A noise like a powerful vacuum cleaner greets me when I visit the offices of Bitmain Tech's development center in Ra'anana. The source of the noise is not a cleaner; it is Ofer Ben-Zvi, the company's development manager, who is demonstrating the Antminer S9 - a bitcoin mining machine, which looks like a small computer.
"This is Bitmain's flagship product. It's already the fifth generation of the company's mining machines, which it began producing in 2013," Ben-Zvi explains. "The machine's electricity consumption is about the same as a clothes dryer, 1.3 kilowatt hours." If you visit the bitcoin mining site, you can see thousands of similar mining machines working simultaneously non-stop, 24 hours a day.
Mining is an integral part of the bitcoin system, which helps maintain its security, credibility, and stability. Chinese company Bitmain is regarded as the world's leading company in the bitcoin mining market. Its development center in Ra'anana, managed by general manager Gadi Glikberg, operates as part of Bitmain's subsidiary, Bitmain Tech Israel. Bitmain's principal activity includes designing, manufacturing and selling machines for mining cryptocurrencies. These machines are equipped with special ASIC chips developed by the company.
Bitmain manufactures several models of the machines for mining five types of digital coins: bitcoin, bitcoin cash, litecoin, dash, and Siacoin. "Every few months, we add a new currency for mining," Glikberg says. "Every currency uses a different ASIC chip, except for bitcoin cash, which uses the same algorithm."
The high electricity consumption of the mining machines explains why most of them are sold in countries where electricity is relatively cheap, such as China, where the average electricity rate is $0.04 per kilowatt-hour, 25% of the price in Israel. "The main consideration in the selection of a location for a mining site is the cost of electricity. This the expensive part of bitcoin mining," Glikberg explains. According to an index compiled by the Digiconomist website, the bitcoin network's current annual electricity consumption is estimated at 48 terawatt-hours, which is equal to Singapore's entire annual consumption of electricity and amounts to 80% of Israel's annual electricity consumption.
Despite recent media reports of stricter regulation of cryptocurrency mining in China, experts believe that 80% of bitcoin's mining power is currently concentrated in China, while the remaining 20% is spread over the Czech Republic, Georgia, Canada, the US, and other countries. "The closing down of bitcoin mines in China was marginal," Glikberg says. "At the same time, there are now places in the world that have more comfortable regulations for activity, such as Canada."
Major chip manufacturers entering the market
As of now, Bitmain's principal competitors in the ASIC machines market, in which its market share is estimated at 70% of total sales, are Chinese company Avalon and Bitfury, which is managed from the Netherlands. In late January, however, Samsung announced that it would begin manufacturing ASIC chips for digital currency mining this year. The South Korean giant's measure is likely to threaten Bitmain's hegemony in the market. Furthermore, Nvidia and AMD, two of the world's largest graphic processing unit (GPU) manufacturers, announced last month a substantial rise in demand for their processors, which are used to mine ethereum and hundreds of other cryptographic currencies based on ethereum protocol.
Bitmain is a private company, and is therefore not obligated to report its financial results. Market sources believe that sales of ASIC machines are in the tens of millions of dollars a year. Samsung, Nvidia, and AMD, on the other hand, are public companies listed on the world's largest stock exchanges, and are therefore likely to give the first detailed reports about activity in the digital currency mining market in the coming year. Incidentally, in its 2017 financial statements, Samsung stated that its chips division had posted $69.8 billion in revenue for the year, thereby overtaking Intel and making it the world's largest chip company.
ASIC chips facilitate bitcoin mining at especially high speed and relatively low energy consumption. Bitmain's Antminer S9, for example, is equipped with 189 such chips. The computing power of these machines is measures in hash units (a kind of calculating action that takes place during the mining process). The maximum mining speed of this machine, Bitmain's strongest and most expensive machine (priced at $2,300 to the customer, not including a power supply) is 14 terra-hash per second (14 trillion calculations per second).
In other words, if we take, for example, one thousand such machines, they can reach a mining speed of 14 peta-has (14,000 tera-hash) per second with an electrical output of 1.37 megawatts. In order to reach the current mining speed of the entire bitcoin network (20 exa-hash), 1.5 million such machines are needed. According to bitcoin's software protocol, however, when you add more miners to the bitcoin chain and the mining power increases, mining becomes more difficult. The bitcoin system is designed so a new block of transactions (bitcoin transfers) is created by the miners every 10 minutes. If the system detects that a block has been created in less than 10 minutes, it automatically makes it more difficult to find blocks.
Bitcoin mining generates new cryptocurrencies in a regular and predictable way. The issuing of 21 million predetermined currencies is slated for completion by 2140. "Bitcoin miners always have an incentive to add more mining machines in order to maintain an average rate of a block every 10 minutes," Glikberg says. "The price of a machine is determined by the calculation of the bitcoin price, the difficulty of mining, and the profit forecast."
Calculating the return on bitcoin mining is a difficult task that must take many factors into account. In an article published last week on the Bloomberg website, analyst Tim Culpan wrote, "Bitcoin miners who've decided to stay in the game amid plunging prices may soon find that the well has run dry. A 70 percent price drop since the heady days of mid-December has cut profitability to the bone. With the cryptocurrency hitting $6,000 on Tuesday, only the biggest and most efficient can stay above water, but even these are balancing on a knife edge." He added, "Unless you're an outfit running the fastest rigs bought at wholesale prices - 67 percent of all mining power is in the hands of four pools - chances are you're losing money."
According to Culpan the "arms race" of players in the market has added 40% to mining power on the network since December 18, after bitcoin reached a peak of $20,000. "That's resulted in the rebalancing system built into the digital currency making it 51 percent more difficult to complete a block." The miners currently receive 12.5 bitcoin for each new block. This price is being halved every four years, and the next time it will be reduced will be in June 2020. Summing up, Culpan states, "The only way for miners to return to sustained profits is if Bitcoin prices rise, or some miners turn off the lights, lowering competition… If that happens, they reason, then the bravest miners will be left alone to enjoy the spoils. If it doesn't, then expect a lot to drive off the cliff together."
"Globes": Is the profit margin in bitcoin mining going down?
Glikberg: "Even after the recent falls, the bitcoin price is still eight times what it was a year ago. On the other hand, the difficulty of mining is six times what is was a year ago. In contrast to the trade in bitcoin, bitcoin mining can be profitable even if the average price goes down. Mining cushions the fall in the bitcoin rate to some extent."
As of now, the global bitcoin mining market is believed to be over $7 billion a year, according to the Digiconomist website. Annual global spending on mining is estimated at nearly $2.5 billion. According to these assessments, the market is working on profits of over 60%. Bitcoin was traded today at $8,500, reflecting a $145 billion market cap. This is 60% below the December 17 peak, but still 750% higher than the price a year ago.
Recruiting employees in Israel
Bitmain is not putting all of its eggs into the one basket of mining machines. Another field in which the company is investing is operation of joint bitcoin mining pools. There dozens of such pool around the world, and Bitmain operates the two biggest ones: BTC.com, the world's largest mining pool, managed from the Netherlands, which has a 25% share of the bitcoin mining network, and Antpool, managed from China, which has a 17% share of the network. In addition to these two, Bitmain founded the Connect pool a year ago, managed from the company's development center in Ra'anana.
Each such pool includes from thousands to hundreds of thousands of bitcoin miners from various places around the world, who contribute their mining forces to the joint pool, thereby increasing their chances of making profits from mining. In exchange, they pay commissions to the company managing the pool. Furthermore, Bitmain has remote mining activity under the Hashnest brand name, which Glikberg says "makes it possible to buy mining machines and manage them remotely, with the activity itself taking place in Sichuan, China."
How does Hashnest differ from mining on the cloud?
"In mining on the cloud, the operator buys a large number of machines, and customers buy from it a contract for a certain period. In exchange, they receive the mining profits, minus the operating revenue. Hashnest, on the other side, sells the customers the machines, and operates the machines for them."
What is Bitmain's interest in operating several mining pools that compete with each other?
"The interest lies in dispersing risks and offering the bitcoin miners a variety of possibilities. The pools compete with each other on the payment to the miners, the types of interface, and the quality of the service they offer the miners.
"Bitmain's customers are very diverse. They include both private customers buying a few machines and companies establishing large mining sites or providing mining services on the cloud," Glikberg says. "There are also customers in Israel, but most of the machines are sold in China, Russia, Canada, and the US - mainly in places with cold weather and less need to invest in keeping the machines cool."
Bitmain's customers include Canadian company Backbone Hosting Solutions, which operates a site for mining cryptographic currencies in Quebec. Two months ago, Backbond Hosting signed a merger agreement with Blockchain Mining Ltd. (TASE:BLCM) (formerly Natural Resource Holdings).
The cofounders and co-CEOs of Bitmain are Jihan Wu and Micree Zhan from China. Glikberg says, "Micree leads the company's technical side, while Jihan handles the business aspect." In addition to managing the development center in Israel, Glikberg, 37, is the company's VP sales and marketing. "I manage the marketing team for outside China," he explains. "The team consists of 35 employees, mostly in Beijing. I communicate with them mainly by Internet. I also travel to China five or six times a year."
The development center in Ra'anana, founded in early 2016, is the first of its type started by Bitmain outside China. "In mid-2015, there was a tough period in the market, with a plunge in the price of bitcoin," Glikberg remembers. At that time, he was managing sales for Spondoolies Tech, a competitor of Bitmain, which was manufacturing chips in Israel for bitcoin mining. Shortly before Spondoolies closed down, Bitmain's founders visited Israel, met with startups in the field, and later hired Glikberg to establish their local development center. "My wife chose the location," Glikberg, a Ra'anana resident, says. Bitmain later acquired Dutch company Blocktrail and started a development center in Amsterdam, managed by another Israeli - Boaz Behar.
Is regulation in Israel interfering with your activity?
"We're in touch with a lot of Israeli startups in the field, and we hear that in many cases, the banks are not allowing them to open a bank account. Bitmain had no such problems, but I'd like the regulators to encourage activity in this field. Today, bitcoin miners from Israel have no chance to join the Connect pool. Until the Israel Tax Authority clarifies its attitude to digital currencies, Bitmain is refraining from allowing activity in Israel."
Are you also an investor in bitcoin?
"No comment."
How does your family feel about your business?
"At the beginning, when I worked at Spondoolies, there was a leap of faith, but the family is very supportive now, and realizes that there is significant activity here."
What is the high-tech community's attitude towards you?
"When high-tech people hear about our activity, it makes them stop and take an interest. At the beginning, they asked me whether bitcoin was being used by drug peddlers, but now they take the field seriously."
The local center has 13 employees, including a team responsible for developing a product called Sophon that contains an ASIC chip for artificial intelligence (AI) applications - a new sector for Bitmain, and a team responsible for designing, developing, and operating the Connect mining pool. "Right now, Connect works only with bitcoin, and we are working on support for more currencies and additional features," Ben-Zvi says.
"We're hiring employees in Israel and looking for software developers, algorithm engineers, and customer service personnel," says Glikberg. "Our goal is to double the number of employees in the near future."
Bitmain's Canadian customer enters the TASE
Bitmain's customers include Canadian company Backbone, which operates the Bitfarms brand name - a cryptographic currencies mining site in Quebec. Two months ago, Backbone signed a merger with Blockchain, managed by Roy Sebag.
At a press conference in late January, figures for Backbone were presented indicating that activity by the four Quebec mining sites, which mine bitcoin, bitcoin cash, ethereum, dash, and litecoin, had generated $18 million in revenue for the company in November 2017-January 2018, while operating costs during this period totaled $1.5 million, leaving the company with a 90% profit from this activity. The company noted that the mining site's main expense was for electricity consumption, with its current output totaling 27.5 megawatts and its joint mining power reaching over 200 feta-hash per second.
Incidentally, Sebat took advantage of the opportunity to declare that Block Chain Mining would offer its shares on the Toronto and Nasdaq Stock Exchanges in June. A week later, however, in a report to the TASE, the company stated that it "had not made any request whatsoever for any authorization whatsoever for registering its securities for trade on any overseas stock exchange, and no operative steps have been take yet in this context." These contradictory announcements are liable to alarm investors in the company, who saw the company's share price plummet from NIS 66 on December 11 to NIS 25 at present, a fall of 60% in two months.
Published by Globes [online], Israel Business News - www.globes-online.com - on February 14, 2018
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