Abstract : Judging from either the scale of the mining industry or the scale of the hardware market of miners, the digital currency mining industry still has plenty of upside potential.
DD Think Tank, an analysis team under ChainDD spent two months carrying out in-depth tracking and analysis of the cryptocurrency market and its performance, finalizing 2018-2019 Cryptocurrency Market Annual Report: Reset the starting point of value. DD Think Tank team collected, processed and analyzed more than 100,000 pieces of data of the global cryptocurrency industry and integrated more than 900 digital currency governance policies from 224 countries and regions (as defined by Baidu Baike), covering dozens of vertical segments. Furthermore, the team performed a weighted index calculation with a selection of 12 mainstream coin trading pairs at head exchanges, using the composite DD index to reflect the conditions, trend and fluctuations of the whole market.
This annual report is the most intuitive 2018 annual industry report for cryptocurrency investors and practitioners worldwide and provides reliable data and trend guidelines for the development during the next stage.
1. BTC Mining
1.1 Social environment of BTC's mining networks
a. BTC mining's geographic distribution: predominantly in Sichuan, China but moving overseas due to restrictions
According to estimation, China's miners work in predominantly a small number of provinces. 80% of Chinese miners are located in Sichuan province while the rest are in Yunnan, Guizhou, Tibet, Xinjiang, west of Inner Mongolia and Heilongjiang.
The key factor for mining site selection decision making is cheap electricity. Sichuan province is endowed with rich hydroelectricity resource. Mongolia is rich in coal so thermoelectricity is cheap. Xinjiang province generates electricity mainly by wind power, with thermoelectricity generation as the supplementary electricity generation. The reason that some mining practice has chosen the north of China is because cold climate can lower extra cooling costs.
At the “DD Pub” event hosted by ChainDD, Dai Pengcheng, sales representative of BITMAIN expressed his opinion that the cost of electricity in China is relatively transparent. The price is 0.31 to 0.33 RMB Yuan in Xinjiang, 0.34 in Inner Mongolia and in Sichuan, electricity price is the lowest during wet periods at a bit over 0.1 RMB Yuan, while during other periods, it is a bit over 0.3 RMB Yuan.
Overall, though China's policies in 2018 had some influence on BTC's price and mining practice and some mining sites are preparing to move away from China in order to search for countries with better electricity prices such as Venezuela, Iran, and some African countries, China is still a major choice for many mining industry investors since those countries are far away and their policies are unstable, which is a concern for mining operators.
b. BTC mining electricity consumption: accounting for 50% of mining costs
DD Think Tank analyzed Digiconomist's data and discovered that overall, the 2018 electricity consumption increased. However, the BCH fork on November 16had a strong impact on the BTC mining industry and after the fork, BTC's computing power decreased. So did the electricity consumption.
By December 31, 2018, according to DD Think Tank's estimation, the annual electricity of BTC in 2018 was 62,350 GW/h, an increase of 301.46% compared with 15,530 GW/h in 2017. The global mining revenue in 2018 exceeded 6.1 billion USD while the mining cost was nearly 3.117 billion USD, just a bit over half of the revenue.
1.2 Development of BTC's mining networks
a. BTC's overall supply: annual production of 681,200 coins with large production in January and smallest production in November
Judging from BTC's daily production increase rate, in January, 2018, BTC's daily production reached its annual peak, at approximately 2038.31 coins. In February, the daily production dropped 4.310% compared with the previous month. In November, BTC's production reached its annual lowest at 48,375 coins in the month and the daily production dropped 8.678% on a month-to-month basis, compared with October.
This corroborated the same pattern of electricity consumption in 2018, which also saw a sharp drop in November. BCT's hard fork in November had significant impact on the BTC mining industry.
Currently, the fixed reward for each BTC blockchain is 12.5BTC. Judging from the current progress, the latest production reduction by half (6.25BTC) will occur on May 10, 2020. Calculated by the blockchain reward on December 31, the annual inflation rate of BTC is 4.05%.
b. BTC mining level of difficulty: highest in October and second largest drop in December in history
DD Think Tank used BTC.com's data and summarized whole network difficulty of BTC in 2018. BTC's mining difficulty increased from 1.87T on January 1 to 5.11T on December 31, an increase of 173.26%. Although on a yearly basis, the whole network difficult was showing a general upward trend, a careful inspection shows that the difficulty change in 2018 still reflected the digital currency market fluctuation.
According to DD Think Tank's observation, in total, 27 BTC whole network difficulty adjustments were carried out in 2018. Among these adjustments, 22 were upward adjustments and 5 downward ones, on July 17, October 19, November 17, December 3 and December 19 respectively. During the periods when the difficult was adjusted downward, the one on December 3 was the second largest one in history with an adjustment of 15.13%, only lower than the 18.03% adjustment on October 31, 2011.
Through the analysis of 2018's BTC mining difficulty changing trend, DD Think Tank has found that the role of difficulty adjustment mechanism is to make sure BTC network will always have sufficient capacity for a dynamic system to execute transaction hash calculation no matter how coin prices fluctuate. Although before mid 2018, BTC price experienced sharp drop, it was still higher than its mining cost. Therefore, when the price fell several times to 6,000 USD, mining companies didn't choose to close operation.
Overall, in real BTC mining operations, there is a lag between price changes and the reaction to these price changes and the number of BTC miners is still increasing. The end of the cryptocurrency market's winter may be coming.
c. Right before the BCH fork battle, BTC's hashrate decreased significantly
Although from January to July of 2018, the global digital currency market experienced sharp rises and falls, BTC's hashrate enjoyed steady upward trajectory. DD Think Tank's analysis has lead to the conclusion that BTC's computing power dropped sharply right before the BCH fork battle and insufficient new fund in the digital currency market meant there was no follow-up fund for rescue when its price went below the 6,000 USD threshold, causing its price to plummet all the way to somewhere around 3,000 USD. Furthermore, plunging BTC price brought about sharp drop of the mining profit, forcing many small mining companies to shut down their mining equipment or exit the market completely. Therefore, the hashrate was weakened.
In comparison to small mining companies, large mining companies' sunk costs are too high and their large ongoing up-front investments play a determining role in their computing power and competitive advantages in later periods. Therefore, they will try their best to maintain their computing power even at a loss. Additionally, large mining companies are more resilient against risks of BTC price drop, thanks to their advantages in electricity and low price mining equipment.
Comparison between hashrates of BCH ABC and BCH SV before and after BCH hard fork is shown below.
d. Oligopoly continues in mining rig industry and overall concentration moderately decreased
DD Think Tank analyzed BTC.com's data, which shows that by January 21, 2019, total mining rig share of the top six mining rigs in terms of computing power percentage had reached 74.48%. The top six mining rigs were BTC.com (21.35%), Antpool (13.97%), SlushPool (10.96), ViaBTC (10.51%), and F2Pool (8.13%).
Among the top six mining rigs, five are from China and only one, namely, Slushpool is from Czech Republic. Among the five Chinese mining rigs, three of them are related to BITMAIN directly or indirectly. BTC.com and Antpool are both mining subsidiaries of BITMAIN and ViaBTC was invested by BITMAIN during its first round of fundraising.
DD Think Tank has charted the change of shares of mining rigs in 2018 and discovered that though BTC.com still occupied the top position firmly, and the rankings of the top mining rigs in terms of computing power percentages remained unchanged, the mining rig industry market share distribution at the beginning of 2018 showed slight differences compared with that at the end of the year. Rankings of some newly emerging mining rigs improved such as Poolin and Houbi.pool,
which didn't show much impact in the competition in the first half of 2018 but were ranked eighth and ninth respectively with market shares of 7.5% and 5.07% by December 2018.
In general, oligopoly continues in mining rig industry and overall concentration moderately has decreased.
1.3 Current miners and relevant data
Mainstream BTC miners mainly consist of computer chips, computing boards with heatsinks, fans, controller circuit boards, aluminum alloy covers and external power supplies. The core component is the chip. The computing capacity and energy consumption of a miner is determined by the chip and its cost accounts for approximately 80% of a miner's cost.
Currently, mainstream miner manufacturers are mainly domestic ones including BITMAIN, Canaan Creative, Ebang International and Pangolin Miner. Take BTC's ASIC miner as an example. The prospectus of Canaan Creative shows that calculated by 2017's quantity of miner deliveries, BITMAIN and Canaan Creative had a combined market share of 87.5%. BITMAIN's own quantity of deliveries was 940,100, accounting for 66.6% and that of Canaan Creative, 294,500, accounting for 20.9%.
Although the harsh digital currency market has led to decreased coin prices and mining profitability and after some mining operations were closed, second-hand miner market has seen increased trading volume while demand for new miners has decreased, data shows that the mining industry's demand for computing power is still high.
2. Ethereum Mining
2.1 Ethereum hard fork was the annual hot topic and price has become the main factor for difficulty and hashrate changes.
Since its launch in 2015, Ethereum (ETH) has drawn significant international attention. The ICO frenzy starting in 2017 and the ensuing digital currency price surge made ETH the second best known digital currency after BTC. By December 21, 2018, the number of Google search for Ethereum had shot up to 113 million times.
DD Think Tank reviewed ETH's 2018 price trend using etherscan.io's data and found that by December 31, 2018, ETH's price was 133.49 USD, a drop of 607.64 USD compared with the price in the previous year, 741.13 USD, a drop of 81.99% on a year-to-year basis.
In terms of the mining difficulty change, from 20:00 to 21:00 on October 16, 2017, ETH network carried out the Byzantine hard fork and blockchain generation reward dropped from 5 ETH to 3 ETH. On the same day, the ETH mining difficulty plummeted, from 2962.491TH on October 15 to 1922.324TH, a drop of 35.11% on a day-to-day basis, and further dropped to 1430.794TH on October 17, a decrease of 51.70% on a day-to-day basis. However, the hashrate was still improving steadily.
Along with the digital currency market's explosive growth in 2018, ETH's mining profitability increased sharply and investors turn their attention to mining on ETH. Therefore, ETH's mining difficulty and hashrate gradually increased. ETH's mining difficulty not only recovered the drop due to the hard fork, but reached 3606.036TH, exceeding its previous historical peak reached on August 9, 2018. According to the Ethereum team's plan, the development of Ethereum can be divided in four stages: Frontier, Homestead, Metropolis and Serenity. The first three stages will adopt PoW consensus mechanism.
“Metropolis” is divided into two upgrade stages including Byzantine and Constantinople. The Constantinople fork was originally planned to be finalized at the end of 2018 and the blockchain generation reward would drop from 3 ETH to 2 ETH after the fork.
On October 8, 2018, the core developers of Ethereum announced that the Constantinople upgrade on the Ethereum test network Ropsten would be delayed to October 14. However, on October 14, due to the consensus issue, the upgrade couldn't proceed. Until November, the Constantinople fork was planned to be carried out in January 2019. In the early morning on January 16, Afri Schoedon, the Ethereum fork coordinator, confirmed on Reddit that due to security loopholes, the core developers of Ethereum decided to delay once more the hard fork.
DD Think Tank's analysis has concluded that on September 8, 2018, ETH's whole network hashrate reached its annual peak at 295912GH/s. From September to mid November, Ethereum's price was fluctuating between 200 USD and 300 USD. Although the price had already dropped almost 700 USD compared with its peak in 2018, ETH miners could still sustain their operations. Along with the fall of the whole market, ETH's price dropped below 150 USD officially on November 19 and ETH mining difficulty simultaneously dropped below 3,000TH while the whole network hashrate dropped to 165252GH/s. When the price dropped to 84.28 USD, its mining difficulty dropped to 2222.302TH and the whole network hashrate was 171971GH/s.
3. The room for improvement is significant but the road ahead will be bumpy.
Although the digital market represented by BTC crashed in 2018, the mining industry at the source of the digital currency market is still relatively vigorous. Since the mining industry relies on mining sites and mining machines, it is defined as part of the real economy, albeit only partially. Although interfered by external factors such as climates and policies, the core factors influencing the mining industry are electricity, coin prices and computing power.
The BTC difficulty adjustment mechanism ensures that the BTC network maintains a dynamic system and whole network operational viability. Judging from either the scale of the mining industry or the scale of the hardware market of miners, the digital currency mining industry still has plenty of upside potential.
However, under the impact of the downward market trend, mining probability has plummeted and mining companies are facing business closure and lay-offs. However, though some investors will exit the market, currently large mining companies' sunk costs are high and they will persevere in the industry's frontier. As soon as signs emerge, showing that the digital market is recovering, they will be rewarded with their hard earned prizes.