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Jamphone
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January 06, 2015, 11:43:37 PM |
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Good question, here's my attempt at a good answer:
Mining hardware is falling in price, albeit slower than the bitcoin price would suggest, due to the relationship between the people who make parts and the people who sell miners.
However, the reason it is not plunging is a commercial/legal issue you see in all manufacturing. When you manufacture, you do so largely on credit from the parts manufacturers. (I'll call Spondoolies/Bitmain "Apple" and the parts supplier "Foxconn" since that's an obvious example of this relationship, although there would undoubtedly be 4 or 5 Foxconns doing different parts for each Apple.) That is to say, no one gets paid until the product gets sold.
While Foxconn knows it has to be patient, it will not wait forever. Typically 90 days after "Foxconn" delivered it's part for the miners to "Apple", "Foxconn" can exercise a "security interest", which is to say that all unsold inventory has a lien in favour of Foxconn. Foxconn likely won't exercise this lien (send the equipment to auction by court order) because court ordered auctions usually bring in only bargain hunters. Also, court ordered sales mean the buyer has to speak the language of the local court, have a local lawyer, arrange shipping themselves, the miners come with no warranty and they can expect zero customer service. Absolutely buyer beware. Foxconn knows that Apples miners are worth more if Apple still exists.
So instead, they start watching Apple sell the miners closely. They don't want sales below the cost of production, because then they won't get paid. They also want to make sure that all of the money from those sales (or almost all) go to Foxconn. If Apple is going to start selling at a price where Foxconn never gets paid back, Foxconn would sue Apple, take control of the miners through a court ordered sale and then battle them in court for the rest that is owing. Obviously, no one wins in that situation, but when it appears everyone is going to lose to some extent that is what will happen.
Also, the Foxxconns tend to be less leveraged and exposed than new technology upstarts to market dynamics, which is to say, they have more disposable assets and less debt due to their business model. If no one wants miners and mining is not profitable, Apple is bankrupt (since this is all they do) while Foxxconn makes parts for someone else's whatever machine with their general purpose manufacturing facility that they already own. Foxxconn can be patient. Something unknown to Apple and the mining world.
I would suggest we're near the bottom of prices where the Foxxconns will let the Apples sell the mining inventory.
Developing and producing 28nm and 20nm chips and equipment would have cost in the very rough range of $40 to 50 million or more per generation, including all overhead. Roughly half was for R&D, which was largely funded from equity sales and prior profits. The other half is the cost of producing the miners, since this can be done on credit. From my numbers, which are ballpark figures only, these companies have not recouped the development and production costs from sales of miners alone. The absolute cost of production per machine is definitely not yet below $300 per TH, perhaps not yet below $400 per TH or higher.
Mining was supposed to make up the difference and the profit. 12 months ago, hosting at 20 or 25 cents/kwh (all-in, electricity plus cooling, facilities, employees etc.) was the norm, and there was still lots of profit leftover for manufacturers. At those prices you could air condition and still make a profit.
Now the miners can barely break even. At this difficulty and $282 bitcoin, 1TH a month will make you $105 a month, but use more than 360 kwh per month. An S4 will use 504KW. If you air condition to cool, you will not cover your costs. Right off the bat, you are losing at least 1/4 of your production ($25/TH) to the cheapest, warehouse size hosting.
However, with next weeks 15% rise, things get scarier, as that only comes from mining profit. You make $91 a month per TH, at a cost that is still $25/TH. So your profit went from $80 to $66 in one difficulty jump. Suddenly 1/3 of your production goes to costs. In a month it may be 50% or more.
(And frankly, that is extremely cheap hosting. Works out to about a nickel US/kwh. I doubt anyone has this great of a price.)
Don't get me wrong, some of these manufacturers deserve to get squeezed for how they treated their customers. (Albeit, some are great.)
KNC can't produce their equipment at a profit. (Why else would they stop selling it? Why haven't they managed to produce bonus miners long since promised?) KNC even started layoffs. Black Arrow appears to be insolvent as do several others. Times are tough. The weak are failing.
Of the big four still standing, Bitfury, Bitmain, Spondoolies and KNC, I predict one, maybe two, will either go bankrupt or be "bought out" from the brink of insolvency.
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