Bitcoin Mining Hardware Valuation Over-Exuberance

by: Jose C. Ramirez


Background and Bitcoin Price Appreciation.

Hardware Prices for ASIC Miners.

Normalization of hardware prices of ASIC Miners.

Prudent Investment Opportunity for High Risk Tolerant Investors.

Greetings from Curacao - Curacao, where I've sipped on Cognac every evening for the last 5 years, while watching Bitcoin reach zen.

I have been following the Bitcoin evolution since I heard about the Winklevoss twins. There is opportunity on the short side, if one has the appetite for a purely speculative and volatile short play, to capitalize on the current crypto-currency bubble.


Bitcoin is a cryptocurrency. Cryptocurrencies, in general, are intended to be decentralized non-governmental controlled, virtual assets, that be used as a payment method. The unit of value is referred to as the 'coin', as in Bitcoin. In order to obtain some coin, one has to convert a currency into virtual coin in an exchange.

In order to track where the virtual coins are and how they are transferred, there is something called the 'network'. The network is a decentralized peer to peer network. Every node on the network contains a ledger of all transactions performed. The ledger is called the "blockchain." The concept is similar for all crypto currencies -- there are many and more to come. Each cryptocurrency has a fixed number of coins. These coins are released to "miners" at a periodically declining rate. All cryptocurrencies have similar concepts implemented. New cryptocurrencies go through an "Initial Coin Offering" (NYSE:ICO) in which the ICO raises capital to establish the market capitalization of the cryptocurrency.

Read more: Cryptocurrency Definition | Investopedia Cryptocurrency

The network is comprised of peer-to-peer internet connected computers. All the computers on the network have a copy of the blockchain and execute calculations which validate all transactions performed on the network. Computational assets executing these calculations are called miners, they are rewarded for completing the calculations. New "blocks" are discovered, by random chance, and when that occurs Bitcoins are issued. The more "calculations" performed, the higher the chance that a miner will be credited with discovering a new block.

Mining Technology

Mining technology has gone through a couple evolutionary phases. In the early days of crypto mining, people were using their general purpose computers to run these calculations and be rewarded. They were mainly using the CPU of the computer, and users would use their own 'networks' of computers. Then the calculations were switched to the much faster processing power found in the GPU, the graphical processing unit. Humans get creative of course, so this sort of setup went from using 1 gpu in a general purpose computer, to using specialized mining rigs in which the cpu was fairly simple and low power, used to connect to the web, but able to accept 6 GPUs running calculations.

Then of course there were data centers of mining rigs built by people to maximize calculation throughput, and hence the reward obtained from doing these calculations.

The latest technological evolution is the entrance of specially designed chips called Application Specific Integrated Circuits (ASICs) that are designed to run the hash algorithm used by specific cryptocurrencies.

Bitmain is a major designer and builder of these ASIC miners, a privately owned company based out of China. Cryptocurrency technology, both the manufacturers of hardware for mining, and large mining operations, are located within the Chinese mainland. Investors should take pause here and really determine what implications that may have on their investment strategy in relation to Bitcoin/cryptocurrencies, and whether that sort of exposure to the country fits within the investor's risk tolerance. Also, beware that electricity in China is subsidized by the government, therefore making mining operations more profitable in China than in the United States. The variable cost of electricity to run the virtual mining equipment is a large component on how profitable a mining operation is in regards to the initial investment, the current exchange rate, current network hash power.

ASIC Specific Bitcoin Calculations

Bitcoin uses the SHA-256 hash algorithm, in which an ASIC was designed to perform this function at a higher throughput measured in hash/sec, more efficiently than running GPUs. The race for higher throughput is a real necessity, as more transactions are conducted in the network, the more difficult it is to run the calculations. As the 'difficulty' of the calculations begin to increase, the more hashing power is required to validate the transaction in the network. As megahash/second calculations once performed in CPUs were replaced by gigahash/second calculations performed by GPU mining rigs, now gigahash/second rates have been replaced by terahash/second performed by specialized ASIC mining hardware resources.

ASIC Mining Hardware Cost

In early 2017, the Bitmain Bitcoin Antminer s9 which mines 13.5 Terahash/s sold for about $2000 (see image 4 below). Bitcoin was exchanging at roughly 1000 to 1250 USD during that time.

The Antminer S9 initial purchase cost was about double the Bitcoin value at the time.

However, now Bitcoin has increased to roughly 16 times that number, and the hardware cost is also now about $6000. The cost of this hardware is only 3 times what it was when Bitcoin was at $1000 to $1250.

For those that are not familiar with how the Bitcoin blockchain difficulty increases, it is not linear, it is logarithmic, and based on hash power available in the mining network.

This graph below shows the logarithmic relationship.

Why is this important ?

The price of Bitcoin has gone parabolic, from April 2017 to present day, sort of correlating with the difficulty chart. That is mostly coincidental. The run up in Bitcoin was based on the anticipation of CBOE's and CME Group's listing, essentially bringing Bitcoin out of the shadows and into the mainstream. What is important in this graph, is the logarithmic chart of the same information above, similar to a stock graph, we adjust the vertical values on a logarithmic scale, creating a linear graph.

Notice the slope of the logarithmic graph above is about 30%, driving the price increase in the Antminer S9 by roughly 3x from April 2017 to the present day.

I was curious about this price increase. Initially I saw the AntMiner S9 for $2000, making the payback for the S9, about 1 month of operation (minus electricity), at about 14 MHash/sec. It was enticing. However I realized the prices I was looking at were stale, now the prices are 3 times that, making the payback 3 months of operation. Now begins the meat of my message.

The hardware price is pushed up by the Bitcoin value, but only to the effect of the logarithmic scale of the difficulty calculation. Had the Antminer S9 price increased 16 times its April 2017 value, in direct correlation to the Bitcoin value, it would be unprofitable to buy and operate the hardware, the initial investment alone taking 16 months at current prices to payback. So the natural hardware price is about 3 times, following the slope of the logarithmic chart on calculation difficulty.

The above sounds reasonable on the surface, but it is peculiar. Why this relationship should be so predictably intact is unsound. Why should relationship between the hardware price and the Bitcoin calculation difficulty be immune to regular micro economics, specifically, the forces of supply and demand? As the price of the hardware increases for no other reason than the gain in Bitcoin value, albeit via the difficulty-calculation-derivative.

When gold prices increase, gold mining increases, but does the price of gold mining increase the hardware prices of gold mining equipment? Gold mining equipment has the benefit of being re-purposed for other mining activity, therefore mining equipment retains value. ASIC miners on the other hand are very specific to one or two coins. If the value of those crypto currencies fall substantially, the resale value, if any exists at all, of the ASIC mining hardware collapses.

The value of the Antminer S9 miner has increased 3x for no other reason than the price of Bitcoin has increased, also, the production of this equipment has probably increased as well, which should have the effect of lowering the price of the hardware equipment. It may be argued that the demand for the S9 has increased, possibly, to some degree, but to the degree that it would increase the price 3x when the Antminer S9 is only one of a variety of hardware pieces that perform the same or better, and those pieces of hardware have also increased at the same rate. The Bitcoin value has created false value in the mining equipment that will be eventually rectified by regular market supply and demand forces, if not the collapse in the price of Bitcoin itself.

One concern is that these hardware valuations might affect the real accounting by companies that facilitate Bitcoin specific hardware, putting artificially high value on these assets, and the current interest in companies entering the crypto currency space to facilitate mining, and by individuals wanting to get into the game, further perpetuates the inflated value of these assets. The unwind of the price could collapse not only the Bitcoin value, but all assets related to it, including assets typically considered 'book value' assets.

And finally, the cost of this mining hardware for personal and home mining is in fact is essentially irrelevant, as a substantial portion of the crypto-currency mining is performed in massive mining farms. For an individual to bother with even investing in crypto currency mining equipment is more of an exercise in entertainment and edification and not so much "for profit."

When the hardware starts sitting on the shelf in perpetuity or when the Bitcoin price collapses, the hardware shown below (at various time epochs) will normalize back to predictable hardware valuation, and the virtual intrinsic value based on Bitcoin price will evaporate. The value will evaporate along with the accounting valuations, the expectations, the credit used for purchasing, the loans underwritten based on those valuations, and we have another bubble popping. Hopefully it doesn't affect anyone outside of the cryptocurrency arena.


If Bitcoin or any cryptocurrency will function as both a store of value and a medium of exchange, the cryptocurrency exchange rates must stabilize to that of traditional value stores and exchange mediums. At the moment, the virtual asset is in a speculative phase experiences large volatility swings. Such volatility is prohibitive for the asset to really be considered a traditional currency replacement as defined in traditional terms. Avoid being fooled into thinking that any one cryptocurrency is more valuable than any other one.

It is possible to short the Bitcoin Investment Trust (OTCQX:GBTC). If one chooses to do so, do so with care with extreme caution. There are times when something is so speculative that any prudent fiduciary should think long and hard before taking a long or short position, and this is one of those moments. I would set a target price for GBTC at 1400, from the current, 2016, with no more than .05% of any portfolio. This price is based on a chart analysis, reverting back to a pre-parabolic gradual price increase, extrapolated into the next 12 months.

April 2017, AntMiner S9

AntMiner S9 "For Sale" on December 27th, 2017 on Amazon.

ASIC Miners June 2017

ASIC Miners December 28th, 2017 -- 3X increase

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.