A year long bear crypto market appears to have had a negative impact on the profitability of cryptocurrency mining. In spite of this, Bitcoin miners still managed to generate $4.7 billion in profit in the first six months of 2018. Constantly growing competition between big mining pools and the increasing difficulty of Bitcoin’s algorithm make getting the first cryptocurrency less profitable and weight the scales against small players.

Miners shut off their machines, and card manufacturers suffer losses. In particular, AMD representatives, whose last quarter fiscal report, published on Oct. 24, demonstrated that revenues from the sale of mining Graphics Processing Units (GPUs) were “negligible.” Presumably, Nvidia and Bitmain could also be in the same predicament and at this point, investors, miners and GPU manufacturers are probably all wondering what it will take to shake the cryptocurrency market from its current malaise.

The 2017 Golden Rush

A year ago, the situation on the mining hardware market was different. Jon Peddie Research shows that in 2017, miners bought 3 million devices for more than $700 million, with Bitmain having the estimated share of $3-4 billion, which surpassed Nvidia’s and AMD’s revenues for the same period.

The increase in the supply of GPU cards, which was observed in the second quarter of last year, can be primarily linked to the growing demand among Ethereum (ETH) miners, according to Jon Peddie Research. A similar leap was already seen in 2013 as a result of a massive purchase of Bitcoin and Litecoin by miners.

The demand for Ethereum led to evolution in the GPU market as professional Bitcoin miners switched over from GPUs to custom ASICs resulting in a further surplus of mining graphics cards on the secondary market.

Amid increasing demand, mining equipment prices grown sharply — the cost of flagship chips rose by 25 percent, with Nvidia’s GeForce 1080 commanding more than $1,000 during the market peak.

2018: Going under with crypto

Since the Bitcoin's dive in January, when in just a month it lost half of its value from the $20,000 landmark high, the situation for miners worsened — the price of the currency broke the mark of $5,800, and card manufacturers announced the decline in the revenues from mining hardware sales.

These factors led to a drop in mining devices prices. As earlier reported by Cointelegraph, in July AMD’s OEM 4GB RX 580 six-pack was sold out at the price of $2,500, while in April it was available for $3,600. An Nvidia GeForce GTX 1080 Founders Edition, 8GB GDDR5X PCI Express 3.0 Graphics Card was sold out at a price tag of $1,050 in the same month, though in July its price wasn’t higher than $709.

The rich get richer — the perspective of miners

Despite the fall in the cryptocurrency market, Bitcoin miners' revenues over the first three quarters of 2018 amounted to a record $4.7 billion, with a monthly profit of 57,000 BTC. For example, the entire past year brought users $1.4 billion less. However, the ever-increasing competition and growing network complexity make mining Bitcoin less profitable, especially for small players, as reported in the latest study made by the analytical company Diar.

Nevertheless, analysts state that September was the first month when private miners’ profits went into the negative due to the increase of computing power.

According to Diar, only large pools can still earn on Bitcoin mining:

“With big mining operations on low electricity costs running at anywhere between 50-60 percent gross profit from Bitcoin revenues, the market has a lot of room left to grow and, profits to squeeze. But Bitcoin mining has, at least for now, and most likely in the future, moved into the court of bigger players with deep pockets.”

Miners’ total income was also not at the point of growth, as 2018’s stats ($11.5 million) is 21 percent lower than $14.7 million value of the same period last year, and significantly lower than the maximum revenue of $53 million observed during the High Yield Investment Program (HYIP) era in mid-December 2017.

Bitcoin miners may have run a losing business since the end of September — this conclusion was made by analyst Barclay James, who calculated a special formula to find the price of Bitcoin at which miners would no longer generate enough profit to cover operational costs. The value obtained is within the range of $6,400-6,500 per coin. A lower threshold was offered by the other analytical agency called Fundstrat, which analysts suggested that most miners may leave their rigs if Bitcoin drop $3,000-$4,000 per Bitcoin.

Massive abandonment of the market by owners of small mining farms in China as a result of a prolonged “bearish” cryptocurrency market speaks about the decline in private miners’ interest.

One of these miners tells that in the second half of 2017, when cryptocurrency prices reached a historic high, he invested hundreds of thousands of yuan in the purchase of nearly a hundred devices. The expectations were not met, the miner confesses:

“By mid-June, my mining business’s profit margin had dropped by 90 percent. One of my friends who also mines altcoins suffered more, nearly losing all his investment.”

AMD –22 percent, Nvidia –30 percent: why their stocks fell?

The decreasing interest of miners towards graphics cards is not the only reason for the decline in the mining equipment production market, analysts from Jon Peddie Research explained. The company has published its Q2 2018 report containing data on the GPU market in general and the segment of discrete video cards in particular. The April–June’s figures were more modest than the statistics of the last quarter, which is also explained by the seasonal factor – the figures for the second quarter are usually smaller than those for the first one – as suggested by analysts.

Overall GPU shipments increased 0.2 percent since the last quarter. AMD’s shipments decreased -1 percent, Nvidia’s -7.5 percent, while Intel increased their shipments by 2.6 percent.

The negative trend is also demonstrated by year-to-year numbers. Total GPU shipments decreased -3.3 percent, with discrete GPUs down -4 percent from the last quarter.

Did the fall of the cryptocurrency market affect the stock indexes of mining hardware colossi? A closer look at AMD and Nvidia charts show that the decline in share value was likely caused by a decrease in sales, rather than by cryptocurrency market correction.

AMD stocks fell by 9 percent, after Oct. 26, the company published a quarterly report. Within a month, the company’s shares prices dropped by nearly 48 percent and experts believe that the main reason behind this decline was the fall of miners’ interest in video cards.

Kinngai Chan, an analyst at the Summit Insights Group, told Reuters that “AMD had too high an exposure to the crypto-currency market,” meaning that miner's acquisitions have significantly increased the company's revenues.

AMD’s fiscal report has also shown that the actual revenues decline of $150 million instead of $50 million expected. The surplus of GPU cards was formed due to the cryptocurrency boom in the first half of the year, which forced AMD to “ramp up” the production of core products.

Though mining represents a "very small percentage" of the company’s overall business, according to AMD CEO Lisa Su, on Nov. 5 it has announced the partnership with seven major tech companies to produce eight new cryptocurrency mining rigs boasting “Ultimate stability,” “24/7 performance”, and “Enterprise-level quality.” The main reason of this production is said to be meeting the various aspirations of “innovative blockchain platforms,” which can be also related to the company’s expectations of the GPU sales for miners in 2019.

AMD is not the only chip producer which stocks have been affected by the state of cryptocurrency markets. Nvidia’s shares fell by 4 percent after its Q3 report estimations announcement on Aug. 16, which demonstrated that its revenue from the sale of video cards in the second quarter of 2018 amounted to $18 million instead of the expected $100 million. In total, October’s drop comprised nearly 36 percent, with the stocks prices falling from $289 on Oct. 1, to $185 on Oct. 29. Nvidia’s Chief Financial Officer Colette Kress told the Wall Street Journal:

“Whereas we had previously anticipated cryptocurrency to be meaningful for the year, we are now projecting no contributions going forward."

The final Q3 fiscal report, published by the company on Nov. 15, revealed that demand for Nvidia’s GPUs among crypto miners has dried up, as reported by Cointelegraph. The overall reported revenue for Q3 comprised $3.18 billion, which is 21 percent higher compared to $2.64 billion the last year, and 2 percent higher than the previous quarter value. However, the latest numbers occurred to be lower than the company expected. In August Nvidia’s analysts predicted its Q3 revenue to be between $3.19 billion and $3.32 billion.

The manufacturer’s founder Jensen Huang added that the company’s revenues for the next year could be reconsidered since “near-term results reflect excess channel inventory post the cryptocurrency boom, which will be corrected.”

Decreasing revenues can have also been driven by the increased competitiveness of Bitmain. In March, Wall Street firm Susquehanna has changed the rating of AMD from neutral to negative and lowered the price forecast for shares in GPU processing manufacturer Nvidia, citing the growing competition from Bitmain’s ETH mining ASICs. The new target price for AMD shares was revised from $13.00 to $7.50, and Nvidia’s forecast was decreased from $215 to $200 at Friday’s market close.

The dominance of ETH ASIC miners could negatively affect AMD and Nvidia, according to analyst Christopher Rolland from Susquehanna Financial, companies whose graphics cards for ETH mining comprise 20 and 10 percent of the companies’ respected revenues.

Bitmain’s Antminer became cheaper

While GPU cards prices haven’t dropped significantly, Bitmain has been deliberately selling its latest and the flagmanship Bitcoin ASIC Antminer S9 at a discount, BitMEX Research reported.

In total for the last year and the first quarter of 2018 Bitmain reportedly sold about two million Antminer S9 models. According to the researchers, who calculated the disclosed gross profit margin of the company in 2017 and the indicative cost of each ASIC chip, Bitmain’s profit margin for the Antminer S9 occurred to be negative with the value of 11.6 percent.

Crypto analyst, Samson Mow, critical about Bitmain’s activity, has calculated that Antminer S9 prices had dropped by 85%, and the company had lost $600-700 millions in Q2.

Why is Bitmain raising capital so fast & only showing Q1 results to pre-IPO investors? We're well into Q3 now. The reason is Q2 was a disaster. Bitmain is sitting on a massive $1.24 billion USD in inventory & S9 prices dropped by ~85%! Q2 losses range in the $600-700 millions. pic.twitter.com/fVYcDRTvBp — Samson Mow (@Excellion) August 13, 2018

However, decreased prices have nothing to do with the miners’ falling interest – researchers suggest that the company employed a strategy to outsell its competition by underpricing its products:

“These low prices are likely to be a deliberate strategy by Bitmain, to squeeze out their competition by causing them to experience lower sales and therefore financial difficulties. In our view, herein lies the key to one of the main driving forces behind the decision to IPO. A successful IPO may increase the firepower available to continue this strategy and eliminate an advantage rivals could have by doing their IPOs first.”

A more serious threat that may affect the viability of ASIC miners, and the sales of the mining giant, are hard forks of mineable coins, to which more and more companies took a stake in. In 2018, at least two projects held hard fork to protect their networks against 51 percent attacks, and this threatens Bitmain’s monopoly in the market, with two of them planning it in the near future.

In April, Monero’s fork disabled mining with Antminer X3, in October, Sia disabled Antminer A3. Their upgrades are followed by scheduled hard forks of Bitcoin Cash (BCH) (Nov. 15) and Ethereum (presumably in January 2019), which could potentially devalue Antminer S9 and E3, designed for the mining of these coins.

To strengthen its position on the market Bitmain continues to compete with other mining hardware producers. On Nov. 5, the company has released two new Antminer models, equipped with next-generation ASIC chips to ensure “industry-leading hashrates.” Announced on October 22, “Overt ASICBoost” firmware upgrade, which was designed to increase mining devices efficiency, along with the deployment of 90,000 Antminers S9 being carried out by Bitmain to get the mining pool dominance ahead of the Bitcoin Cash hard fork, can potentially increase the company’s revenues of Q3 2018.

Other GPUs

The decline in demand is also confirmed by smaller video card manufacturers. Gigabyte recently published a financial report for the last month, which showed that its revenue in June fell by 31 percent compared to last year and by 30 percent compared to the previous month. Additionally, revenues for the second quarter of 2018 fell by 33 percent compared to the first, according to the report.

A similar situation faces TUL Corporation, which produces video cards under the PowerColor brand. The company's earnings for June occurred to be 28 percent lower than in May. For the entire second quarter, the decline was 59 percent compared to Q1. The numbers are significant, given that up to 95 percent of the company's revenue comes directly from the sale of AMD video cards.

The opposite financial results have been reported by Canadian mining hardware producer Hut 8, on Nov. 8. As stated in its fiscal document, the company’s revenue reached a record $13.5 million for Q3 (126 percent higher than for the same period in 2017), and $27.7 million for last three quarters.

Hut 8 attributed the increase to its set up of sixteen Bitfury BlockBoxes in September at its mining facility in the City of Medicine Hat, for an aggregate of 56 BlockBoxes at that site. Each BlockBox reportedly contains 176 mining servers and has a hashrate of 13.7 Ph/s.

Among the reasons the company gives for the lower financial results in 2017, there is the BTC price drop, the increased competition, and the record high temperatures in Alberta. Hut 8 also expects that the efficiency of ASIC chips will rise during the colder months, which will improve performance in the next quarter.

Another manufacturer said that the profit it received in Q3 2018 exceeded that for the same period last year, despite the fact that its revenues for cryptocurrency mining business were down due to the “worsening external environment” and “increasing depreciation cost.”

On Nov. 12, Japanese IT giant GMO Internet has released its Q3 fiscal report revealing that company’s crypto-related activity, including mining hardware production and crypto exchange operation, had brought about $22.8 million in revenue over the third quarter “in just a year since the launch.”

Expectations on the mining producers market

If the data supplied by researchers and analysts is to be believed, then Bitcoin miners have been operating at a significant loss since June and many individuals have abandoned the practice altogether. The growing hash power of BTC will remain lucrative to those who are able to mine at an industrial scale or operate in countries where the operational and energy costs are favorable. The survival of Bitcoin and the network hashrate remaining within the range between 40 and 50 million This demonstrate that there is still significant activity in the global cryptocurrency mining sector and the confidence of miners may return sooner or later. Smaller scale miners are fleeing in droves and the distribution of players is rebalancing as the emergence and consolidation of mining farms takes place, experts at Diar.co suggest:

“Bitcoin mining has, at least for now, and most likely in the future, moved into the court of bigger players with deep pockets.”

Therefore, “big mining operations on low electricity costs running at anywhere between 50-60 percent gross profit from Bitcoin revenues” will continue to make hefty profits and analysts believe that “the market has a lot of room left to grow and, profits to squeeze.”

Jon Peddie Research also doesn’t expect a significant reduction in the price of video cards:

"We believe that concerns about the fall in demand for GPU for the production of ethereum and other cryptocurrencies, as well as the significance and impact of these processes on the company's viability, are greatly exaggerated, and Nvidia will most likely be able to overcome these" hard "times by focusing on its other directions.”

As of current, despite the significant drop in the price of major cryptocurrencies, the demand for cryptocurrency mining remains relatively high as seen in the rise in the hash rate of the Bitcoin network and the expansion of Samsung, GMO, and Bitmain’s operations, which activity wasn’t affected by grown shipments tariffs and regulations.

The last quarter of 2018, and 2019 may see the continuation of Initial Public Offerings (IPOs), which one by one have been announced by Canaan Creative, Ebang Communication, Bitmain, and Bitfury this year.

The estimated amount of $20 billion these company are expected to raise at IPO stages in total, and the values of $14 billion and $80 million Bitmain and Bitfury have already reached during their initial funding rounds, suggest that ASIC miners producers may have an alternative way of monetization even in case of decreasing sales.