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Deep thinking: How can mining machine manufacturers survive in a Cold War environment?

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Mining machine manufacturers going global: balancing global and local strategies with both hands.

Original Title: "In-depth Perspective: Survival Considerations for Mining Machine Manufacturers in the New Cold War Environment"

Original Source: Wangjiangyue, Wu Shuo Real

Foreword

The author has been involved in the Bitcoin mining industry for four years. In the Bitcoin mining industry and the entire cryptocurrency community, four years often means several cycles of prosperity and decline. This industry is like a thorny rose, full of temptation and traps. Outside the industry, black swans and gray rhinos often remind us of the vulnerability of the cryptocurrency industry (yes, it is too easily affected by macroeconomics and geopolitics). There is a widely circulated saying in "Game of Thrones": chaos is a ladder. Some people take advantage of the chaos, while others just get burned and make clothes for others. However, before the new cycle comes, the author will record what he has seen and learned in the industry for four years, to share with all practitioners who hold faith and move forward diligently.

Periodic Phenomenon and Pseudo-"Decentralization" in Cryptocurrencies

When I first entered the industry, what impressed me the most was the constantly fluctuating curve of Bitcoin. Fluctuation and cycle are the basic characteristics of the cryptocurrency industry. Countless tiny peaks and valleys depict the price fluctuations like an electrocardiogram (undoubtedly, this is exciting). Fluctuations tell us about the instant changes in supply and demand and investor confidence in Bitcoin, while cycles provide a historical perspective, depicting the repetitive patterns in the industry. Given that the coin price spirals upward in each cycle, the cycle itself has become a relatively optimistic expectation. Here, I want to modify a quote from Keynes, in the long run, someone will always survive.

The estimation of Bitcoin's value cannot be separated from the long-term narrative surrounding it. The roots of these narratives stem from the white paper released by Satoshi Nakamoto in 2009. It can be observed that both the so-called "decentralization" (P2P technology practice) and the digital gold as a safe-haven asset (Bitcoin's deflationary mechanism) are based on a "technological" belief. However, it overlooks the role of human nature in technology diffusion.

Since the development of Bitcoin and its mining industry, the "decentralization" that the author has seen is a false proposition. The fact today is that as an upstream mining machine manufacturer, after experiencing multiple rounds of technological innovation and evolution, it has become highly centralized, with only Bitmain, Canaan, and Whatsminer accounting for more than 90% of the market share; the distribution of mining pools is also highly concentrated, with the top 5 mining pools controlling 90% of the global computing power; exchanges are even more so, highly concentrated in a few such as Binance and Coinbase; and so are Bitcoin holders, with the top three being Satoshi Nakamoto, Binance, and the US government. Today, the cryptocurrency industry has undergone a transformation in the global economic and geopolitical conflicts. It requires each of us to reset ourselves, break ourselves, give up historical experience, and re-examine and learn with an open mind like a newcomer.

One, Mining Machine Products and Development Trends in the Era of Great Changes

With the clash of Eastern and Western civilizations, geopolitical influences, the rise of OPEC+, pressure from green environmental extremists, sustained domestic economic inflation in the United States, and the spread of a new Cold War of globalization, it is an undeniable fact that global traditional energy prices continue to rise and will continue to do so for a long time to come. Therefore, high-efficiency machines are the best choice for future miners. In addition, on the one hand, criticism of the environmental pollution caused by Bitcoin mining is rampant, and on the other hand, the physical boundaries of mining activities are limited in extreme climate regions. The industry urgently needs new technologies and products to address these potential challenges. In addition to traditional air-cooled machines, immersion liquid cooling is one of the choices for the next generation of technological breakthroughs and iterations.

Overall, there are several factors to consider when evaluating the development trend of mining machine products:

1. ASIC Process: The chip is the main factor that determines the performance of the mining machine. Currently, the 5nm process for mining machine chips is mature, and the 3nm advanced process is being perfected. With the technological iteration and design progress of mining machine manufacturers, the technology of mining machine chips has become mature in both design and production. Today, almost all major mining machine manufacturers can easily complete high-efficiency mining machine chip design on TSMC's advanced process (5nm and 3nm), Samsung (5nm and 3nm), and SMIC's N+1 and N+3. From the machines produced by these three chip manufacturers, TSMC is undoubtedly the best in terms of yield and performance, followed by Samsung, and then SMIC. These wafer foundries rely on "harvesting" the R&D investment of mining machine manufacturers to complete their advanced process technology and craftsmanship. This is a "love-hate relationship" that no one can do without, and I even think it is a "mistress-style love-hate relationship" because the public face of wafer manufacturers has always been high-end consumer electronics and artificial intelligence (think of the public relations crisis of game players protesting Nvidia's "mining card" and Intel's repeated failure to produce mining machine chips). Some wafer manufacturers are unwilling to admit that it is actually the cryptocurrency mining machine business that gave them the initial R&D funding, allowing them to achieve breakthroughs in advanced processes built on a large amount of US dollars.

2. Energy efficiency ratio (PE) will be the only competitive indicator: Looking back at the 14 years of Bitcoin, with the ups and downs of the market, every bear market has led to a sharp drop in coin prices and a corresponding drop in electricity prices due to the shutdown of a large number of mining machines. However, this round of bear market starting in 2022 is the first time in history that there has been a reverse development of falling coin prices and rising electricity prices. In addition, the upcoming fourth round of block reward halving is a harbinger of the "strangling" of the mining industry in a sense. Of course, the development of mining machine chip processes and the launch of high-efficiency machines have slowed down the "death sentence of mining day". Therefore, in the future market, mining machine manufacturers will inevitably compete in the market of low coin prices and high electricity fees, and the PE of mining machines will become the only important performance indicator. Miners (as long as they have money) will choose high-efficiency mining machines. In today's market environment, 25 J/T is an entry-level existence. To have a market competitive advantage, it is necessary to research and develop and produce mining machines of around 20 J/T or below. From the perspective of machine form, in addition to traditional air-cooled machines, efforts should also be made to promote the development and mass production of immersion liquid-cooled mining machines to better adapt to extreme climate environments and be more friendly to human habitation.

3. Competitive product parameters in the next 6-12 months (before and after halving):

"有竞争优势的产品" translates to "Competitive products" in English.

PE：20 J/T +-3%

Computing Power: 160 TH/s +-3%

Power Consumption: 3200W +-3%

The product is an entry-level offering in the market.

PE：25 J/T +-3%

Computing Power: 130 TH/s +-3%

Power Consumption: 3250W +-3%

Other mining machines with energy efficiency ratio above 30 J/T will face shutdown and elimination. Even if they are sold to customers with extremely low electricity bills or those who steal electricity, they are still lacking competitiveness. Moreover, the market for stealing electricity or "ultra-cheap electricity" is very niche, very unstable, and also suspected of being illegal, so do not waste manpower and resources in such a market.

4. Why is immersion liquid cooling the future form and even infrastructure of mining machine products?

The mining industry is facing two main contradictions. One is that the investment in advanced process chip research and development is getting higher and higher, often reaching hundreds of millions of yuan, while the performance improvement obtained is getting smaller and smaller. For mining machine manufacturers, this is a process of diminishing marginal investment returns. For mining machine manufacturers, it is necessary to achieve a better technical path with small cost improvements. Immersion liquid cooling is the most efficient cooling technology, which allows machines to improve performance through overclocking without the need for chip upgrades. The combination of immersion liquid cooling and container has a smaller footprint, higher modularity, lower noise, and can overcome the impact of extreme weather and sandstorms, and is expected to become the infrastructure of the next generation of mining.

Another contradiction in the mining industry is that while the overall network computing power and mining difficulty continue to reach new highs, block rewards are constantly halving. Therefore, for miners, this is also a process of diminishing returns on investment, and only large miners may come out on top. It can be seen that the integration of the industry will further intensify in the future. Conversely, the integrated mining machine industry will have more abundant funds and motivation to promote product iteration and mine construction, providing a prerequisite for the large-scale application of immersive liquid cooling technology.

二、Market and Sales Forecast: The Relationship between Supply Chain, Spare Parts Inventory, and Sales

Wafer and foundry: In general, the production cycle of wafers is 4-6 months. Due to the historical dominant position of wafer manufacturers, mining machine manufacturers usually need to pay the full amount or at least 50% of the prepayment to lock in wafer foundry. This brings considerable cash flow pressure to mining machine manufacturers. In addition, the unpredictable bull and bear cycles of Bitcoin have added uncertainty to the future sales and shipments of mining machine manufacturers. To solve this dilemma, mining machine manufacturers need to make accurate market forecasts and sales strategies to avoid risks. In my opinion, based on market and supply chain conditions, it is necessary to control the proportion of spot sales, increase the proportion of futures sales, and continuously optimize customer structure to reduce risks. The specific strategies are as follows:

1. Futures sales strategy: 80% of the output is used for futures sales, with delivery after 6 months, and delivery in batches every month, with an average monthly shipment volume. This strategy can ensure the balance and efficient sustainable operation of production and supply chain. It can effectively reduce the cash pressure of wafer (chip) inventory, reduce the procurement cost of auxiliary materials and other accessories, and improve the efficiency of the supply chain.

2. 50% Prepayment Strategy: Within one week after the customer signs the contract, they need to pay 50% of the total contract amount as a prepayment to lock in the unit price and production capacity, while also ensuring the large amount of cash flow needed for the mining machine manufacturer to purchase wafers. This strategy ensures two things: first, it guarantees the normal cash flow needed for the mining machine manufacturer's research and development, production, and procurement, and second, it shares the risk of a possible bear market. Because the 50% prepayment almost covers the cost of the machine.

3.2:8 principle for major customer strategy: As mentioned at the beginning, the decentralization of this industry is a false proposition. In fact, it is a highly centralized industry, especially in the mining business, which requires a lot of capital and technical support. Those who can survive the ups and downs are generally "big miners" who have technology, capital, and teams. For them, mining is more about long-term strategy and business layout, rather than short-term speculation like retail investors. Therefore, major customers often have a strategic coexistence, win-win, and prosperous partnership with mining machine manufacturers, and are the backbone of the cryptocurrency industry. Retail customers are at best a supplement in the layout of mining machine manufacturers, because the life cycle of retail customers is too short and the liquidity is too strong to maintain long-term cooperation. According to the author's observation, few retail investors have survived a season in the past 5 years. In the early days of the industry, except for Bitmain, most of the customers in the mining machine industry were domestic mining and domestic mining retail investors, with almost no international major customers. In the past 4 years, the author has seen that various mining machine companies have gradually established a strategic major customer system based on international major customers, including well-known old mining companies and emerging US-listed mining companies, such as Genesis, Hut8, CoreScientific, Bitfarm, Bitfury; and emerging listed companies such as HiveBlockchain, Mawson, IrisEnergy, Marathon, Riot, etc. Major customer sales revenue accounts for an average of more than 80%, which is a stable revenue base.

Three, Sales Operations and Sales Management

1. Market Forecast: Generally speaking, sales operations need to make rolling forecasts every three months for the next 12 months. However, it is not easy for the Bitcoin mining industry to make such sales forecasts due to its irregularity. Absolute prediction is impossible, but basic prediction is still achievable. For example, by combining their own futures orders with market trends, it is possible to predict a rolling sales every three months. As the production of mining machines involves a long supply chain from wafer to product, sales operations need to have professionalism and market insight to achieve as accurate a forecast as possible and reduce stockouts or inventory.

2. Sales Price: The price of mining machines is very transparent. The market is not large and there are not many players. In addition to pricing based on experience and cost, mining machine manufacturers should also consider channel inventory, mining farm capacity and power supply for the next 3-6 months, as well as factors such as coin price, electricity price, and network computing power. In terms of pricing, generally speaking, the pricing with a competitive advantage for miners' investment payback period of 12-18 months is considered a good price. 18-24 months is considered average, and it is difficult to sell for 24-30 months. Most miners have a speculative mentality. On the one hand, they only want to make quick money, and on the other hand, they do not have the ability to predict the medium and long-term trends of BTC.

3. After-sales service: The working environment of mining machines is extremely poor, so the stability, durability, ease of maintenance, and ease of replacement of mining machines are important indicators. In addition, timely after-sales service is of utmost importance. In a normal mining environment, time is BTC, so stable and durable machines as well as timely after-sales service are also important considerations for miners when making purchases.

4. Sales Report and CRM: This industry is different from traditional FMCG or IT industries and is more like a speculative financial industry. Therefore, sales analysis can only reflect current data and should not have too much reference value for history and the future. Instead, data such as currency price, mining machine capacity, electricity price, network-wide computing power, and difficulty coefficient have more practical guidance for sales. Customer data in CRM is also periodically eliminated, with low retention rates. Long-term customers mainly consist of a dozen or so KA customers, and most small and medium-sized retail investors die in the "dawn before the bull market comes".

Four, Channels: Opportunities and Risks Coexist

Regardless of whether it is a B2B or B2C business, "channels" are essential in any industry. Taking the fast-moving consumer goods industry as an example, some people once believed that channels were king and thought that having channels meant having everything. Distributors and agents often ended up comforting themselves at a rapid pace, while brand owners firmly stuck to consumers with products, brands, and services, and gave the channel a hard lesson. In the fast-moving consumer goods field, channel operators have matured through nearly 20-30 years of development and management. They have abandoned the arrogance of thinking that channels are king in the early days and have become "willing" green leaves of brand owners, quietly making money under the banner of brand owners. This low posture has become their norm and three-view cognition, as the old saying goes: "Silent and wealthy." However, looking back at the development of the B2B industry, channel operators are moving towards a more professional direction. They not only need to expand channels, but also provide pre-sales, sales, and after-sales technical support, improve solutions, and have strong funding to support inventory. Indeed, such channel operators also have more say and decision-making power. It is precisely this "desire for power" that has achieved their ambitious "ambition", often unconsciously disrupting brand owners' channel strategies, pricing strategies, inventory strategies, and customer management strategies, and inadvertently walking to the opposite side of brand owners.

1. The channel is like water, it can carry a boat or overturn it.

Channel management is a complex art of management. It is not just about the channel itself, but more about the understanding of human nature. The game between brand owners and channel partners regarding their desire expectations is also a litmus test for the human nature of salespeople. When brand owners are in a weak position, channel partners will maximize their own interests regardless of the interests of the brand and customers, and quickly reap all the benefits that can be reaped, with clear short-term speculative nature. In this case, there will often be mutual dumping between regions/channel partners, grabbing customers, smashing prices, and causing the brand owner to be unable to ship normally, with large inventory pressure and chaotic market prices. There are constant complaints from external customers and internal sales competition and consumption. The brand owner is kidnapped by the channel partner, not only losing profits, but also offending customers. When channel partners are in a weak position, brand owners often accuse them of not expanding well and delaying business opportunities. Looking at the development and routines of the mining industry's channel partners in recent years, they are very skilled in using strategies such as closing the market during a bull market, playing cards and drinking, and making moves to bottom out during a bear market, cutting the leeks of mining machine manufacturers.

(1) Bull Market: Do not participate in the high-priced mining machine competition at this time, watch from the sidelines, and enjoy eating, drinking, playing cards with friends. If you have the opportunity, seize it and quickly sell for a profit.

(2) Bear Market: Occasionally tease the mining machine manufacturers who are under the dual pressure of inventory and cash, set up a trap and deceive them into signing a "so-called mortgage installment payment contract", but with a very low down payment ratio, which locks the price and production capacity of the mining machine manufacturers. Then, they shout out in the market, raise the price a little (their offer is even lower than the official price of the mining machine manufacturers), and sell the machines or even resell the contracts. The result is that the market price is chaotic. As long as the inventory machines or contract machines on the channel distributors are not sold out, the mining machine manufacturers' inventory cannot be sold because the price and shipment are completely controlled and hijacked by the channel distributors. The channel distributors make money, and the mining machine manufacturers are cut.

2. The chaos of channel management in the mining machine industry from the perspective of several leading manufacturers

(1) During a bull market, mining machines are in short supply, and miners and agents are struggling to find them. On the one hand, top manufacturers retain the maximum sales profit in their exclusive sales companies, and on the other hand, sales or agents add layers of markup, occasionally promoting bottom-level kickbacks. From the market perspective, what is seen is opaque pricing, layered markups, and a very poor sales experience and reputation for honesty, leading to the loss of major customers.

(2) During the bear market, due to the previous oppression channel hoarding, once the bear market comes, agents panic and choose the "escape is the best strategy" strategy of dumping goods, leading to instant market price chaos. Miners and channel merchants despair and demand that mining machine manufacturers refund, return goods, and issue coupons to make up for losses. If the manufacturers have sufficient cash, they can actually accept refunds to make up for the difference, but the problem is that when the bear market comes, who has extra cash? Who doesn't want to reserve a little more cash for the winter? Moreover, the initial receiving prices of miners and channel merchants may not all be the first-hand manufacturer prices. Since this year's bear market, channel merchants have collectively turned against manufacturers and repeatedly staged lawsuits.

(3) A large amount of channel inventory backlog, price-cutting and clearance sale is imminent: According to incomplete statistics, there are currently about one million channel inventories in the market, including inventories of agents and mining companies that have not yet been put online. With the continuation of the bear market and the upcoming halving, the current channel inventory machines will soon become scrap metal after the completion of the new generation of mining machines iteration. In order to minimize losses, top manufacturers will have to cut prices and clear inventory in a timely manner. In this round, if individual top manufacturers can cut prices and clear inventory in a timely manner, they can kill two birds with one stone, on the one hand, solve inventory pressure, on the other hand, crush other manufacturers before the dawn of the bull market. Other manufacturers who want to survive need to adopt a faster and more aggressive sales and pricing strategy, a precise price sniper strategy.

3. 2B Business Model: Key Account Model vs Retail and E-commerce for Individual Customers:

(1) Mining machine sales is a simple 2B business, where big customers bring in big sales, and the professionalism of the customers is the foundation. E-commerce retail and individual customers are just filling in the gaps. Some mining machine manufacturers have a one-sided view of retail customers and e-commerce, thinking that they can sustain the company. In fact, whether it's Bitmain, Whatsminer, or Avalon, 80% of sales come from less than 20% of big customers.

(2) Communication and service costs between large customers and retail customers: Large customers have professional operation and engineering teams, and there are dedicated personnel for after-sales service and updates, which are efficient and labor-saving. Retail customers lack a team, and often have to deal with a bunch of after-sales engineers from the mining machine manufacturer for a small firmware update or a power outage. Often, it is because they don't understand it themselves, and they end up complaining to the manufacturer. For the manufacturer, it is a thankless task, and the business is not large enough to afford to miss any aspect of the service.

Five, Smokeless War of Miners and Mining

1. Early miners mainly focused on mining sites in China's Yunnan, Sichuan, Xinjiang and other regions, relying on thermal power and hydropower during the wet season. The electricity and maintenance costs of mining were very low. Deploying 10,000 machines and hiring 3-5 rural high school graduates who could be trained to maintain the operation of the mining site. Therefore, China's mining industry has a very competitive advantage, occupying 70% of the global network computing power for a time. The miners during this period were basically the first batch of Chinese Bitcoin adventurers and pioneers. They were either speculators with some spare money and keen insight, or technical men who were involved in blockchain and BTC. After several rounds of bull and bear cycles, this group of miners gradually became fixed. There are only a few large miners in China, which are quite concentrated, just like mining pools and exchanges. The essence of mining determines that miners must obtain the most bitcoins at the lowest cost, so stealing electricity and obtaining low-cost electricity is their first choice. Therefore, their relationship with local officials has also become an important part of their interests. They often collude with each other, which led to the Chinese government's successive introduction of anti-corruption and green carbon neutrality policies, which cracked down on mining activities across the country.

2. On September 3, 2021, the National Development and Reform Commission and 10 other departments jointly issued a document to rectify the "mining" of virtual currencies. Then, on September 24 of the same year, the People's Bank of China and 10 other departments issued a notice on further preventing and disposing of the risks of virtual currency trading speculation, which directly caused confusion in the cryptocurrency and mining circles in China. The first thing they did when they woke up was to "migrate platforms and employees overseas" and "dismantle mining machines to Kazakhstan, a Central Asian friendly country next to Xinjiang".

(1) Kazakhstan not only has cheap electricity, but also has clear laws that make mining legal and exempt from taxes. Overnight, it became a paradise for Chinese miners. In just 3 months, from October to December, Kazakhstan's Bitcoin hash rate increased to 30% of the global hash rate, jumping from obscurity to become the world's second largest hash rate contributor. During this period, the structure of miners also changed. In addition to Chinese miners, there were also new energy participants from Kazakhstan. However, the good times did not last long. On January 6, 2022, Kazakhstan erupted in riots, shattering the dreams of all Chinese miners and also shattering the short-lived dreams of Kazakhstani miners who had just tasted a little bit of sweetness. Since then, Kazakhstan's mining policies, tax policies, and electricity prices have taken a "self-inflicted" road to ruin. Large numbers of Chinese miners immediately fled Kazakhstan, carrying their machines and Bitcoin, and rushed to what they believed to be the next golden land - the United States.

(2) The American market and American miners, who have been crushed by Chinese mining machines and miners, saw hope and took advantage of the opportunity to seize mining resources. They invested heavily in the United States, especially in Texas, increased leverage for Bitcoin financing, built mining farms, and bought mining machines. In a short period of time, American mining companies sprouted up like mushrooms after rain, accompanied by a large influx of Chinese miners. In just a few months, the computing power of the United States surged to the top of the world. During this period, the miner structure also added institutional investors with Wall Street backgrounds and a group of listed mining companies. Thus, the United States completed the entire strategic takeover from mining at the bottom of Bitcoin to trading at the top exchange. It became the dominant player in the Bitcoin kingdom, which combines global computing power, global exchanges, and global mining pools. Currently, the only missing piece is that the mining machine manufacturers have not been "cheated/forced" to the United States, but it seems that completing this step is only a matter of time.

(3) Now looking at the surviving miners, they can basically be divided into: energy miners, institutional investment miners, traditional old-fashioned mining enterprises, and emerging NASDAQ-listed mining enterprises. Among them, the best operators are still the old-fashioned mining enterprises. They have weathered the storms and still stand tall, mainly because of their understanding of the industry, control of risks, and timely anticipation of bull and bear cycles.

Six, Mining Business and Strategy

1. Three major risks in mining business

(1) Risks of policy and regulatory trading: Mining business is a high-risk business both domestically and internationally. Uncertainty risks at the policy level can be seen everywhere, coming at any time, and cannot be predicted or avoided. Legitimacy, tax compliance, compliance with fiat and BTC transactions, and how to avoid the risk of dirty coins, etc.

(2) Electricity price and power supply risks: Electricity price is the most basic element that determines whether mining is profitable and whether investment can be recovered quickly. Maintaining a stable and low electricity price is the key to profitability in the mining business. In addition, stable power supply with 24/7 electricity is also a crucial factor for stable profitability.

(3) Partner Risks: The high profitability of this industry often triggers human greed. To avoid the risk of partners "eating each other and closing the door," it is necessary to avoid cooperating with short-term opportunists, speculators, and unfamiliar customers in mining operations.

2. Selection of Mining Business Partners: Three Types of Partnerships

(1) Resource-based customers: They are well-known local enterprises and entrepreneurs who have energy resources, social status, and honor. Such customers are unwilling to violate laws and regulations, and will not engage in black market activities for small profits. Often, these customers can also help mining machine manufacturers to handle some local government relations, which is beneficial for the extension and sustainable development of mining business.

(2) Emerging listed companies (clients): North American mining listed companies, they are standardized and professional, technically mature, operationally efficient, financially compliant, backed by institutional investment, and have abundant funds. They value reputation and long-term development, have long-term plans, and are good mining business strategic partners.

(3) Old-fashioned mining companies: They are the evergreen trees in this industry, operating in the mining and coin circles for many years. They are very professional, knowledgeable about the industry, have technical expertise, and can operate and maintain mining equipment. They are experienced partners in the field. However, they are also very calculating and specialize in small accounts, making them a stumbling block in the industry. Working with them can be advantageous, but it can also be easy to be taken advantage of. Of course, it can also help to develop the team and improve the self-operated mining operation and management capabilities of mining equipment manufacturers.

3. Why do we need to carry out mining operations?

(1) During a bull market, mining operations can continuously generate cash (BTC) for mining machine manufacturers, like printing money, which can quickly increase the company's revenue, market value, and the value of diversified operations.

(2) During a bear market, machine prices may fall below production costs, making it more profitable to deploy the machines for self-mining in mining farms rather than selling them. On one hand, this helps to cushion the supply chain and maintain normal production and supply chain operations, while on the other hand, it reduces inventory and maintains low-level operating income. When the bull market arrives, the machines and mining business can be sold together to capture greater profits, or mining can continue to reap the huge value brought by BTC. Both options can be freely switched.

(3) Computing power and computing power business: Building a computing power platform and computing power sales business, seamlessly evolving from simple mining machine manufacturer business to advanced business models such as computing power sales and computing power securitization.

4. Where are the future mining sites?

(1) According to current indications, the US government is trying to stifle cryptocurrency in order to maintain the dominance of the US dollar. They are systematically shutting down Bitcoin trading platforms (FTX, Coinbase, and Binance are recent examples). Additionally, over the past year, many US states have implemented unfriendly policies towards mining (such as environmental impact assessments, electricity prices, and taxes). The author believes that in the near future, the US government will "kill the dog" by shutting down mining companies all at once, killing the approximately 3000 MW of mining farms in the US overnight, and effectively ending Bitcoin mining in the US. In short, the US market will no longer exist. Continuing to invest in the US market is very risky, and building mining farms in the US is an unwise decision.

(2) Kazakhstan: a typical Central Asian government management model, corrupt officials who pretend to know everything, and they have brought trouble upon themselves. Since the turmoil in January 2022, the government has successively introduced a series of unfriendly policies towards mining and trading, which directly destroyed the once prosperous mining industry in Kazakhstan. From ranking second globally and accounting for 30% of the network's computing power, it was cut to less than 5%. I wonder if this is the outcome that Kazakhstan wanted, or if the US government encouraged Kazakhstan to do so?

(3) South America is the next mining choice: abundant hydroelectric power, cheap electricity prices, inexpensive sites, and currently relatively policy-friendly. For example, Uruguay, Paraguay, Mexico, etc. The downside is low political stability, low transparency, and poor policy continuity.

(4) Middle Eastern Arab countries: Cheap electricity prices, cheap venues, friendly policies. Liquid-cooled machines can adapt better and more efficiently to extreme climates. The downside is that the overall power supply efficiency is less than 70% throughout the year, and various resources are highly monopolized. "Arab traditional business etiquette is lengthy."

(5) North African countries: Rich in electricity resources, lacking in industry, mining is the best industry for rapid development of the local economy, and can receive strong support from the current government. The risk is political instability and poor security. Recently, countries with abundant hydroelectric resources and cheap electricity prices include Ethiopia.

(6) Russia: There are abundant power resources and the mining industry has developed early with a large number of very experienced practitioners. However, Russia is hindered by US sanctions and has a poor business environment with a lack of contract spirit.

(7) Iran: Speaking of Iran separately, they have been mining using second-hand equipment on the market, controlled by the National Guard, quietly mining as if they have never stopped.

Seven, Mining Machine Manufacturers Going Global: Both Globalization and Local Strategies Need to be Emphasized

The world economy has flourished under the globalization of the past 30 years, especially developing countries led by China have benefited greatly, with rapid economic and technological growth, becoming beneficiaries of globalization. Since China banned the mining industry in 2021, mining support has increased in North America, Central Asia, and other regions, and the "mining capital" Sichuan, which is prevalent in the Chinese internet, has given way to Texas in the United States. Various mining machine manufacturers are seeking overseas paths. In my opinion, for mining machine manufacturers, adhering to a globalization strategy is completely correct, the key is how to implement the globalization strategy and which path to take.

1. Two hands grasp, two hands hard: Local talents and local economic foundation must be strong. Only with a strong local foundation can there be the ability to go out, walk steadily, and have talent reserves, economic support, and material foundation for globalization. Otherwise, even if you reluctantly "globalize" and go overseas, it will be short-lived and at best, a temporary solution.

2. Globalization Path: Looking back at China's economic development over the past 30 years, in traditional physical industries, except for the photovoltaic industry, Chinese companies have mostly been limited to cheap labor and commodity exports, with few original and innovative products and companies going global. In the fields of the Internet and communication equipment, the benchmarks that have been relatively successful in going global in recent years include Huawei, Transsion Holdings, and entertainment companies represented by ByteDance and miHoYo. The uniqueness of the mining industry lies in the combination of high-end manufacturing and emerging finance, which, despite much questioning, to some extent represents. In the past few years, due to the highly monopolized industry, the ability of mining machine manufacturers to go global has been limited to product exports, with lagging supporting service capabilities. At the same time, the cyclical switch between strong seller markets and strong buyer markets has not given mining machine manufacturers sufficient motivation to build service capabilities. However, after 2021, with the rise of institutional customers, mining machine manufacturers have gradually realized the importance of services.

Currently, some mining machine manufacturers have begun to establish service stations and branches in overseas markets, which is a good thing. However, it is also important to note that globalization still requires a local perspective, adapting to local regulations, customs, and culture to maintain long-term customer relationships and gradually build a protective moat of service capabilities. These are not achieved overnight and require steady progress to replicate successful management and business models. Rome was not built in a day, and there is often only one path to success, while the road to failure is full of pitfalls. What I have personally witnessed is that some companies have spread themselves too thin, adopting a nomadic model that will eventually deplete resources and end in failure.

3. US Government and Cryptocurrency: The relationship between the US government and cryptocurrency is complex. The government obtained a large amount of Bitcoin by shutting down the Silk Road. The anonymity and black market transactions of cryptocurrency, as well as providing funding channels for sanctioned countries such as Iran and Russia, are not allowed by the US government. They will not tolerate a challenge to the dominance of the US dollar, just as they are unwilling to accept China's peaceful rise. The SEC's lawsuits against Coinbase, Binance, and Tether after a series of scandals such as Three Arrows Capital and FTX show the determination of the US Democratic government to kill cryptocurrency.

4. Tether and its strategy: As the world's largest stablecoin, it is crucial to maintain the stable development of the BTC market. According to a senior industry insider, a Tether executive recently revealed that they plan to allocate a fixed percentage of the $4 billion in annual profits to purchase BTC. At the same time, they will also expand their mining business, investing hundreds of millions of dollars each year to support computing power and mining equipment manufacturers. It seems that Tether has become the Don Quixote of the industry. Here, the author boldly imagines that, in the context of the run on crypto-friendly banks, Tether's ambition may be to play the role of "Tether Fed" in the crypto industry, securing its position as the leader of the industry with a critical market rescue.

Eight, a little speculation about the near future

The development of Bitcoin is not something that can be controlled by a government or an institution, especially in the current and future conflicts between Eastern and Western civilizations, geopolitical conflicts, currency hegemony monopolies, energy shortages, and new cold wars under deglobalization. The world may need cryptocurrency more, especially Bitcoin.

"Institutional Bull" Periodic Recurrence

From 2010 to now, Bitcoin has been unilaterally declared "dead" 474 times (see 99Bitcoins), which is enough to show that Bitcoin is the cockroach that can't be killed. What I have observed is that after a series of explosions, Bitcoin has shown signs of resurgence. The US government and institutional investors often do their own thing when it comes to Bitcoin. In the eyes of the US government, the dominance of the US dollar is the core, and Bitcoin is at most a black glove that cannot be whitewashed. However, in the eyes of institutions, being able to cut leeks is the real deal. BlackRock, the world's largest asset management company, personally pushed for a Bitcoin spot ETF, and its application record for the ETF is also a mix of successes and failures. If successful, it is highly likely that we will see the institutional bull market in 2021.

The entry of institutions will further promote the change of the fund structure in the Bitcoin industry. In the early years, the coin circle and the mining circle were basically full of speculative investors with a gambling mentality, often making a lot of money in the short term or losing everything. Therefore, the industry has always been a few people who "make a fortune in silence". In the late 2018 and early 2019, institutional investors from traditional Wall Street financial funds, family funds (old money), and companies with traditional energy backgrounds gradually entered the game, and the composition of the industry is gradually changing. With the entry of old money, the price of Bitcoin also began to dance with Wall Street. Of course, this also means that the volatility of Bitcoin will be smaller.

Bitcoin's "last name" is not important, making money is important

As for the compliance of cryptocurrencies, it has always been volatile, with the SEC and CFTC constantly at odds. In recent days, US senators will introduce a new version of the cryptocurrency regulatory law to expand the power of the CFTC. It stipulates that even decentralized assets can be regulated as commodities as long as they do not involve corporate debt and equity. It seems that Americans also understand the "wisdom of later generations", and the issue of what Bitcoin is classified as can be put aside for now. Currently, the US inflation is high, and there is no one to take over the high US debt, further damaging the credibility of the US dollar. Quietly selling coins is also one of the measures taken by the US government to recover the US dollar and boost confidence. Therefore, in this context, whether the compliance of cryptocurrencies is truly compliant or just old wine in a new bottle remains to be seen. However, as long as liquidity remains, the music and dance can continue with the new replacing the old.

Asia still cannot be ignored

In 2021, China dealt a heavy blow to Bitcoin, and two years later, the United States sued major exchanges Binance and Coinbase. Now, China has tacitly approved Hong Kong's support for Web3.0 and cryptocurrencies, indicating that governments around the world have ambiguous attitudes towards cryptocurrencies. In the past two years, funds have begun to flow back to Asia, with Singapore thriving and Hong Kong unwilling to give up its position as the financial leader in Asia. Singapore and Hong Kong are competing for funds, and the biggest winner is undoubtedly cryptocurrency. It is worth noting that in June 2023, Japan's "Funds Settlement Act Amendment Bill" was passed in the Upper House, becoming the world's first country to issue a stablecoin law. In the visible future, Asia will still be an important pole in the cryptocurrency industry. In addition, against the backdrop of the global economic downturn, more and more governments in small countries in Africa and South America are adopting an open attitude.

Under the new Cold War situation, the US government's regulatory results for Binance and Coinbase are different. Binance's market share in the US is only 0.9%, while Coinbase's market share in the US has risen from 48.4% to 55% in June. In the secret battle of cryptocurrencies, both China and the US may support their own centralized exchanges to attract overseas funds and take measures to prevent large-scale capital outflows when necessary.

In Central Asia, Kazakhstan has always been the focus of attention. In 2021, the country became the region with the fastest growth in hash power, but then fell sharply due to power outages and policy reasons. In the past year, the Kazakhstani government has collected $7 million in taxes from cryptocurrency mining entities, and as of April this year, the government's tax on crypto mining is $541,000. If this standard continues, the total tax revenue for 2023 is estimated to be only about $1.62 million, mainly due to the policy crackdown on the country's crypto mining industry. As a resource-based country, it is understandable to use surplus electricity to generate income. The previous round of policies mainly responded to illegal mining and low electricity taxes for crypto mining. The crypto mining industry, as one of the sources of tax revenue, will not be completely banned, and the intensity of policy crackdown mainly depends on how much benefit the government can obtain from it. What I see is that the country plans to introduce new regulations, including miner licenses, the use of licensed exchanges and mining pools, etc. These measures will further reduce tax evasion and improve industry transparency, rather than expelling the mining industry from the country. The sharp decline in mining tax revenue currently also indicates that the country's mining industry needs time to recover and rebuild confidence in capital. In addition, improving the efficiency of energy use requires the introduction of more advanced machinery and equipment, so in the future, we may see the Kazakhstani government relax its policies on import value-added tax and digital mining taxes related to mining machine imports.

Green Mining: The "Letter of Intent" that Bitcoin Mining Must Submit

After the previous "crypto winter", the Bitcoin mining industry entered a period of consolidation. The current situation facing the Bitcoin mining industry includes: 1) Political correctness: sustainability issues related to Bitcoin mining under the carbon reduction framework; 2) Funding sources: Bitcoin ETF is a double-edged sword for the mining industry. The launch of ETF will undoubtedly drive up the coin price and help miners' profits, but ETF provides institutional investors with zero-threshold funding channels. In this case, who will bother to invest in large-scale mining infrastructure and equipment procurement? 3) Listed mining stocks have begun to seek new narratives of "diversified income", that is, using mining graphics cards for AI.

As of today, facing the powerful US government, the Bitcoin mining industry cannot "enclose itself", and in order to survive, it must be a little "green". First of all, for the sustainability issue of mining. Under the framework of global carbon reduction, green mining is the inevitable path for future industry compliance, which also means that in the long run, only companies with strong funds and deep government relations can survive. Currently, listed companies in the industry have taken action and established the BMC Mining Association to regularly disclose operational data. These companies also need to form professional lobbying teams to clarify the continuous optimization of the power structure of the encrypted mining industry, as well as the role as a source of new energy power subsidies. Secondly, mining companies are also seeking cheap hydroelectric power in other regions outside of North America, such as the Nordic region, and increasing their ties with energy companies, especially new energy companies. Finally, ESG will undoubtedly be the narrative standard for future listed companies, and Bitcoin mining companies cannot be exempted. It may be worthwhile to establish an organization similar to the Green Fund, allocate some money each year as a "letter of introduction" to US decision-makers, and seek greater discourse power in legal and public spheres.