My findings are based on first-hand experience. I have lived in China since late 2011. I operated home mining from 2013–2016 with equipment from Bitmain (S3, S3+, S5, S7), bought hash power from Hashnest (Bitmain) and had cloud mining contracts with Genesis mining and Hashflare.
During this time Bitmain has always pushed itself further than to the top of the mining industry and displaced all another concurrence. Fraudulent companies that announced hardware but never built it contributed to Bitmain’s success.
The process to collect transactions, to put them in blocks and validate them is called mining. As an incentive to complete this task properly, one may prescribe oneself a reward if successful. This reward is also used to bring new Bitcoin into circulation. Roughly every four years, the reward is halved. This is supposed to simulate, similar to gold digging, that it becomes more and more difficult to mine values. This is not to be confused with the difficulty, which is adjusted approximately every 14 days (2016 blocks) to smooth significant increases or decreases in the global hash rate and provide an average block processing time of 10 minutes.
In the early days of Bitcoin, mining took place on CPUs. With a rising exchange rate of Bitcoin, the use of GPU became efficient. But the invention of ASIC, highly specialized chips, changed the circumstances dramatically. Satoshi Nakamoto does not seem to have foreseen the possible development, his whitepaper practically only talks about CPU power. Bitmain focused very early on the development and use of ASIC. The company is headquartered in China and has close business relationships with a large number of mining pools located there. Bitmain mines in large facilities themselves, develops new hardware at relatively short intervals and sells it worldwide. With China-based mining pools depending on Bitmain’s hardware you could already start a 51%-attack. Don’t worry — below more about that.
In the long and exhaustive scaling debate that ended in the activation of SetWit in 2017 and resulted in several hard forks, Bitmain spoke out against SegWit activation but later joined SegWit2x. It seems obvious that they promote Bitcoin Cash and other altcoins — probably for reasons that become clear below.
How could a Chinese Hardware supplier monopolize a whole industry?
Bitmain’s strategy is very simple but requires continued growth. It is based on technology and knowledge advantages and a unique position to manipulate the market and the “raw material” market at the source almost arbitrarily. The strategy below does not claim to be complete, and a $4 billion company has certainly purchased a few experts to optimize its processes and cover up any traces as best it can.
- It all starts with the development of a new hardware generation of mining machines
- Bitmain starts mining with its own hardware but takes care that difficulty raises only slowly. at raising exchange rate Bitmain earns a lot of wealth already
- At a time when ROI is relatively low (low difficulty, high exchange rate) Bitmain starts selling this hardware generation in mass. They earn again lots of money with, but the risk of investment shifts to the buyer
- The latest generation of hardware is sold for months until the market is saturated or the ROI reaches the limit of the buyers’ willingness to take risks.
- Over the entire period it makes sense for Bitmain to push the price of Bitcoin through sales on all markets
- The hardware buyers make only small profits, their hardware just reaches the ROI.
- Now follows the death blow: By using additional hardware the difficulty is significantly increased and at the same time the bitcoin exchange rate is extremely pressed for 4–6 weeks.
- a) Mining is no longer efficient for a large part of the worldwide mining pools at the same energy costs. They have to switch off their devices because the electricity costs are higher than the yields.
b) Cloud miners, follow a similar strategy and after a trial period, the contracts end with the clients. However, it can be assumed that the devices will not really be switched off, but will continue to be operated in the hope of a strongly rising exchange rate in the near future.
- Since Bitmain, due to its high volume on the international trading platforms, can keep the price down for as long as it likes (probably with a silent agreement or even in cooperation with the large trading platforms), they can also cash-in by “betting on falling share prices”- with high leverage!
- If the global hash rate should drop, it will be compensated by additional hardware by Bitmain and kept stable.
Now Bitmain can let the exchange rate rise again in a controlled manner, the majority of the hardware now works for Bitmain, they have the proceeds from the hardware sale and from the speculative business, and mining revenues flow directly to Bitmain as the exchange rate rises.
Sometime in the meantime, Bitmain has developed a new hardware generation, which may even already be in use. A new cycle of exactly the same game begins. Big non-Chinese mining pools have no choice but to play along and try to make maximum profit from the situation. The risk is permanently shifted to the customer through cloud mining contracts.
Bitmain is a monopolist who skilfully and mercilessly exploits its unique supremacy to maximize its profits. I don’t want to take that further at this point, but any commitment to decentralization hides Bitmain’s real ambitions only. It’s a multibillion-dollar company and they’re just looking at the profit.
They already applied the same strategy to dash, zcash and bitcoin gold. The fact that this business model works brilliantly makes Bitmain’s negative attitude to developments such as the Lightning Network easy to understand.
The Lightning Network removes the foundation of their business model by shifting trust in the individual transaction to the network and degrading validation to a simple recording device — a distributed database. In this sense, Bitmain’s strategy is a game on time and is already shifting to other cryptocurrencies that work with a PoW consensus mechanisms and refuse SetWit and the Lightning Network. So the problem should go away on its own, or?
What to do?
If you want to break Bitmain’s preeminence, you can only develop ASIC-based hardware yourself. Corresponding efforts have failed in the past. The high initial investments and the high risk let all efforts fizzle out.
The PR China is forcing large mining facilities to move gradually by slowly increasing energy costs, but as long as energy costs are below the global average and Bitmain can move its mining farms to appropriate areas, the game will continue.
However, for bitcoin the limit of minting output will soon be reached, it will become unprofitable to operate large facilities because there is not much more Bitcoin to get. Even if the Bitcoin price rises exorbitantly, the increase in the global hash rate is no longer worthwhile. One can only hope that at this point in time, the hash rate is distributed as evenly as possible across the globe.
- Today ~80%
- ~ Year 2030 95%
- ~Year 2140 all Bitcoin in circulation (21m)
As you see, Bitmain has a long way to go, if they want to continue their game. In the meantime, an article like this may shed some light on their machinations.
By the way: No worries about a 51% attack or a sudden failure of large hash capacities or even an attempt by China to expropriate Bitmain and/or all miners in China. Bitcoin is not determined by the miners or developers and certainly not by a hardware manufacturer — even if they like to think so. Bitcoin is operated by the nodes, in case of doubt by the wallet operators. In case of a hostile takeover, the hash algorithm would simply be changed and/or a fork to another consensus algorithm. All mining hardware worldwide would be worthless at a stroke and all Bitmain’s investments would be gone.
But the best thing to beat Bitmain is the Lightning Network! As described above and in my other articles, the Lightning Network will adjust the balance of power and move it back to the user. I am convinced that this is the reason why Bitmain is increasingly focusing their activities on “classic PoW” coins. Here Bitmain can expect to abuse and the position of power and to continue this devil’s game.
The future will show who has the staying power.
This article first appeared on Medium.