Bitcoin Miners Retain Rigs in the Hope That the Bull Run Will Continue

As bitcoin's rise continues, some bitcoin miners are holding on their mining rigs in the hopes of selling them at a better price.

Vincent Vuong, director of sales and procurement at bitcoin mining and hosting firm Compass Mining, stated, "I know there is supply available." “I spoke with quite a few individuals. They all have tens of thousands of units, but no one wants to sell them.”

Mining rig prices fell due to China's ban on crypto mining a few months ago, but owing to bitcoin's current bull run, the machines are again selling at a premium.

Bitcoin has experienced some of its biggest increases this year in recent weeks, increasing dealers' confidence in the machines' future values.

Bitmain and MicroBT, for example, enable its customers to pre-order mining rigs and hold futures contracts for batches of equipment that will be delivered at a future date. As the coronavirus epidemic has delayed global operations and caused a supply chain bottleneck for components to build the machines, this technique has grown increasingly prevalent.

Major chip suppliers, such as Taiwan Semiconductor Manufacturing Co., have very limited quotas for certain chips for bitcoin mining equipment manufacturers, which has led to the practice.

According to industry experts, mining equipment costs have already risen significantly in both futures and spot markets, indicating miners' optimistic predictions for the biggest cryptocurrency's price.

As a result, a lively futures contracts market has developed for miners, brokers, and speculators, who trade depending on bitcoin prices and other variables that influence equipment profitability, such as energy costs.

“The mining machine futures market is one of the main bellwethers for bitcoin's market,” said Franky Hu, chief business development officer of MyRig, a miner hosting services provider headquartered in Russia. “Miners gamble on greater bitcoin prices when mining rig futures contracts trade at a significantly higher price than current pricing, resulting in a larger profit margin.”

Rig prices in the secondary spot market seem to have bottomed out in July and have been rising over the last three weeks. According to the Rig Price Index of Seattle-based mining firm Luxor, prices for various mining equipment increased by 7.5 percent on average last week, the largest rise since the recovery began.

According to Ethan Vera, Luxor's chief operating officer, the increase rate of rig prices in the secondary market shows that purchasers are pricing machines based on a positive view for a bitcoin price, which may lead to larger profit margins.

The price of the rigs is determined not just by the value of the equipment, but also by the anticipated profitability, which is based on market opinion about the price of the bitcoin that the machines might mine.

“Over the last three weeks, rig prices have outperformed bitcoin prices, demonstrating that it isn't only about present economics, but also about future sentiment,” Vera added.

The bright side

Bitcoin recrossed the $50,000 barrier early this week and has been gaining for five weeks in a row, its longest weekly winning run in nine months.

“When the price of bitcoin rises, nobody wants to sell their machines,” Vuong said. “There is a lot of room for growth.”

Miners and brokers have made large gains in the past by executing well-timed transactions during bitcoin bull runs, according to Vuong.

Before last year's bull run, for example, the S9, one of Bitmain's earlier types of mining equipment, was selling for up to $20. Vuong claims that during the height of the surge in late 2020, the identical computers were selling for $600 to $700, a 30 to 35-fold increase.

Over time, trading mining equipment has grown increasingly strategic. Vuong even argued that someone who traded hardware might have made more money than someone who bought and held bitcoin.

Even in this short-term downturn market, some vendors are choosing to wait it out by hosting their mining equipment. This may produce daily gains, giving them more time to wait for the bad market to pass, according to Vuong.

Furthermore, for devices that are already hooked in, sellers may usually get a better selling price. He said that the machine on the shelf is more valuable than those in the warehouse.

Bitcoin miners in China have calmed down.

According to Vera, Chinese miners were eager resellers in the first few months following the prohibition, resulting in a surplus of secondhand equipment on the market.

In May, China's State Council asked for a blanket ban on crypto mining and trade, resulting in a huge market for secondhand mining equipment, according to Vera.

Before the crackdown, some of the largest Chinese miners were operating massive mining farms that generated over 1 exahashes per second (EH/s). According to Vera, approximately one million mining equipment in China fell down as a result. Exahashes is a metric for a mining machine's computing power, which is a powerful computer used to solve arithmetic problems in order to get freshly created bitcoin. Bitcoin transactions are also processed by the computers.

“They had to unplug all of their equipment because of the prohibition, which means they might lose millions of dollars every day,” Vera said.

Miners, on the other hand, are increasingly considering the long term. “Miners in China are generally more patient, less anxious than they were before the ban was imposed,” Vera added.

“They have accepted the reality that they will lose money this year and are devoting more effort to planning how they will operate their business in the future.”

Bitcoin mining rigs arbitrage

A price arbitrage mechanism exists in the huge secondhand rig market, allowing brokers to incorporate bitcoin's price into how much a machine could sell for.

Every morning at 11 a.m. in Beijing, Chinese brokers update mining machine pricing and transmit this information to brokers in North America. This daily update allows Chinese miners and brokers to incorporate bitcoin's price into the pricing of their mining rigs in a couple of hours.

“Whenever the bitcoin price rises, the machine prices rise in the following hours,” Vuong said. “Unless the two parties had a very strong connection, no seller would fulfill the agreement with purchasers for more than a day.”

While rig costs may rise in a matter of hours, they typically decrease two to three weeks after bitcoin prices fall, allowing vendors ample time to alter their pricing.

“It took more than three to four weeks after the bitcoin price dropped to approximately $30,000 before we began to see hardware costs drop,” Vuong added.

However, there is still a danger in keeping mining rigs since their value depreciates over time as they degrade, and miners may lose money sitting on a pile of equipment in a warehouse if they can't find locations to run them.

Bitcoin mining now requires a lot more methods, according to Vuong. “There are a lot of different ways to play it, and it will become less about who has the most money to spend and more about who has the greatest long-term planning and strategy.”

A quiet resurgence

According to two major Chinese bitcoin mining companies who declined to reveal their identities due to China's laws and regulations on crypto mining, another reason Chinese miners have stopped selling mining machines is that some of them are able to plug their bitcoin mining rigs back online and mine bitcoins in certain jurisdictions in China.

“Given how much hashrate has returned online and how most miners outside China are still constructing their mining facilities,” one insider added, “we believe some miners in China with at least a few hundred megawatts of total capacity have begun mining again.”

Bitcoin's mining difficulty increased by 13% today in the next biweekly adjustment, in response to an increase in global hashrate as more miners return online. The most recent upward adjustment, the biggest since July, is the third in a row.

On the other hand, according to another source, once the rainy season in South China ends, some Chinese miners may have to put their mining equipment on hold or sell them.

The bitcoin hashrate 14-day moving average has remained over 100 EH/s, according to Arcane Research statistics. This is a 25% gain from the lows.

However, major public Chinese mining firms moving out of China, such as BIT Mining, are not rebounding at the same pace, and miners outside of China are still constructing new facilities to provide additional hashrate.

BIT Mining has been deploying thousands of its mining equipment to new sites in Central Asia and North America, but the firm has only recovered a few hundred petahashes per second (PH/s), compared to its theoretical maximum hashrate of 1425.3 PH/s (1.42 EH/s).

Private and small-scale bitcoin miners, on the other hand, are starting to anticipate a brighter future as a result of China's crypto mining laws.

“At the moment, some Chinese miners believe that some hashrate will be plugged back in, particularly given that Ethereum GPU (graphics processing unit) mining equipment are no longer prohibited in the country,” Vera added. “They believe that a few hundred megawatts of power may be restored in China by the end of the year, which has boosted the confidence of Chinese brokers and miners.”

According to Hu of MyRig, there may be further rises in rig costs in the long run as more institutional players such as family offices join the bitcoin mining sector.

A wide range of non-crypto businesses are looking to bitcoin mining to diversify their income streams, from power producers to real estate to family offices. “Today, every business is becoming a mining company,” Hu said.

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