Bitcoin Mining Special Edition - TokenInsight
Bitcoin MiningSpecial Edition- The Third HalvingJune 2020ANALYSTSFanger Chou, Johnson Xujohnson@tokeninsight.comT I R es ea rchTokenInsight.combd@tokeninsight.comFind, Create, and Spread Value in Blockchain.
RESEARCHContentExecutive Summary3Overview4The Current Bitcoin MiningDevelopment5Bitcoin Mining IndustryMiner’s Profit Margin(%)Mining DerivativesThe Impact of Halving on BitcoinMining10Halving PopularityBitcoin PriceBitcoin Network DifficultyAverage Block TimeMiner's IncomeFuture Trends of Bitcoin Mining17Global Trends and Changes in MiningpolicyFuture Development and Evolution ofMiningtokeninsight.com2
RESEARCHExecutive Summary① The decline in the proportion hash rate in China Since September2019, The estimated hash rate in China has shown a slow downwardtrend, which has dropped from 75.63% to 65.08%; while the UnitedStates has begun to increase from 4.06% to 7.24%, up by 78.33%;② The mining marginal profit falls below 0 After halving, if the mineruses the Antminer S17 , the electricity cost needs to be controlledbelow US 0.08 or the operating cost should be kept minimum tomaintain profitability; if miners are using the Antminer S9 models, theelectricity fee needs to be managed under US 0.035 or reduce theoperating costs is the only way to remain profitable;③ More than 60 As of the first quarter of 2020, there are more than 60existing cloud mining service providing platforms worldwide, of which 9major platforms cover major markets and offer cloud hash rate servicesfor more than 30 algorithms and tokens;④ The rise of mining derivatives TokenInsight is optimistic about thefuture of crypto asset derivatives, especially when institutions arepaying more and more attention to this innovation and such financialproducts;⑤ Surging of halving popularity According to Google Trends data, thesearch volume of 'Bitcoin Halving' reached more than 100 within aweek after halving, and the search volume exceeded more than 9 timescompared to the second Bitcoin halving (July 3-6, 2016);⑥ The 16th largest May 20, Bitcoin mining difficulty was adjusted for thefirst time after halving. The difficulty fell by 6%, which is considered tobe the 16th largest adjustment in Bitcoin history.⑦ 20%: The average block time of 1000 blocks (approximately one week)before the halving is 560 seconds, and 689 seconds post halving, whichhas risen by about 20%, indicating that there have been about 20%network hash rate during this period gradually exit the network.⑧ 18% Before the halving, the proportion of transaction fees remainedmostly below 6%; After the halving, due to the halving of rewards andthe increase in average transaction fees, the proportion of transactionfees fluctuated within the range of 18% -24%.⑨ Progressive TokenInsight believes that with the arrival of the halving,there will be a sell-off of old mining machines in the market. Therefore,2020 is a pivotal year for the progressive transformation of the miningindustry, and the unstructured mining operations will be replaced byefficient, professional, and refined management strategies.tokeninsight.com3
RESEARCHOVERVIEWBitcoin's Third HalvingAfter the third halving, the annual supply growth rateof Bitcoin is about 1.7%, and various challengesemerged in the bitcoin mining ecosystem.As of May 12, Bitcoin officially completed its third block reward halving atthe block height of 630,000. The first halved block was broadcast byAntPool, and the block reward has now been set to 6.25 BTC, and thetransaction fees approximately 0.91 BTC.‣ The History of Bitcoin Halving (Data updated to May 18, 2020)1st Halving2nd Halving3rd HalvingPrice change 2.01- 1,178 163.65- 19,800 3,180-?Before halving 2.01- 12.22 163.65- 657.61 3,180- 9,323After halving 12.21- 1,178 657.61- 19,800-Bull duration12 12 months9 16 months-Max drawdown50.42%39.55%-Max drawdown date100 days before24 days before-All time high date368 days after525 days after-Bear duration14 months12 months-Source: TokenInsight1. 2019 Gold annual supply;https://www.gold.org d-trends-fullyear-20192. The change of USA M1supply: https://fred.stlouisfed.org /series/MANMM101USA657Stokeninsight.comAs a type of asset allocation, Bitcoin’s annual supply growth rate after thethird halving is about 1.7%, which is lower than gold’s 4.8%1 in 2019, andthe U.S. narrow currency (M1) growth rate in 2019 is 4.44%2. For theBitcoin third halving, there are limited new money coming in as for now, inorder to support the Bitcoin price in the long run organically, the industryneeds to attract newcomers to support the growth of the industry.The impact of the halving on the Bitcoin mining ecosystem has a longlasting impact, short term mining costs have risen sharply, miner revenuefrom fees has risen sharply, some inefficient mining machines have beeneliminated during the third halving, upstream and downstream miningoperations such as mining farms, mining pools, and mining machinemanufacturers will accelerate the reshuffle, and 2020 is a key year for theprogressive transformation of the mining industry.4
RESEARCHTHE CURRENTBITCOINMININGDEVELOPMENTBitcoin Mining IndustryChina's average monthly hash rate may decline, theUnited States seizes market shareAccording to the data from the Bitcoin Electricity Consumption Index(CBECI) released by the Cambridge Centre for Alternative Finance (CCAF),as of May 7, 2020, the world ’s annual power consumption is 20863 trillionwatts per hour (TWh), Bitcoin mining power consumption is estimated tobe 69.03TWh a year, accounted for 0.33% of the global electricity usage.‣ Bitcoin Mining Power Consumption IndexSource: Cambridge Centre for Alternative Finance, TokenInsightExpected annual power consumptionMinimum annual power 92019/7/142020/5/17CCAF pointed out that although CBECI is more accurate than others, itsaccuracy is still limited. Since the precise energy consumption of theBitcoin network cannot be determined, CBECI offers a range ofpossibilities, including minimum annual power consumption and estimatedannual power consumption.The minimum annual power consumption assumes that miners use themost efficient mining machine for mining. The estimated annual powerconsumption assumes that miners use both old and new mining machinesat the same time, rather than a single type of mining machine for mining.It can be seen from the above figure that after the market suffered a sharpdecline on March 12, 2020, the minimum annual power consumption indexof Bitcoin mining declined, and the estimated annual power consumptionwas more obvious. At the same time, after halving, the estimated annualpower consumption has also shown a downward trend.tokeninsight.com5
RESEARCHTokenInsight believes that Bitcoin's estimated power consumption canreflect the emotions of miners to a certain extent. The main factorsaffecting Bitcoin mining are Bitcoin price and mining rewards. When themarket is negative, the attitude of the miners will also be negative.In addition, due to the impact of the halving, there will be a gradual shutoff of the older generation miners, resulting in a slow decline in Bitcoinmining power consumption.According to the average monthly hash rate estimated by CCAF, China'sBitcoin hash rate continues to occupy a sizeable position, and the overallrate remains above 65%.As of April 2020, the United States is currently the country with thesecond-highest hash rate, accounted for 7.24%; Russia, ranked third,accounted for 6.9%; Kazakhstan, Malaysia, and Iran accounted for 6.17%,4.33%, and 3.82% respectively of the global market.‣ Average monthly hash rate by countrySource: Cambridge Centre for Alternative Finance, /012020/022020/030%2020/04On the other hand, since September 2019, China's estimated hash rate hasshown a slow downward trend, which has now dropped from 75.63% to65.08%; while the United States has begun to increase from 4.06% to7.24%, up by 78.33%;Unexpectedly, Kazakhstan's current hash rate accounted for 6.17%, up334.51% from 1.42% in September 2019.tokeninsight.com6
RESEARCHMiner’s Profit MarginPost halving, the older generation mining machinereached its end of the lifecycle, gradually phasing outfrom the Bitcoin networkTokenInsight analyzes the miners’ profit by introducing two indicators,namely Miner ’s Profit Margin and Marginal Cost of Creation. The formulafor calculating the miner's marginal cost of creation is as follows:1* Ha sh r a t e * Po w er E f f i c i e n c y /1000 * E l e c t r i c i t y * 24h * (1 O p er a t i o n Cos t s)Bl o ck Re w a r d T r a n s a c t i o n FeesWhere Block Re war d represents the daily block reward generated by theBitcoin network (expressed in the number of Bitcoins, before-halving:1800, post-halving:900, but it varies according to the actual blockproduction time); T r a n sa ct ion Fees is the fees for daily Bitcoin networktransactions; Ha shr ate is the hash power for the entire Bitcoin network.Po wer E f f icien c y is the power consumption; Elect r icit y is theelectricity price; Oper at ion Costs is the operation cost. This formulashows the production cost of one Bitcoin on any particular day. The miner'sprofit margin is the proportion of Bitcoin price minus the cost ofproduction.Taking the Antminer S17 as an example, if the electricity cost is 0.08,the marginal production cost (operating cost ratio of 15%) was 5,300before halving, and rose to about 9,300 post halving.The miner's profit margin (operating cost ratio of 15%) remained at around40% before halving. Post halving, the miner's marginal income fell toaround 3%, which is basically at a non-profit state.‣ Bitcoin's marginal production cost and marginal revenue (AntminerS17 ; electricity cost 0.08 )Source: TokenInsightBitcoin Price(Left)tokeninsight.comMarginal Cost of Creation(Left)Profit Margin(Right) 11,00050% 8,50025% 6,0000%1/11/313/13/314/30-25%7
RESEARCHTaking the previous generation mining machine Antminer S9 series miningmachine as an example. Its marginal revenue and marginal production costare shown in the figure below.If the electricity fee is 0.035, the marginal income of miners (operatingcost ratio is 15%), the marginal income of Antminer S9 series minersmaintained at about 45% before the halving, but after the halving, it willfall and breakthrough 0, and will not be maintained until the market isstable.The miner's marginal production cost was 5,300 before the halving, androse to about 9,300 after the halving.‣ Bitcoin's marginal production cost and marginal revenue (AntminerS9; electricity cost 0.035)Source:TokenInsightBitcoin Price(Left)Marginal Cost of Creation(Left)Profit Margin(Right) 11,00050% 8,50025% hich means, if miners are mining with Antminer S17 , they need tocontrol electricity costs below 0.08 or reduce operating costs to maintainprofitability; if they are mining with Antminer S9, they need to controlelectricity fees below 0.035 or reduce operating costs to maintainprofitability.TokenInsight believes that the profit margin falls below 0 does not meanthat miners must shut down their operations immediately. Different minershave different mining machine purchase prices, electricity costs, andoperation and maintenance costs.For miners, frequent switching opportunities bring greater pressure on themining machine and power supply system, increase the damage rate, andaffect revenue. On the other hand, it will also cause greater losses inextreme market conditions.tokeninsight.comWhen the profit margin falls below 0, miners are suggested to take intoaccount the near future market outlook, and then to consider adjust theoperations strategy such as to adopt liquid cooling technology, underclock, reduce operation and maintenance costs and various othermeasures, thereby reducing overall production costs. In addition, toconsider using financial instruments to hedge and stables mining income. 8
RESEARCHMining DerivativesThe rise of mining derivatives not only uses Bitcoin asthe underlying asset, but also on hash rateThe mining industry is gradually becoming mature, and the industry iscurrently in the process of shifting from home miners to institutionalization.At present, the cryptocurrency market has developed various financialproducts to match the production cycle and meet the needs ofprofessional miners.Financial productBabel Finance, Matrixport, RenrenBit are the leading financial serviceproviders in the Chinese cryptocurrency financial services market.‣ Leading Financial Service ProvidersSource: TokenInsightNameLoan balanceBabelFinanceIn March 2020, Babel Financial disclosed that its 2019 annual report revealed that its loanbalance as of the end of 19 was nearly 300 million. In the first quarter of 2020, this amountrushed to 380 million. The annual report also shows that the proportion of miners 'loans is notmore than 30%, but after experiencing a sharp decline in the market on March 12, theproportion of miners' loans changed.RenrenBitRelease of the 2020Q1 financial report (unaudited) shows that its loan balance has dropped fromabout 65 million USDT at the beginning of the year to 35 million USDTMatrixportMatrixport is a Bitmain company, and its official website shows that the loan balance reached 100 million.Hash rate FuturesHash rate futures can be used to build various financial products forminers. Derivatives exchange FTX recently announced the launch of theBitcoin hash rate futures contract. At present, FTX has launched threeBitcoin hash rate futures contracts, which have maturity on Q3, Q4 2020and Q1 2021.The launch of the Bitcoin hash rate futures contract means that the industrycan also analyze the hash rate futures in different settlement periods tomake reasonable predictions on future changes in hash rate and difficulty,thereby protecting its own interests through such financial products.TokenInsight is optimistic about future cryptocurrency derivatives,especially when institutions are increasingly interested in such innovativeand diversified financial products. The significance of these derivatives isnot only to provide trading methods, but the most important thing is toobtain greater liquidity and improve market structure.tokeninsight.com9
RESEARCHTHEI M PA C T O FH A LV I N GONBITCOINMININGHalving PopularityGoogle Trends shows that the popularity of thehalving surged before halving, and the most searchinterests were based in Africa and EuropeAccording to Google Trends data, the search volume of Bitcoin Halvinghas reached a peak of 100 within a week of halving, and the search volumeexceeds more than 9 times of the previous halving (July 3-6, 2016)‣ Bitcoin Halving Search InterestSource: Google TrendsBitcoin 5-17On the other hand, as of May 30, Google Trends for the past 30 daysshowed that Africa and Europe are the regions that have the most searchinterest on Bitcoin halving. Among the top 5 search areas in the past 30days, Nigeria has the highest searching interest, followed by Switzerlandand Slovenia.‣ Bitcoin halving countries/regions search interestSource: Google tokeninsight.com20406080100TokenInsight believes that Europe'sattitude towards cryptocurrency hasalways been relatively open. Nigeria, thelargest economy in Africa, has seriousnational currency inflation, looseregulation, and a sufficient youngaudience to drive the development ofcryptocurrency in Africa.10
RESEARCHBitcoin PricePrices rebound, and market sentiment is relativelyoptimistic post halvingAs can be seen from the figure below, in the 2,000 blocks before and afterBitcoin's halving, its price fluctuated violently, reaching a peak near theblock height of 629,950, but then it fell sharply. After the halving, theBitcoin price rose slowly, completely recovering the previous decline, andtrying to hit the 10,000 major price level again.‣ Bitcoin price block by blockSource: ByteTree, TokenInsight 10,000 9,500 9,000 8,500629000 629200 629400 629600 629800 630000 630200 630400 630600 630800TokenInsight believes that the closer the halving moment, the moreunstable the investor sentiment and the more drastic the price fluctuation.Market participants have high expectations for the halving, and after themarket has recovered and stabilized, investor confidence has strengthenedagain, further promoting the positivity in the market.‣ Bitcoin Perpetual Funding RateSource: ByteTree, TokenInsightBitcoin PriceBitcoin Perpetual Fund Rate 10,0000.10%0.04% 7,833-0.02%-0.08% 5,667-0.14% 3,5002/21 2/283/63/13 3/20 3/274/34/10 4/17 4/245/15/85/15-0.20%Perpetual funding rates also demonstrates a positive sentiment in themarket. Before Bitcoin halving, the perpetual funding rate ended itsnegative trend for two months and rose to the positive territory. Despitesubsequent slight changes due to price fluctuations, it maintained positivevalues post halving.tokeninsight.com11
RESEARCHBitcoin Network DifficultyAfter halving the mining difficulty decreased by 6%,the 16th largest decline in historyOn May 20, the difficulty of Bitcoin mining was adjusted for the first timepost halving. The difficulty decreased by 6%, making it the 16th largestadjustment in the Bitcoin network history.‣ Top 20 difficulty downward adjustment in the Bitcoin historySource: BTC.com, TokenInsightDifficulty Drop 8.03%/118/320/1116/2310/8/2/91120 /24/81720 /27/41220 /16/81120 8/3/1620 /20/520020 1/1/117 720 1/2/15 8/201/119720 1/1/118 520 5/2/1220 /19/510920 1/2/111 420 1/2/1320 /25/311920/12/161820 2/2/141220 0/1/111 /3220202020The network hash rate fluctuated at around 100EH / s before and afterhalving, and at its low reached 81.65EH / s post halving, briefly touchedsub 80EH/s at one point.As of May 21st, Bitcoin's entire network has maintained hash rate of about94.37 EH / s and a mining difficulty of 15.14T. The second difficultyadjustment post halving saw a decrease of roughly 9.3% in difficulty to13.73 T. As the network tries to rebalance itself, the mining sector has seensome older generation miners such as S9s switching back on due to 2conservative downward adjustments in difficulty and providing sufficientrelief to the miners.Bitcoin Price(left axis)Bitcoin Hash rate(right axis) ‣ Bitcoin price and network hash rateSource: TokenInsight 11,000140EH123EH 8,500105EH 6,000 3,50088EH1/1 1/9 1/17 1/25 2/2 2/10 2/18 2/26 3/5 3/13 3/21 3/29 4/6 4/14 4/22 4/30 5/8 5/16tokeninsight.com70EH12
RESEARCHAverage Block TimePost halving, the average block time dropped byabout 20%, and the network hash rate saw a shortterm decline but will be revert back up again in themid-term.The Bitcoin average block time in 2020 fluctuated at around 600 secondsbefore March; after March, the average block time showed a largeincrease, reaching 800 seconds after the sharp decline in March; with thefollow-up positive action on the Bitcoin price, the block time returns to theinterval of about 500 seconds, and post halving, it dropped again toaround 800 seconds.‣ Average block time‣ Change in average block time Source: Glassnode, TokenInsightbefore and after halvingAverage Block TimeBitcoin PriceSource: ByteTree, TokenInsightAverage Block Time of Each 200 Blocks800s700s600s1,000s 11,000825s 8,250650s 5,500475s /214/104/305/18Although the price returned to the same level in March 2020, during thehalving, Bitcoin's block production time was greatly affected.TokenInsight recognises that the current hash rate of the entire networkcannot be directly observed, but it can be calculated from the averageblock time an
Special Edition - The Third Halving June 2020 ANALYSTS Find, Create, and Spread Value in Blockchain. TokenInsight.com bd@tokeninsight.com Fanger Chou, Johnson Xu johnson@tokeninsight.com h. Content tokeninsight.com RESEARCH 2 Executive Summary 3 Overview 4 The Current Bitcoin Mining
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