finally!

A post that sits more firmly at the intersection of crypto and the coronavirus. (More of my most recent updates here.)

Let’s talk about bitcoin mining for a minute, and particularly, what could happen in the months ahead for bitcoin’s network security as cost structures get weird with the upcoming block reward halving, Chinese chip production slows down, and coronavirus concerns (potentially) impact staffing at major industrial mining farms in China.

The good news is that the mining industry is already quasi-public, so we have a sense for who all of the major players are, and we know where the majority of hashing capacity actually runs for proof-of-work powered networks (mostly China, but also Texas, and places that are cold and energy rich).

Network capacity and growth
Current hashing power on the bitcoin network stands at about ~110 exahashes per second (EH/s), up from ~40 EH/s at the end of 2018. That capacity has continued to swell in spite of the approaching halving, which (by definition) slashes miner revenues by 50%, and may drag some industrial mining farms to near break-even levels on their operations.

Coinshares estimated in December that Bitmain machines continue to power the majority of the world’s total hashing capacity, even if the firm's dominance is declining. CoinDesk published an excellent analysis last month explaining how 2019 mining capacity growth was likely driven primarily by up-and-comer MicroBT, whose machines now apparently represent up to 30% of total mining capacity. And Canaan Creative, which now trades publicly in the U.S. claims to account for 10%+ of hash power based on its late 2019 IPO prospectus. All three companies are racing to deliver next generation chips in advance of the halving (especially Bitmain’s AntMiner S19, and MicroBT’s WhatsMiner M30).

When it comes to the coronavirus potential impact, MicroBT is based out of Shenzhen, whose province Guangdong has been the second-hardest hit province in China after Wuhan’s Hubei. Canaan Creative operates out of Hangzhou, whose province Zhejiang has been third-hardest hit in China. Both are under relative lockdown, and not yet close to their pre-virus capacities. Likewise, Bitmain is based in Beijing, but chip manufacturing is done in Shenzhen and Malaysia. (It's a bit more hedged, but maybe too early to tell whether Malaysia would have similar disruptions.)

Production of new mining machines from these major manufacturers is already highly dependent on the limited wafer supply from semiconductor companies like Samsung and TSMC. But throw in the variance that may come from production delays - due to reduced staffing, supply chain disruptions, or wholesale export restrictions - and you’ve got a potential crap shoot with respect to who the winners and losers might be in the medium-term chip manufacturing foot race.

One miner could have multi-month delays that allow another to open up a significant lead in next generation machine installations with key mining farm operators.

The Block (paywall) wrote up a good overview of this dynamic as well, noting that all of the major Chinese chip manufacturers had already "put out notices informing clients that they have suspended shipping, manufacturing, and customer services of their mining rigs.” Though their sources seemed to think the impact would be muted and they were much more optimistic about the virus-related return to business as usual than I have been.

On the one hand: “Profitability is impacted. This is pretty significant due to anticipated increasing difficulty.”

On the other, "Production will continue in Malaysia.” And "I think the virus is a 4 to 6-week hiccup. We’ll move beyond it and catch up.”

The mining industry is already ruthlessly competitive, though.

That’s true with respect to both chip manufacturing and industrial mining farm management. And while most of today’s mining farms are much better at hedging out their risk - be it bitcoin price sensitivity, energy rates, or supply chain diversification - you might expect shipping delays to have the greatest economic impact on operators that are overleveraged and borrowing and lending around highly variable chip shipment and installation dates.

It feels like a potentially high variance event, and I wouldn’t be surprised to see the perfect storm of events significantly shake up the mining market's power dynamics for the rest of the year.

-TBI