Guosheng Securities: Mining ASICs are “Call Option” of Bitcoin

According to a recent report by Guosheng Securities, bitcoin mining asics are actually a “call option” of bitcoin from the investment perspective. The report also points out the monopoly of major players is expected to continue in the near future.
Bitcoin mining asics compete for bookkeeping rights by consuming computing and power resources, creating a decentralized consensus basis for the system value of trust. The advancement of chip technology has promoted the “arms race” among miners. The equipment renewal cycle is around 2 years. From the investment point of view, the Bitcoin mining machine can be regarded as the “call option” of the bitcoin price. Because the miners are bullish on the future price of bitcoin, the demand for mining asics also increases. On the other hand, miners could reduce investment on equipment when they expect the bitcoin price to drop. Therefore, the mining machine is not only an hashing device, but also a financial instrument.

With the continuous inflow of capital, the downstream demand for Bitcoin mining machines is still strong. It’s estimated that the neutral growth rate will reach 165% in 2018. Affected by the decline of bitcoin price in the year-to-date, the mining revenues fell sharply, which led to a slowdown in demand for new mining machines. However, in the survey, reporter finds that mining is still the most accepted mode of traditional capital (fixed asset investment, income daily, strong liquidity, etc.). Through sensitivity analysis, the report find that if BTC could be stable around US$10,000 in the remaining time of 2018, it will generate 40,000 PH/s of new computing power demand in 2018, up 165% from last year. If BTC sticks around 6,000 USD, the new computing power demand is about 30,000 PH / s, an increase of 96%. Although it is lower than last year, such growth rate indicates that the demand for computing power is still in a high-speed development stage. At the same time, the launch of a new generation of equipment in the second half of the year will also be the focus of attention.

The top two players (Bitmain, Canaan Creative) account for more than 80% of the market share, and the industry competition pattern is an oligopoly. As the two leading companies are better than other companies in terms of core resources (R&D, capital, upstream and downstream channel relationships, and economies of scale), the report believe that leading companies will continue to maintain a competitive advantage in the future and the position in existing market. In terms of incremental market, POW and AI machine learning rely on a large amount of computing power. Bitmain and Canaan have expanded to AI field. In terms of other POW-based mining, the development of chips, including ETH, is still uncertain. The development of new chips are also testing their capital strengths.

The valuation of ASIC producer is likely to be boosted by the rise of Bitcoin and consequent sales of new generation of bitcoin mining machines.

The report points out potential risks:

1. Bitcoin prices may continue to fall, resulting in lower downstream mining demand;
2. the development and sales of new generation of bitcoin mining machines are not up to expectations.

It is worth noting that the sales number of manufacturers still looks good as of June. But if the BTC price still maintains the status quo or even falls further, the situation in the second half of the year is very likely to deteriorate.

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