Bitmain Unveils New Strategies At Chengdu Event

Bitmain introduces new options to existing customers at an exclusive Chengdu event as competition intensifies in the Bitcoin ASIC business. Fastblock and Bit5ive are announced as official Antminer distributors to the South American market.

Quick take;

  • Competition in the Bitcoin ASIC hardware market intensifies as Bitmain introduce three new business strategies
  • It is estimated that Bitmain’s market share has declined from 70% to 65% since June
  • The strategies introduced by Bitmain are characteristic of a maturing industry where businesses find innovative new angles to increase their competitive edge.

At an event exclusive to Bitmain customers in Chengdu on Saturday 7th of December, the hardware giant unveiled three new business strategies. Addressing clients, chairman and CEO Jihan Wu detailed news options which will be available to Bitmain customers.

Bitmain Compete on Purchasing Terms

To date, purchasers of Bitcoin ASIC hardware have had to make payments in full far ahead of delivery dates regardless of the manufacturer they are purchasing from. Verified slides from the Chengdu event suggest that Bitmain is replacing this with a down payment structure where customers can pay a fraction of large purchases upfront and postpone the rest of the payment until closer to shipping date.

It is believed that customers purchasing 100 to 999 mining rigs can pay 50% of the total value upfront while purchasers of mining rigs above this amount pay only 20% upfront. The rest of the balance is settled seven days before shipping.

Discount structures are highly characteristic of mature industries whereby businesses compete by offering the most attractive credit terms to their customers. For the Bitcoin ASIC industry, Bitmain’s move to a down payment structure introduces the fresh angle of competing by offering more attractive terms to purchasers.

This move by Bitmain may be a sign of the Bitcoin ASIC hardware industry maturing. Canaan completing an IPO would also suggest that the Bitcoin ASIC industry has evolved significantly in 2019.

While the move may be a sign of industry maturation, the driving motive for the fresh strategy is certainly for Bitmain to offer more value to their customers in the extremely competitive Bitcoin ASIC hardware market. News developments this year suggest that Jihan Wu has been extremely concerned regarding Bitmain’s waning dominance.

While Bitmain is still the market leader with an estimated market share of 64.5%, this figure has declined from an estimated 77% in 2017. It is also believed Bitmain’s share has been waning significantly in 2019 with estimates putting the Bitmain market share at 70% in June 2019.

Put Options & Co-Mining Agreements

Introducing down payment structures for customers gives Bitmain the competitive advantage of offering more attractive purchasing terms than competitors. The downside and tradeoff is that Bitmain takes on extra counterparty risk.

But this is not the only tradeoff Bitmain are making to increase their competitive advantage. Customers who purchase 1,000 Antminer S17 Pro mining rigs will receive 62 put options that will allow the holder to sell bitcoin to Bitmain for roughly $5,000 (35,000 RMB) on March 27th 2020.

Such put options give holders a hedge against significant downside movement in bitcoin price. The tradeoff for Bitmain in this case is minimal given that sales of 1,000 Antminer S17 Pro mining rigs generate revenue of roughly $1.5 million whereas their potential loss on the 62 put options is limited to a theoretical maximum of roughly $310,000 (62*5,000) and will only be realised if bitcoin drops below $5,000.

A third strategy Bitmain is rolling out is a co-mining agreement targeted at mining farms who are running at less than full capacity. The co-mining agreement details that Bitmain will cover electricity costs at $0.05 per kWh while the mining farms owners rent Bitmain’s Antminer S17 and T17 mining rigs.

The co-mining agreement enables mining farm owners to run at full capacity whereas they would have otherwise been running at less than full capacity if they had to meet their own electricity payments. The agreement specifies that Bitmain will receive 75% of the mining profits with the rest going to the mining farm owner.

In the case that mining profits are less than electricity costs, 100% of the mining revenue generated will go to Bitmain. Such a strategy is an interesting way for Bitmain to scale its own proprietary mining by working with mining farm owners.

Bitmain’s new strategies are a sign of the firm sourcing new and innovative ways to increase their competitive edge. Bitmain has also announced that they will be working with mining-as-a-service companies Bit5ive and Fastblock who will act as the official distributors of Antminer hardware to the South American market