Depth Viewpoint: Survival Thinking of Mining Machine Manufacturers in the New Cold War Environment

Author: Wangjiangyue

Preface

I have been involved in Bitcoin mining for four years. In the Bitcoin mining industry and the broader cryptocurrency community, four years often means several cycles of boom and bust. This industry is like a thorny rose, full of temptations and traps. Externally, black swans and gray rhinos often remind us of the vulnerability of the crypto industry itself (yes, it is too easily influenced by macroeconomics and geopolitics). In "Game of Thrones," there is a widely circulated saying: "Chaos is a ladder." Some people take advantage of chaos, while others only suffer in the chaos and end up helping others to their own detriment. However, by enduring hardships, one can eventually see the light. Before a new cycle begins, I will record my insights from four years in the industry in writing, for the benefit of all practitioners who hold faith and continue to move forward.

The cyclicality and pseudo-"decentralization" of cryptocurrencies

When I first entered the industry, what impressed me the most was the constantly fluctuating curve of Bitcoin. Fluctuation and cycles are the basic characteristics of the cryptocurrency industry. Countless tiny peaks and valleys resemble an electrocardiogram (undoubtedly, this is exciting) depicting the price fluctuations. Fluctuations reveal the instant changes in supply and demand as well as investor confidence in Bitcoin, while cycles provide a historical perspective, outlining repetitive patterns in the industry. Given that the price of Bitcoin has spiraled upwards in each cycle, the cycles themselves have become a relatively optimistic expectation. Here, I want to modify a quote by Keynes: In the long run, there will always be survivors.

Evaluating the value of Bitcoin cannot be separated from the long narrative surrounding it. The roots of these narratives can be traced back to the whitepaper published by Satoshi Nakamoto in 2009. Whether the so-called "decentralization" (P2P technology practice) or the digital gold as a safe haven asset (Bitcoin's deflationary mechanism), all are based on a belief in "technological determinism." However, it overlooks the role of human nature in technological diffusion.

From the development of Bitcoin and its mining industry so far, what I see is a false proposition of "decentralization." In reality, as the upstream production manufacturers of mining machines undergo multiple rounds of technological innovation and evolution, they have become highly centralized. The top three market shares are held by Bitmain, Canaan, and Ebang, accounting for over 90% of the market. The distribution of mining pools is also highly concentrated, with the top five pools controlling 90% of the global hash rate. The same goes for exchanges, with high concentration in a few platforms like Binance and Coinbase. This also applies to Bitcoin holders, with Satoshi Nakamoto, Binance, and the US government being the top three. Today, the cryptocurrency industry is undergoing transformation amidst great global economic changes and geopolitical conflicts. It requires each of us to reset ourselves, shatter our egos, abandon historical experiences, and approach things with the curiosity and humility of a newcomer.

I. 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, ongoing domestic economic inflation in the United States, and the spread of a new globalization Cold War, the continuous rise in global traditional energy prices has become an undeniable fact and will continue for a long time in the future. Therefore, high-efficiency machines are the best choice for future miners. Additionally, on the one hand, there has been increasing criticism of the environmental pollution caused by Bitcoin mining, and on the other hand, extreme climatic conditions limit mining activities in certain 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 trends of mining machine products:

1. ASIC Process: The performance of mining machines is mainly determined by the chips. Currently, 5nm process chips for mining machines have matured, and the development of 3nm advanced process chips is ongoing. With the technological iteration and design progress of mining machine manufacturers, mining machine chips have matured in both design and production processes. Today, almost all major mining machine manufacturers can easily complete the design of high-efficiency mining machine chips using TSMC's advanced processes (5nm and 3nm), Samsung's (5nm and 3nm), and SMIC's N+1 and N+3. Among the machines produced by these three chip manufacturers, TSMC undoubtedly has the highest yield and performance, followed by Samsung, and SMIC is a newcomer. These wafer foundries rely on "harvesting" the research and development investment of mining machine manufacturers to complete their own technological and process advancements. This is a kind of "love-hate relationship that neither can do without," and I even believe it is a kind of "love-hate relationship like a mistress." Because wafer manufacturers usually present themselves as being involved in high-end consumer electronics and artificial intelligence (think of the gaming community's protests against Nvidia's "mining cards" PR crisis and Intel's repeated failures to produce mining machine chips). Some wafer manufacturers are unwilling to admit that it was actually the cryptocurrency mining business that provided them with the financial support during their early research and development, allowing them to achieve breakthroughs in advanced processes created by a large amount of US dollars.

2. Energy Efficiency Ratio (PE) will be the only competitive indicator: Looking back at Bitcoin's fourteen years, the bull and bear cycles, every bear market, the price of the currency plunges, and the shutdown of a large number of miners also leads to a drop in electricity prices. However, this round of bear market starting in 2022 is the first time in history that there has been a reverse development with falling currency prices and rising electricity prices. In addition, the upcoming fourth round of block reward halving, in a sense, signifies the "death sentence" for the mining industry. Of course, the development of mining machine chip technology and the launch of high-energy efficiency machines have delayed the arrival of the "mining doomsday." Therefore, in the future market, mining machine manufacturers will inevitably compete in a market with low currency prices and high electricity costs, and the PE of mining machines will become the only important performance indicator. Miners (as long as they have money) will choose high-energy efficiency mining machines. In today's market environment, 25 J/T is considered entry-level; to have a competitive advantage in the market, it is necessary to develop and produce mining machines that operate at around 20 J/T or lower. In terms of machine form, in addition to traditional air-cooled machines, efforts should also be made to promote the development and mass production of immersed liquid-cooled mining machines in order to better adapt to extreme weather conditions and be more friendly to human habitats.

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

· Competitive products:

PE: 20 J/T +-3%

Hashrate: 160 TH/s +-3%

Power Consumption: 3200 W +-3%

· Entry-level products in the market:

PE: 25 J/T +-3%

Hashrate: 130 TH/s +-3%

Power Consumption: 3250 W +-3%

· Other mining machines with energy efficiency ratios above 30 J/T will face shutdown and elimination. Even if they are sold to customers with extremely low or stolen electricity, they lack competitiveness. Moreover, this stolen electricity or "ultra-cheap electricity" market is very niche, highly unstable, and also involves illegal activities, so do not spend time and effort cultivating such a market.

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

The mining industry is facing two main contradictions. On one hand, the investment in the development of advanced process chipsets 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 returns on investment. For mining machine manufacturers, they need to achieve better energy efficiency through cost-effective improvements in technical paths. Immersed 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 immersed liquid cooling and containers takes up less space, has a higher degree of modularization, low noise, and can overcome the impacts of extreme weather and sandy conditions. It is expected to become the infrastructure of the next generation mining industry.

The mining industry faces another contradiction in that while the total computing power and mining difficulty continue to rise, the block rewards are constantly halving. Therefore, for miners, this is also a process of diminishing returns on investment, and only large miners have a chance to succeed. This indicates that the integration of the industry will further intensify in the future. In turn, the integrated mining machine industry will have more abundant capital and motivation to promote product iteration and mining farm construction, which provides a prerequisite for the large-scale application of immersive liquid cooling technology.

II. Market and Sales Forecast: The Relationship between Supply Chain, Spare Parts Inventory, and Sales

Wafer and outsourcing: In general, the mass production cycle of wafers is 4-6 months. Due to the historical dominant position of wafer manufacturers, mining machine manufacturers typically need to pay the full amount or at least 50% advance payment to secure wafer outsourcing. This brings considerable cash flow pressure to mining machine manufacturers, and coupled with the unpredictable bull and bear cycles of Bitcoin, it adds uncertainty to future sales and shipments. To solve this dilemma for mining machine manufacturers, effective market forecasting and sales strategies are necessary to successfully avoid risks. In my opinion, based on market conditions and supply chain situations, it is necessary to control the proportion of spot sales, increase the proportion of futures sales, continuously optimize customer structure to reduce risks. The specific strategies are as follows:

1. Futures sales strategy: 80% of the production output is used for futures sales, with delivery scheduled 6 months later in monthly installments, averaging monthly shipment volume. This strategy ensures the balanced and efficient sustainable operation of production and supply chains. It can effectively reduce cash flow pressure for wafer (chip) inventory, reduce purchasing costs of auxiliary materials and other accessories, and improve supply chain efficiency.

2. 50% prepayment strategy: Within one week after signing the contract, customers need to pay 50% of the total contract amount as a prepayment to lock in the unit price and production capacity, while also ensuring a large amount of cash flow for mining machine manufacturers to purchase wafers. This strategy guarantees two things: firstly, it ensures the normal cash flow required for mining machine manufacturers' research and development, production, and procurement; secondly, it spreads the risks that may arise from bear markets because the 50% prepayment almost covers the cost of the machines.

3. 2:8 Principle of Major Customer Strategy: As mentioned at the beginning, the decentralization of this industry is a false proposition. It is actually a highly centralized industry, especially the mining business, which requires a large amount 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. They are the cornerstone of the cryptocurrency industry. Retail investors, at best, fill in the gaps in the layout of mining machine manufacturers because the lifespan of retail customers is too short and their liquidity is too strong to maintain long-term cooperation. According to my observation, very few retail investors have been able to survive for a quarter in the past 5 years. In the early days of the industry, apart from Bitmain, most of the customers in the mining machine industry were domestic mines and domestic small-scale miners, and there were almost no international major customers. In the past 4 years, I have seen that various mining machine companies have gradually established a strategic major customer system based on international major customers. The customers include well-known old mining companies and emerging US-listed mining companies, such as Genesis, Hut 8, CoreScientific, Bitfarm, Bitfury; as well as 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.

III. 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 to make such sales forecasts in the Bitcoin mining machine industry, and there is no regularity to follow. Absolute prediction cannot be achieved, but basic prediction is still possible. For example, through the combination of their own futures orders and market trends, it is possible to predict a rolling sales every three months. Since the production of mining machines goes from wafers to products, the supply chain is particularly long, which requires sales operations to have professionalism and market grasp ability to make predictions as accurately as possible and reduce stockouts or inventory.

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

3. After-sales service: The working environment of mining machines is very poor, so the stability, durability, easy maintenance, and easy 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 and timely after-sales service are important options to consider when miners make purchases.

4. Sales reports and CRM: This industry is different from traditional fast-moving consumer goods or traditional IT industries; it is more like a speculative industry similar to finance. Therefore, sales analysis can only reflect the current data, and it should not have much reference value for historical and future data. On the contrary, data such as coin prices, mine site capacity, electricity prices, network-wide computing power, and difficulty coefficients have more practical guidance for sales. Customer data in CRM is usually updated periodically, with a low retention rate. The main long-term customers are a dozen or so key account customers, and the majority of small and medium-sized retail investors die in the "dawn before the bull market."

Four, Channels: Opportunities and risks coexist

In any industry, whether it is a 2B or 2C business, "channels" are indispensable. Taking the fast-moving consumer goods industry as an example, some people used to believe that "channels are king" and mistakenly thought that having channels meant having everything. Distributors and agents often quickly end their dreams in a self-consoling manner. Brand suppliers firmly hold consumers with their products, brands, and services, and also teach channels a lesson. In the fast-moving consumer goods field, channels have become mature. With nearly two to three decades of development and management, channels have given up the arrogance of believing that "channels are king" in the early days. Today, they have become "willing" green leaves under the banner of brand suppliers, silently making money. This low-profile attitude has become their norm and three-view cognition, fulfilling the saying: silently make a fortune. However, in contrast to the development of the 2B industry, channel operators are moving towards increasing professionalism. They not only need to expand channels, provide pre-sales, sales, and after-sales technical support, improve solution capabilities, but also have strong financial support for inventory. It is true that such channel operators also have more power and decision-making authority. It is precisely this "desire for power" that creates their ambitious and often unconscious disruption of brand suppliers' channel, pricing, inventory, and customer management strategies, unintentionally turning against the brand suppliers.

1. Channels are like water, it can carry a boat and overturn a boat

Channel management is a complex art of management. It is not just about channels; it is more about understanding human nature. The game between brand suppliers and channel operators regarding desire and expectations is also a touchstone for the human nature of sales personnel. When brand suppliers are in a weak position, channel operators will maximize their own interests regardless of the interests of the brand and customers, quickly harvesting all the benefits they can get, with a clear short-term speculative nature. In this case, there will often be mutual dumping between regions/channel operators, competing for customers, slashing prices, leading to the brand suppliers' inability to ship goods normally, and putting pressure on inventory, resulting in market price chaos. Customer complaints will increase externally, and internal competition among sales personnel will intensify. Brand suppliers are held hostage by channel operators, resulting in not only profit losses but also offending customers. When channel operators are in a weak position, brand suppliers often blame them for not expanding channels effectively and delaying opportunities. Looking at the development and routines of mining industry channel operators in recent years, they are very skilled in strategies such as closing doors and resting during bull markets while playing cards and drinking, and making moves and exploring bottoms during bear markets, thereby taking advantage of mining machine manufacturers.

( 1) Bull Market: Don't participate in the high-priced mining machine purchase at this time, watch with cold eyes, and enjoy eating, drinking, playing and playing with friends. Seize the opportunity to make a profit by quickly reselling at a higher price.

( 2) Bear Market: Occasionally provoke mining machine manufacturers under the pressure of inventory and cash, set up a trap, deceive the mining machine manufacturers into signing a "so-called mortgage installment payment contract", but with a very low down payment rate, which locks the price and production capacity of the mining machine manufacturers. Then, they manipulate the market by shouting orders and slightly increasing the price (their offer is even lower than the official price of the mining machine manufacturers), reselling the machines or even the contracts. As a result, the market price becomes chaotic. As long as the channel distributors' stocked machines or the machines on the contract are not sold out, the mining machine manufacturers cannot sell their inventory because the price and delivery are completely controlled and manipulated by the channel distributors. The channel distributors make money while the mining machine manufacturers are left with nothing.

2. Chaos in the channel management of the mining machine industry seen from several leading manufacturers

( 1) In a bull market, mining machines are in high demand and miners and agents are hard to find. On one hand, leading manufacturers withhold the maximum sales profit in their exclusive sales companies, and on the other hand, sales or agents add layers of markup, occasionally even promoting lower-level kickbacks. From the market's perspective, the prices are opaque, with layers of markups, resulting in a poor sales experience and reputation, causing the loss of major customers.

( 2) In a bear market, due to the pressure on the channel for stockpiling, once the bear market arrives, the agents panic and choose the "best strategy" of dumping their goods, leading to instant market price chaos. Miners and channel distributors, in desperation, demand refunds, returns, and compensation from the mining machine manufacturers to make up for their losses. If the manufacturers have sufficient cash, they could accept the refunds, but the problem is that once the bear market arrives, who will have extra cash? Who wouldn't want to reserve some cash for the winter? Moreover, the initial receiving price for miners and channel distributors may not all be from the manufacturers themselves. Since the beginning of this bear market, the channel distributors have collectively turned against the manufacturers, staging a series of lawsuits.

( 3) A large amount of channel inventory is piling up, and price slashing and dumping are imminent: According to incomplete statistics, there are currently about 1 million units of channel inventory in the market, including the inventory of agents and unlisted mining enterprises. With the continuation of the bear market and the upcoming halving, the new generation of mining machines will be iterated, and the current channel inventory machines will become scrap. In order to minimize losses, leading manufacturers will definitely cut prices and dump their inventory in a timely manner. In this round, if certain leading manufacturers can slash prices and dump inventory in time, they can kill two birds with one stone. On one hand, it can alleviate inventory pressure, and on the other hand, it can crush other manufacturers before the dawn of the bull market. Other manufacturers who want to survive need to adopt faster and more aggressive sales and pricing strategies, and a precise price-sniping strategy.

3. B2B Business Model: Key Account Model vs Retail and E-commerce Customers:

( 1) Mining machine sales is a simple B2B business, where big clients bring in large sales volumes, and the professionalism of the clients is the foundation. Retail and individual customers are just supplementary. Some mining machine manufacturers have a wishful thinking about retail and individual customers or e-commerce, thinking that they can sustain the company through them. However, whether it is Bitmain, Canaan, or Avalon, 80% of sales come from less than 20% of the big clients.

( 2) The communication and service cost between large customers and retail customers: Large customers have professional operation and engineering teams, with dedicated personnel for after-sales service and updates, which are efficient and effortless. Retail customers lack a team and often have to go through a bunch of after-sales engineers from the mining machine manufacturers for a small firmware update or a power outage. It is often due to their lack of understanding, and they end up complaining to the manufacturers. For manufacturers, this is a thankless task. The business is not large, and no service can be spared.

5. Smokeless War Between Miners and Mining

1. Early miners were mainly based in mining farms in cloud-rich, Sichuan, Xinjiang, and other places in China, mainly relying on thermal power and hydropower during the peak water period. The cost of mining power and maintenance was low. Deploying 10,000 machines and hiring 3-5 rural high school graduates who could be trained relatively easily to maintain the operation of the mining farm. Therefore, China's mining industry has a significant competitive advantage, and for a while, China occupied 70% of the world's total network computing power. During this period, the miners were basically the first group of Bitcoin adventurers and risk-takers in China. They were either speculators with some spare money and a keen eye, or technical guys who ventured into blockchain and BTC. After several cycles of bull and bear markets, this group of miners gradually became relatively stable. There are only a few major miners in China, and they 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 using low-cost electricity are their preferred choices. Therefore, their relationship with local officials has also become an important aspect of their interests. It often involves a lot of collusion, to the extent that the Chinese government subsequently introduced measures to crack down on corruption and promote green carbon neutrality, which not only led to a weed-out of mining activities in various regions but also disrupted the operations of miners.

2. On September 3, 2021, "Eleven Departments including the National Development and Reform Commission Jointly Issue a Document to Rectify the 'Mining' of Virtual Currency." Subsequently, on September 24 of the same year, the People's Bank of China and ten other departments issued a notice about "Further Preventing and Dealing with the Risks of Speculation in Virtual Currency Trading," which directly disrupted the cryptocurrency and mining circles in China. Their first response after realizing this was to "migrate platforms and employees overseas" and "ship mining machines to Kazakhstan, a friendly Central Asian country next to Xinjiang."

(1) Not only is electricity cheap in Kazakhstan, but the law also explicitly allows mining and exempts mining machines from taxes. Overnight, it became a paradise eagerly sought after by Chinese miners. In just three months, from October to December, the Bitcoin hash rate in Kazakhstan increased to 30% of the total network computing power, transforming from an obscure player to the world's second-largest contributor to hash rate. The composition of miners during this period also changed. In addition to Chinese miners, there were also new participants from Kazakhstan's energy sector. However, the good times did not last long. On January 6, 2022, riots broke out in Kazakhstan, shattering the dreams of all Chinese miners and crushing the short-lived dreams of prosperity for Kazakh miners. Since then, Kazakhstan's mining policies, taxation policies, and electricity fees have embarked on a path of self-destruction. Large numbers of Chinese miners subsequently fled to Kazakhstan, carrying their machines and Bitcoin, rushing day and night, heading straight for what they believed would be the next gold mine - the United States.

(2) The US market and US miners, who have always been crushed by Chinese mining machines and miners, saw hope and seized the opportunity to occupy mining resources. In the United States, especially in Texas, they made large investments, increased leverage for Bitcoin financing, built mining farms, and bought mining machines. In a short period of time, the mining industry in the United States "sprouted" like mushrooms after rain, accompanied by a large influx of Chinese miners. Within a few months, the computing power in the United States rose to the top globally. During this period, the structure of miners also included institutional investors with Wall Street backgrounds and a number of listed mining companies. At this point, the United States completed the entire strategic takeover from mining at the bottom of Bitcoin to the top exchanges. This strategy aimed to dominate the world with its global computing power, global exchanges, and global mining pools. The only thing missing at the moment is for mining machine manufacturers to be "tricked/pushed" into the United States, but it seems that completing this step is only a matter of time.

(3) Looking at the current situation, the surviving miners can basically be divided into: energy miners, institutional investment miners, traditional old mining companies, and emerging NASDAQ-listed mining companies. Among them, the old mining companies are the most adept at operating. They have weathered the storms and remain strong, mainly because of their understanding of the industry, risk control, and timely anticipation of market cycles.

6. Mining Business and Strategy

1. Three Risks of Mining Business

( 1) Policy and regulatory risks in transactions: Mining business is a high-risk business both domestically and internationally. Uncertainty risks at the policy level can be seen everywhere, coming anytime, and cannot be predicted or avoided. Legality, tax compliance, compliance in fiat and BTC transactions, and how to avoid risks of dirty coins, and so on.

( 2) Risks of electricity prices and power supply: Electricity prices are the fundamental factor determining the profitability of mining and the speed of investment recovery. Maintaining stable and low electricity prices is the key to profitable mining business. In addition, stable power supply, 24/7 electricity supply, is also a crucial factor for stable profitability.

( 3) Risks of partners: The high profitability of this industry often arouses greed in human nature. To avoid the risks of partners "backstabbing" each other and closing the door on each other's faces, it is necessary to avoid cooperating with short-term opportunists, speculators, and unfamiliar clients in mining business.

2. Selection of mining business partners: Three types of partners

( 1) Resource-based clients: They are well-known local enterprises and entrepreneurs with energy resources, social status, and honors. Such clients are unwilling to violate laws and regulations, and will not engage in unethical practices for minimal profits. Often, these clients can also help mining machine manufacturers to establish relationships with local governments, which is beneficial for the extension and sustainable development of mining business.

( 2) Emerging listed companies (clients): North American mining listed companies are standardized, professional, technologically mature, operationally efficient, financially compliant, and backed by institutional investments with abundant capital. They value their reputation and long-term development, have long-term plans, and are good strategic partners for mining business.

( 3) Veteran Miners: They are the evergreen trees in this industry, operating in the mining and cryptocurrency circles for many years. They are highly professional, knowledgeable about the industry, skilled in technology and operations, and are expert partners. However, they are also very meticulous and always calculate small gains. They can be a bit stingy in the industry. Collaborating with them can be advantageous, but it may also result in being taken advantage of. Nonetheless, it can be an opportunity to strengthen the team and enhance the mining operation and management capabilities of the miner manufacturers.

3. Why engage in mining business?

( 1) During a bull market, mining business can bring continuous cash flow (BTC) to miner manufacturers like printing money, enabling the company to rapidly increase revenue, enhance company value, and diversify its operations.

( 2) During a bear market, the price of machines may fall below production costs. In such cases, it is more beneficial to deploy the machines for self-mining in the mining farms. On one hand, this cushions the impact on the supply chain, ensuring normal production and supply chain operations; on the other hand, it helps reduce inventory and maintain a low level of business income. When the bull market approaches, machines and mining business can be sold together, generating greater profits, while continuing to mine and gain the tremendous value that BTC brings. It allows for a flexible strategy.

( 3) Hashpower and hashpower business: Building a hashpower platform and engaging in hashpower sales business, transitioning from simple miner manufacturing to advanced business models encompassing hashpower sales and securitization of hashpower.

4. Where will the future mining farms be located?

( 1) Based on current indications, the United States government is actively stifling cryptocurrencies. In order to maintain the dominance of the US dollar, they are systematically eliminating trading platforms for Bitcoin (FTX, Coinbase, and Binance are recent examples). Additionally, in the past year, various US states have introduced unfriendly policies towards mining (environmental assessments, electricity prices, taxation, etc.). It is my belief that in the near future, the US government will shut down mining companies in one fell swoop. Overnight, the current 3,000 MW of mining farms in the US will be wiped out, and there will be no more Bitcoin mining in the country. In short, the US market will cease to exist. Continuing to invest in the US market is highly dangerous, and building mining farms in the US is an unwise decision with high risks.

( 2) Kazakhstan: It represents the typical Central Asian governance model, with corrupt officials who pretend to understand but actually don't. Since the upheaval in January 2022, the government has implemented a series of unfriendly policies towards mining and trading, thereby destroying the previously thriving mining industry in Kazakhstan. From being ranked second globally, with 30% of the entire network's hashrate, it has been arbitrarily reduced to less than 5%. I'm curious whether this outcome is what Kazakhstan wanted, or if it is driven by the encouragement of the US government?

( 3) South America is the next mining destination: It has abundant hydroelectric power, cheap electricity prices, and affordable land. Currently, the policies are relatively friendly in countries such as Uruguay, Paraguay, and Mexico. However, stability of the political landscape, transparency, and policy continuity are lacking.

( 4) Middle Eastern Arab countries: They have cheap electricity prices, affordable land, and friendly policies. Liquid-cooled machines can adapt more efficiently to extreme climates. However, the annual power supply efficiency is less than 70%, and there is a high degree of resource monopoly and lengthy "Arab traditional business etiquette protocols".

( 5) Northern African countries: abundant power resources, lack of industry, mining is the best industry for rapid local economic development, and can receive strong support from the current government. The risk is political instability and poor security. Recently, countries with abundant hydropower resources and cheap electricity prices include Ethiopia, etc.

( 6) Russia: abundant power resources, early development of mining industry, and a large number of highly skilled professionals. The disadvantages are that Russia is subject to U.S. sanctions and has a poor business environment with a lack of contract spirit.

( 7) Iran: Let's talk about Iran separately because they have been mining all along, using second-hand machines from the market, secretly mining as if they never stopped.

7. Mining Machine Manufacturers Going Global: Embrace Globalization and Local Strategies

The world economy has flourished under the globalization development over the past 30 years, especially developing countries led by China have benefited greatly and achieved rapid economic and technological growth, becoming the 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 was prevalent in the Chinese internet, has also yielded to Texas, United States. Various mining machine manufacturers are actively seeking a path to go global. In my opinion, for mining machine manufacturers, sticking to a globalization strategy is completely correct. The key lies in the implementation of the globalization strategy and the path to globalization.

1. Embrace Globalization and Local Strategies: A strong local talent pool and solid local economic foundation are essential. Only with a strong local foundation can companies have the ability to go abroad in a solid and sustainable manner. Globalization requires talent reserves, economic support, and material foundation. Otherwise, even if a company reluctantly goes global, it will lack endurance and be short-lived. At best, it can be called a "flash in the pan".

2. Globalization Path: Looking back at China's economic development over the past 30 years, in traditional industries, apart from the photovoltaic industry, Chinese companies have mostly been limited to cheap labor and commodity exports, with few instances of original and innovative products and companies going global. In the fields of the internet and communication equipment, successful examples of going global in recent years include Huawei, Transsion Holdings, as well as entertainment companies represented by ByteDance and miHoYo. The uniqueness of the mining machine industry lies in the fact that, regardless of how much it has been questioned, to some extent, it represents the combination of high-end manufacturing and emerging finance. In the past few years, due to the highly monopolized industry, mining machine manufacturers have only made limited efforts in terms of going global, focusing mainly on product exports with lagging supporting service capabilities. At the same time, the cyclical switch between a strong seller's market and a strong buyer's market has not provided sufficient motivation for mining machine manufacturers to build service capabilities. However, since 2021, with the rise of institutional customers, mining machine manufacturers have gradually realized the importance of services.

Currently, some mining machine manufacturers have started to establish service stations and branches in overseas markets, which is a good thing. However, it is also necessary to pay attention to the perspective of localization in globalization, adapt to local regulations, work habits, and culture to maintain long-term customer relationships, in order to gradually build a moat of service capabilities. These are not accomplishments that can be achieved overnight but 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 there are various traps on the road to failure. What I have personally seen is that some companies that flourish and expand rapidly will eventually exhaust their resources and end up in failure.

3. The US Government and Cryptocurrency: The relationship between the US government and cryptocurrency is complicated. They obtained a large amount of Bitcoin by smashing the "Silk Road". The anonymity of cryptocurrencies and their use in illicit activities, as well as providing funding channels for countries such as Iran and Russia that are on the sanction list, are not allowed by the US government. They will not tolerate any challenges to the dominance of the US dollar, just as they are unwilling to accept China's peaceful rise. Following a series of scandals involving Three Arrows Capital, FTX, etc., the series of lawsuits against Coinbase, Binance, and Tether by the US Democratic Party government shows their determination to kill off cryptocurrencies.

4. Tether and its strategy: As the world's largest stablecoin, maintaining the stable development of the BTC market is crucial. According to a message from a senior practitioner, a top executive of Tether recently revealed that they plan to allocate a fixed proportion of their annual $4 billion profit 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 machine manufacturers. In this regard, Tether has become an irreplaceable Don Quixote in this industry. Here, let's imagine boldly that in the context of a run on crypto-friendly banks, Tether's ambition may be to play the role of "Tether Reserve" in the cryptocurrency industry and solidify its position as the leader through a crucial market rescue.

8. Some Speculations about the Near Future

The development of Bitcoin is not something that a government or an institution can control, especially in the context of conflicts between Eastern and Western civilizations, geopolitical conflicts, monopolies on currency hegemony, energy shortages, and new Cold War under deglobalization. The world may need cryptocurrencies, especially Bitcoin, even more.

"Institutional Bull" Cyclically Recurring

From 2010 to the present, Bitcoin has been declared "dead" unilaterally 474 times (see 99 Bitcoins), which is enough to prove that Bitcoin is a resilient force. What I have observed is that after a series of scandals, Bitcoin has shown signs of a comeback. The US government and institutional investors often have different opinions on Bitcoin. In the eyes of the US government, the supremacy of the US dollar is paramount, and Bitcoin, at most, is just a black glove that cannot be whitewashed. In the eyes of institutions, the real value lies in being able to exploit opportunities. BlackRock, the world's largest asset management company, is actively pushing for a Bitcoin ETF, and its record of ETF applications has had both successes and failures. If successful, in the near future, we will likely see the bullish situation in the institutional market in 2021.

The entry of institutions will further influence the funding structure of the Bitcoin industry. In the early years, the cryptocurrency and mining communities were predominantly speculative gamblers, often making a fortune or going broke in the short term. Therefore, the industry has always been about a few people getting wealthy silently. In the latter part of 2018 and the beginning of 2019, institutional investors from traditional Wall Street financial funds, family funds (old money), and companies with traditional energy backgrounds began entering the market, gradually changing the composition of the industry. With the entrance of old money, Bitcoin's price began to dance in sync with Wall Street. Of course, this also means that Bitcoin's volatility will decrease.

The importance of Bitcoin's "surname" is irrelevant, making money is what matters

As for the compliance of cryptocurrencies, it has always been volatile, with the SEC and CFTC constantly at odds. In the past few days, US senators will introduce a new revised version of cryptocurrency regulation to expand the CFTC's power. The regulation states 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 the later generation," so the debate over what Bitcoin's "surname" should be is temporarily set aside. Currently, the US is facing high inflation, struggling to find buyers for its government bonds, and the credibility of the US dollar is further eroded. Quietly selling Bitcoin is also one of the measures taken by the US government to recover dollars and boost confidence. Therefore, in this context, whether the compliance of cryptocurrencies is truly compliant or just a rehash of old ideas remains to be seen. However, as long as there is liquidity, the show can go on.

Asia is still worth paying attention to

2021 Heavy hammer fell on Bitcoin in China, two years later the US sued exchanges such as Binance and Coinbase, and now China tacitly supports Hong Kong's support for Web3.0 and cryptocurrencies. It can be seen that the attitudes of governments around the world towards cryptocurrencies are ambiguous. In the past two years, funds have started to flow back to Asia, with Singapore thriving and Hong Kong unwilling to give up its position as the leader in Asian finance. Singapore and Hong Kong are competing for funds, and the biggest winner is definitely cryptocurrencies. Worth noting is that in June 2023, Japan's "Revised Financial Settlement Act" was passed in the Upper House of Parliament, becoming the world's first country to enact stablecoin legislation. In the foreseeable future, Asia will still be an important pole in the cryptocurrency industry. In addition, in the context of global economic downturn, more and more governments in small countries in Africa and South America are adopting an open attitude.

In the new Cold War pattern, the results of the US government's regulation of 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% in June to 55%. In the secret battle of cryptocurrencies, both China and the US may support their respective centralized exchanges to attract overseas funds and take measures when necessary to prevent massive capital outflows.

In Central Asia, Kazakhstan has always attracted the most attention. In 2021, the country quickly became the region with the fastest-growing hash rate, but then it fell sharply due to power outages and policy reasons. The Kazakhstani government collected $7 million in tax from cryptocurrency mining entities in the past year, and as of April this year, the government's tax revenue from mining was $541,000. If this standard continues, it can be estimated that the total tax revenue for the whole year of 2023 will be only about $1.62 million, mainly due to the impact of policy crackdown on the country's cryptocurrency mining industry. As a resource-based country, there is nothing wrong with using surplus electricity to generate income. The previous round of policies was mainly a response to illegal mining and low electricity tax for cryptocurrency mining. The cryptocurrency 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 the author sees is that the country plans to introduce new regulations afterwards, including miner licenses, the use of licensed exchanges and mining pools, etc., these measures will further reduce tax evasion and improve industry transparency, instead of cutting the mining industry out of the country. The current sharp decline in mining tax revenue also indicates that the country's mining industry needs time to recover and rebuild confidence in capital. In addition, improving the efficiency of electricity utilization requires the introduction of more advanced machines and equipment, so in the near future, we may see some relaxation in the country's import value-added tax on mining machines and digital mining taxes.

Green Mining: the "Pledge" that Bitcoin Mining Must Submit

In the aftermath of the previous "crypto winter," the Bitcoin mining industry has entered a period of consolidation. The current challenges facing the Bitcoin mining industry are as follows: 1) Political correctness: sustainability concerns surrounding the Bitcoin mining industry under the carbon reduction framework. 2) Source of funding: Bitcoin ETF is a double-edged sword for the mining industry. While the introduction of ETFs is likely to increase coin prices and benefit miners, it also provides institutional investors with a low barrier to entry, thus reducing the incentive to invest in large-scale mining infrastructure and equipment procurement. 3) Listed mining stocks have begun seeking new narratives of so-called "diversified income," including using mining GPUs for AI.

Today, facing the mighty US government, the Bitcoin mining industry cannot thrive in isolation. To survive, it must adopt a "green" stance. Firstly, addressing the issue of mining sustainability. Under the global carbon reduction framework, green mining is the only viable path for industry compliance in the long run. This means that only companies with strong financial resources and deep government connections can survive. Currently, listed companies in the industry have taken action by establishing 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 crypto mining power structure and its role as a source of subsidies for new energy. Secondly, mining companies are actively seeking cheap hydropower in regions outside North America, such as the Nordic countries, and increasing their partnerships with energy companies, especially those in the renewable energy sector. Finally, ESG will undoubtedly become a standard narrative for future listed companies, and Bitcoin mining enterprises are no exception. It may be beneficial to establish organizations similar to green foundations and allocate funds on an annual basis as a "certificate of commitment" to US decision-makers, in order to seek greater legal and public influence.