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2018 was a difficult year for Bitcoin and Crypto miners. Some of the largest multi-billion dollar companies in Asia have recorded losses of hundreds of millions of dollars.
Since the Japanese Internet conglomerate GMOs and the largest mining machinery manufacturer in the sector, Bitmain, have suffered throughout the year, the entire sector would have closed the year with losses. significant, following the trend of the two companies.
$ 320 million of losses for GMOs
GMO, one of the most influential Internet companies in Japan, recorded a loss of over $ 320 million in the fourth quarter of 2018. Following what the company described as an "unexpected loss", the company has officially withdrawn from its mining sector.
In June, the Japanese company allocated about 10% of the company's capital and resources to engage in an ambitious mining operation with the vision to compete against Bitmain.
At the time, the company set up a department dedicated to the development of cryptocurrency mining equipment to create its own 7-nanometer (nm) ASIC chips to run a large-scale mining facility. The GMO team said in June:
"We will use the 7nm process technology at the cutting edge for the chips to be used in the extraction process and we are currently working on its research and development with our alliance partner with semiconductor design technology to build computers high performance extraction will reduce energy consumption compared to existing mining machines with the same performance and achieve computational performance of 10TH / s [transactions per second] for chips. "
The company, despite the large amount of capital and resources, did not take into consideration the size of Bitmain operations. As early as mid-2017, Bitmain was looking for a valuation of over $ 15 billion, anticipating an initial successful public offering (IPO) in Hong Kong.
Currently, GMOs are valued at just over 169 billion yen, equivalent to about $ 1.5 billion. That is, only 10% of Bitmain's valuation at the beginning of this year.
Initially, the GMO was convinced that, as an important Internet conglomerate in Asia, it could outsource Bitmain and secure a considerable share of the market share of the cryptocurrency mines industry. However, as subsequently revealed by BitMEX, Bitmain was ready for such competition and was willing to operate at a loss to squeeze the competition.
On Christmas Day, December 25, the GMO withdrew its mining activity, absorbing the loss of $ 320 million and immediately halting the development, production and sales of its mining equipment. A public document published by OGM read:
"After taking into account changes in the current business environment, the Company expects it to be difficult to recover cryptocurrency-mining-business activities through the sale of mining machinery, so the Company has decided to discontinue development, the production and sales of mining machines, thus recording an extraordinary loss, GMO Internet will record losses from the transfer of receivables for about 17.5 billion yen and a provision for writedowns of about 3.5 billion yen, recording an extraordinary loss of about 24.0 billion yen on consolidated accounts and individual accounts. "
Even Bitmain has struggled
The main competition of GMOs was Bitmain and GMOs committed themselves to overcome the cryptocurrency mining equipment manufacturer based in China since its inception.
But according to a report published by BitMEX Research, Bitmain has sold many of its miners S9, its flagship product, at a loss for the whole year, in a probable attempt to establish its dominance over the industry, engaging in a price war with its competition, which knew that other companies in space could not handle.
In August, when the BitMex Research report was released, the price of Bitcoin was still hovering at around $ 7,000, above the break-even cost of mining. As such, by the end of the third quarter of 2018, miners in the cryptocurrency space were still making profits and Bitmain was able to sell its Antminer S9 to mining facilities around the world.
Because of the relatively high demand for data mining, Bitmain could handle losses at the cost of creating a more inefficient environment for its competitors. But as the months went by and the bear market exploded in November, when the price of Bitcoin fell below the cost of breaking the mining sector to $ 6,900, Bitmain also began to struggle.
A BitMEX Research document published Aug. 30 laws:
"This analysis implies that Bitmain is currently at a loss, with a negative profit margin of 11.6% for the main S9 product and a margin of over 100% negative on the L3 product. therefore the situation may not be so serious, but we believe that it is probable that Bitmain is currently suffering significant losses.These low prices are likely to be a deliberate strategy by Bitmain, to squeeze the competition causing a drop in sales and therefore financial difficulties ".
After a period of three months neglected from September to December, Bitmain would have fired 50 percent of its workforce. On MaiMai, a Chinese social media platform, an employee of Bitmain has confirmed that over 50 percent of "the entire staff of Bitmain" has begun to let go.
The Bitmain staff member also added that some departments "must be left completely" due to market conditions.
The priority of the dismissal is foreseen for the newly established departments that work outside the main area and the business model of Bitmain, such as artificial intelligence (AI).
The problem with Bitmain and the approach of other companies
In May, Bitmain issued a statement that was not provided by the cryptocurrency community, revealing the company's long-term plans to compete with Nvidia, Intel and AMD – companies valued at over $ 100 billion – in the # 39; IA.
Confident in the sustainability of the cryptocurrency mining industry, Bitmain has begun to enter completely new sectors to go against some of the world's largest technology companies.
In a series of interviews with Bloomberg Businessweek, Bitmain co-founder Jihan Wu said that artificial intelligence chips are similar to Bitcoin's mining chips, in the sense that artificial intelligence requires "many calculations" and the Bitcoin mining requires application-specific integrated circuits chips (ASICs), which are applicable in AI. Basically, Bitmain's plan was to create chips using their existing chip designs to power artificial intelligence systems and software.
The problem Bitmain and most of the companies in the cryptocurrency had in the first quarters of 2018 the aggressive diversification of services and products, often expanding outside the cryptocurrencies, without making the necessary improvements to their main products and models of business.
ConsenSys, for example, the largest blockchain software firm in the world, based in New York, has fired over 300 employees from its workforce to focus on a select group of products that can push the mainstream to acquire active users.
Many companies in the cryptocurrency sector, including the mining sector, have expanded their activities in various sectors, going from mining and mining equipment production activities and the excessively aggressive approach failed due to the worsening of market conditions in the third and fourth quarter of 2018.
Not all negative
According to the cryptocurrency market data provider and the Blockchain portfolio platform, the Bitcoin hash rate – or the computing power level that supports the Bitcoin network – has decreased from 61 exahash to 44 exahash, from August to December.
On December 3, Malachi Salcido, head of Salcido Enterprises, one of the largest mining facilities in the United States, said miners left the market en masse. The executive pointed out that the price of cryptocurrencies should increase by wide margins because the mining business is profitable, but said that smart money is trying to reverse the trend.
"I expect where we'll be a bit worse before they get better.As all the funds in the market, smart money is watching for the turn, which usually does not happen quickly.It would not surprise me if the fund were finally at February, "said Salcido, following the release of a Fundstrat article that revealed that at least 100,000 individual miners have left space.
However, from January 2018 to December, the bitcoin hash rate increased from 17 exahash to 44 exahash. Despite the substantial drop in the hash power of the dominant cryptocurrency, on a yearly basis, the Bitcoin hash rate increased by 158%.
The recovery of the hash power of the Bitcoin network in December and the relatively high computing power of cryptocurrency probably come from large structures that are continuing to exploit the digital asset.
Although individual miners who rely on cloud mining platforms and small ASIC mining platforms are able to get out of space with a small loss, it is difficult for mining centers that have acquired long-term contracts from power line operators and purchased large quantities of ASIC miners to bring their operations stop.
As security expert and cryptocurrency, Andreas Antonopoulos explained:
"Part of the reason is [i.e., the death spiral of crypto] Miners are unlikely to have a much longer-term perspective. This means that they already have investments in equipment and usually buy electricity on long-term plans, but do not pay within the week. And so, if they have to wait to become profitable for another three months and have the equipment in place, they will not shut it down. "
Large conglomerates such as Intel, the $ 213 billion technology conglomerate, are currently working on developing efficient mining systems that could improve chip and mining equipment productivity.
A patent acquired by Intel for the SHA-256 datapath for high performance energy efficient Bitcoin extraction demonstrates a hardware component that is able to be accelerated for the sole purpose of extracting cryptocurrencies.
Samsung, the largest market valuation company in Korea, is currently using its foundry at its headquarters in Suwon, South Korea, to produce cryptocurrency equipment and chips.
Previously, due to the partnership between Bitmain and TSMC, a Taiwan chip maker, most of the chips were produced by the two companies, which led the market to be dominated by two companies.
Trend in 2019
Large-scale mining facilities are expected to continue their activities also because of their long-term strategies.
It remains uncertain what factors could cause cryptographic resources to recover in the next 12 months but with significant cuts to the workforce and realignment of the vision, having generated billions of dollars in profits from 2017 to 2018, companies like Bitmain have the capital to support the their operations.
Therefore, although most individual miners have left space, analysts expect large mining facilities to remain in space and await the downstream market for cryptographic activities, given that once the cryptocurrency market valuation recovers, miners will be able to start recording profits again.
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