The miner-trader disparity

Leo Zhang

By Leo Zhang

Bitcoin hashrate has been increasing at an alarming pace despite the spot price having been butchered year-to-date. Since January this year, Bitcoin miners and traders have lived in completely separate universes.



Why is this happening? Do miners simply have unwavering conviction to the future of Bitcoin? The truth is, despite the blood bath in secondary markets, the current price level hasn't been painful enough to trigger a mass exodus of miners yet. A simple scenario will illustrate why.

Suppose you are mining with the common Antminer S9i. Assuming you are amortizing the machine cost linearly for 12 months, and operating the machine at $4c per kwh, your all-in production cost should be roughly around $5,000 per BTC (source: As long as the trading price doesn't tank below production cost for prolonged period of time, miners are better off keeping the power on.

However, the average production cost is likely going to change very soon. Competitors of Bitmain are racing to ship significantly more powerful machines.

Why are both demand and supply still so strong for Bitcoin ASIC miners? On the demand side, most miners entering the market pre-ordered the machines during the peak bull market last year. When new machines are announced, customers can seldomly get the shipments right away. Typically they have to wait for 4 months or even longer. This is because TSMC requires most chip designers to fund the tape-out with full upfront cost. Pre-ordering machines is basically buying futures contract. Once the machines arrive, the miners need to operate the machines regardless of how thin profit margin is to recoup the hardware expense. This is why demand for hashpower is never aligned perfectly with price movements.

On the supply side, as alluded in the previous post, Bitmain is losing its technological edge. Designing cryptocurrency ASICs is not nearly as complicated as designing chips for advanced computing. ASIC design is quickly getting commoditized. The machines coming from new competitors are much better in performance than Bitmain's latest and greatest, a water-cooled version of the S9. Now well-equipped from the pre-order fundings, the new chip designers are able to put down orders for large allocation of wafers at foundries. Bitcoin price is a general indicator of changes in mining capacity, but foundry wafer allocations give more timely information. Intuitively, in the next few quarters we will likely see demand for wafers from cryptocurrency ASIC designers decline.


The disconnect between hashpower and trading price is a known characteristic of cryptocurrency markets. This is due to the different pace of hardware cycle and information structure in capital markets. The two factors are deeply intertwined. Hashpower crystalizes the security of the blockchain, making the network more valuable; in turn, price increase attracts demand for hashpower, and pushing the competition among hardware vendors to be fiercer than ever.

For intelligent investors, how cycles evolve through dynamics of the two factors, is the key to understanding where the opportunities are.

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