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2020 Q1 Cryptocurrency Mining Industry Research Report May 2020 ANALYSTS Johnson Xu, Harper Li, Cecilia Jiang, Fanger Chou [email protected] TI Research TokenInsight.com [email protected] Find, Create, and Spread Value in Blockchain. RESEARCH Content Executive Summary 3 Industry Dynamic 4 Industry Updates Global Policies Market Overview 5 Bitcoin Market and Network Hashrate Miner’s Profit Margin Mining Hardware 10 Mining Chips Hardware Manufacturer Mining Machine ROI Analysis Cloud Mining 14 Cloud Mining Profitability Analysis Cloud Mining Algorithms Mining Pool 17 Mining Pool Hashrate Distribution Mining Farms 19 Financial Products 20 Standardised Financial Products Structured Financial Products Altcoin Mining 22 tokeninsight.com 2 RESEARCH ACKNOWLEDGEMENT MEDIASUPPORT tokeninsight.com 3 RESEARCH Executive Summary ① Extremely volatile session: 2020 Q1 was an extremely volatile session for bitcoin, hashrate ranged at 100 EH/s, and briefy touched ~70 EH/s. ② Older generation ASICs are phasing-out: Older generation ASICs’ proft margin such as Antminer S9s are being squeezed out by the newer generation miners, its proft margin maintained positively at roughly 35% before March, quickly turned into negative territory during the March market crash and recovered partially to average of 20% during April 2020. ③ ASIC is dominating the market, Bitmain is still leading: As a specially customized chip to meet a specifc demand, ASIC is far superior to FPGA and GPU in performance, volume, and power consumption. TokenInsight believes ASIC will keep grasping its overall share in the mining market. ④ Market volatility is expected: in the near future while the bitcoin network experiences a chaotic period in the short term to adjust itself back to an equilibrium state post-halving, and ultimately achieving a more effcient blockchain network. ⑤ Highest No. Of ASICs in Q1 in the past 3 years: Although the number of newly released mining machine models launched in Q1 2020 has decreased by nearly 60% from Q4 2019, it is the highest in numbers when compared with the frst quarter in the past three years. ⑥ Structured fnancial products: At present, the majority of players who have adopted structured fnancial products are institutional players. TokenInsight believes that these structured fnancial products are diffcult to understand, thus they may face some resistance in terms of the adoptions in the market. ⑦ COVID-19 has a negative impact: on mining farms globally, mining farms from the west is leveraging various strategies to lower the cost of production, and selling bitcoin at a favorable price. ⑧ Filecoin mainnet delayed once again: uncertainty surges. The future Filecoin market direction depends on the broader market conditions, the actual result for the mainnet launch, and the overall confdence in the mining community post-launch. ⑨ Handshake ASIC mining: Affected by the delivery of Handshake ASIC mining machine Mars H1 in Q2 2020, the income of GPU miners will continue to shrink, and phasing-out after ASICs fully enter to the Handshake network in Q2 2020. tokeninsight.com 4 RESEARCH Mining Pool Industry Landscape ASIC Miners Mining Farms Cloud Mining Altcoin Mining Financial Products tokeninsight.com 5 RESEARCH INDUSTRY Industry Updates DYNAMICS ① Innosilicon announced that it will soon launch a new generation of bitcoin mining machine T4 + 75T. ② In early March 2019, affected by the bearish report released by the investment analysis platform Marcus Aurelius Value, some law frms in the United States successively investigated Canaan Creative (NASDAQ: CAN) and fled a securities class-action lawsuit, asked the company to compensate investors for losses caused by violations of federal securities laws. ③ On March 12, the BTC price closed at $5,500 for the day, touched $3,800 at its lowest. Many mainstream mining machines reached the shutdown price. ④ On March 19, Bitmain launched the new Antminer Z11. ⑤ On March 23, Bitmain launched the S19 series of new miners. The new machine S19 Pro has hashrate of 110 TH/s and an energy effciency ratio of 29.5 J/TH ± 5%. S19 has hashrate of 95 TH / s and an energy effciency ratio of 34.5 J/TH ± 5%. Global Policies ① On January 16, Uzbekistan to create national mining pool, launching licensed exchange. Establishing a “national mining pool” has been declared a priority in Uzbekistan. Miners who join the pool will enjoy lower electricity rates, announced the country's agency overseeing the crypto industry. ② On January 22, the results of the RFP or only released recently with Hydro-Québec granting one-ffth of total block set aside for crypto mining. ③ On February 8, Ukraine’s Manifesto of the Virtual Assets Ministry, Ministry and Committee of Digital Transformation of Ukraine have concluded that Bitcoin’s protocol and enforced consensus rules are enough to regulate the onchain activities, it does not need government oversight or intervention. ④ On March 27, The Missoula County Board of Commissioners in Montana, United States, has extended its green regulations for cryptocurrency miners, which are designed to control the energy consumption of the industry in the county. tokeninsight.com 6 RESEARCH Bitcoin Market and Network Hashrate Q1 2020 was an extremely volatile session for bitcoin, hash rate ranged at 100 EH/s, and briefy touched ~70 EH/s. As the market is gearing towards the bitcoin network 3rd halving, coupled with the COVID-19 pandemic and the global market downturn. The cryptocurrency market has experienced an extremely volatile session during Q1 2020. Bitcoin started off the year from the $7K range, peaked in mid-February at just above $10K, reached its quarterly low at sub $4k due to the market wide panic. Bitcoin’s rolling 30-day ROI was in extreme positive territory before the end of February, reached extreme negative return during March 2020. ‣ BTC Rolling 30-Day ROI Source: TokenInsight 40% 20% 0% -20% -40% -60% 1/1 1/10 1/19 1/28 2/6 2/15 2/24 3/4 3/13 3/22 3/31 The network hashrate fuctuated around 100 EH/s, peaked at roughly 136 EH/s, and reached its lowest point during the March 12 market plunge to 76 EH/s. The network hashrate during Q1 2020 did not change much compared to Q4 2019. ‣ BTC Price and Hashrate Source: TokenInsight Bitcoin Price Hashrate (Right Axis) $11,000 140EH 122.5EH $8,500 105EH $6,000 87.5EH $3,500 70EH 1/1 1/9 1/17 1/25 2/2 2/10 2/18 2/26 3/5 3/13 3/21 3/29 tokeninsight.com 7 RESEARCH Miner’s Profit Margin Older generation ASICs are phasing-out from the network, miner’s revenue still heavily depends on the block reward. TokenInsight uses the below formula to calculate marginal cost of creation for 1 bitcoin. 1 * Ha shrate * Power E f f icienc y/1000 * Electr icit y * 24h * (1 + Operat ion Costs) Block Re ward Where Block Reward represents the daily block reward generated by the Bitcoin network (expressed in the number of bitcoins, this value is 1800, but it varies according to the situation); Hashrate is the hash power for the entire bitcoin network. This formula shows the production cost of one bitcoin. The miner's proft margin is the proportion of bitcoin price minus the cost of production. Miner’s proft margin (S17+, $0.04 electricity, 15% operation costs) stayed at roughly 70%, reached its lowest point of 45% during the market downturn, creeping back up to the 65% level after the market plunge, and stabilized during April 2020. ‣ BTC Marginal Cost of Creation (i.e., Antminer S17+) Source: TokenInsight Marginal Cost of Creation Bitcoin Price Proft Margin (Right Axis) $11,000 80% 60% The profit margin (orange $7,667 line) for Antminer S17+ experienced a volatile 40% session during March 12, but still stayed above 45%. $4,333 20% $1,000 0% 1/1 1/11 1/21 1/31 2/10 2/20 3/1 3/11 3/21 3/31 The marginal cost of creation for 1 bitcoin (S17+, $0.04 electricity, 15% operation costs) based on the network diffculty started with $2.2K in the beginning of the year, reached 2.9K at the peak due to upward diffculty adjust based on an increase of network hashrate. tokeninsight.com 8 RESEARCH Older generation ASICs’ proft margin such as Antminer S9s are being squeezed out by the newer generation miners, its proft margin maintained positively at roughly 35% before March, quickly turned into negative territory during the March market crash and recovered partially to average of 20% during April 2020. ‣ BTC Marginal Cost of Creation (i.e., Antminer S9) Source: Coin Metrics, TokenInsight Marginal Cost of Creation Bitcoin Price Proft Margin (Right Axis) $11,000 50% 37.5% 25% $8,667 12.5% The profit margin 0% (orange line) for -12.5% Antminer S9 dropped $6,333 sharply on March 12 -25% and fell below 0%. -37.5% $4,000 1/1 1/11 1/21 1/31 2/10 2/20 3/1 3/11 3/21 3/31 4/10 4/20 -50% Before the market wide panic on March 12, the marginal proft gap ‣ Profit Margin Comparison Source: TokenInsight between the two generations of mining machines was 35%, after the market plunge, although the the proft margin bounce back signifcantly, S17+ S9 Difference the marginal proft gap between the two generations of hardware increased to 40%. Before 70% 35% 35% 0312 Miner’s proft still heavily depends on the block reward rather than the After 65% 20% 45% network transaction fees. Miner revenue from fees only accounted for 0312 average of 1.5% from total mining reward (Block Reward+ Transaction Fees), increased 5x to roughly 5.55% at the peak and returned to a lower level in April 2020. ‣ Miner Revenue From Fees Source: Coin Metrics, TokenInsight 6% 4% 2% 1/1 1/8 2/5 3/4 tokeninsight.com 1/15 1/22 1/29 2/12 2/19 2/26 3/11 3/18 3/25 9 RESEARCH Average block interval Block time has been slowly increasing from 550 seconds to 622 seconds and reached its peak of more than 800 seconds after the March market downturn.
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