Bitcoin’s price crash last week has cast a shadow over mining firms, which have spent over half a billion dollars overhauling equipment over the last six months in preparation for the network’s next so-called halving.

Large bitcoin (BTC) mining farm operators in three countries told CoinDesk they’ve been on a buying spree to upgrade or expand facilities since September, reflecting a shared commitment to staying in the mining game for the long haul.

In May, the amount of freshly minted bitcoin awarded to a successful miner every 10 minutes or so will be programmatically split in half, hitting these firms’ top line. Since older equipment is becoming unprofitable even before the reward is cut, more than $500 million has been poured into the new, more efficient machines that can churn out more bitcoin, according to a CoinDesk estimate.

But bitcoin price’s recent plunge – crashing to below $5,000 on Friday and recording a 50 percent drop since its high above $10,000 in late 2019 – is creating greater uncertainty about mining farms’ profitability.

According to data from mining pool PoolIn, even the most efficient equipment on the market, such as MicroBT’s WhatsMiner M20S and Bitmain’s AntMiner S17 Pro, is generating daily profits at a gross margin below 50 percent. That estimate is based on bitcoin’s current price and mining difficulty (a measure of how competitive it is to mine bitcoin) with an average electricity cost of $0.05 per kilowatt hour (kWh).

If bitcoin’s price does not bounce back to a higher point after the halving, which will essentially reduce mining revenue by half, mining farms would have to bear a longer payback period for their investment.

“We have been just heads down and kept mining, and bought a bunch of new machines,” said Zheng Xun, CEO of Hashage, which operates several sites in China’s mining hub in Sichuan province. “We already have a large scale so probably won’t buy any more for the time being. We’re maintaining cash flow to see how the market plays out after halving.”

That said, it remains to be seen how bitcoin’s overall computing power will react to bitcoin’s price drop in the coming weeks as older mining equipment is expected to shut down. If the computing power and the mining difficulty on bitcoin’s network decrease significantly, the incumbents will be able to mine more coins.

But for now, the network’s seven-day rolling average hash rate has shown a downtrend since last week’s price crash, falling to 108 exhashes per second (EH/s) from 118 EH/s around March 9.

Chris Zhu, co-founder of the mining pool PoolIn, said in an online panel via WeChat on Friday his expectation before the price crash was bitcoin’s hash rate would still rise slowly. Now he expects the computing power to go down by 20 to 30 percent in the coming months.

Buying spree

Global mining farms’ spending glut is reflected in the significant growth of bitcoin’s total computing power in the past half-year.

Since September 2019, the hashing power on the bitcoin network has increased by 30 percent, jumping from around 90 EH/s to most recently around 120 EH/s.

Given that most of the new equipment has been priced between $20 to $30 per terahash per second (TH/s), mining farm operators may have spent more than $600 million in recent months to get ready for the coming halving event. (For context, 1 EH/s = 1 million TH/s.)

Artem Eremin, product manager of 3logic, a reseller of bitcoin ASIC miners, said his clients in Russia and central Asia have started actively buying Bitmain’s AntMiner S17s since October, preparing to replace the old ones. (ASICs, or application-specific integrated circuits, are computer chips customized for heavy-duty activities like mining.)

3logic now sells about 2,500 units of the newest equipment per month. It used to be around 5,000 units in October and November, Eremin said, although the buying momentum slowed in December. According to different estimates, a third to half of all mining computers in Russia might have been replaced with the new models by now.

Igor Runets, CEO of Bitriver, a mining venue in Bratsk, Russia, said his clients had been buying new ASICs quite actively since last fall but slowed down their purchases in January. “There was the Chinese New Year, the coronavirus outbreak, and then the buying activity just didn’t fully recover after that,” he said.

Similarly in China, larger mining farms have been revamping their facilities with top-of-the-line equipment in large quantities since the second half of 2019, when major manufacturers started to ship equipment in bulk.

Zheng said his firm scaled up its facilities by 30 percent with the latest machines supplied by Bitmain and MicroBT since the end of the summer in China last year and the deployment was in place prior to the Chinese New Year.

Some, like Gabriel Xia’s Spark Capital, a China-based fund, even started the replacement and upgrade work as early as summer 2019. “We sold all the old S9s in summer last year when its price at the second-hand market doubled and started buying new equipment,” he said.

Mining consolidation

Behind this recent buying momentum is the tremendous amount of investment that has poured into the bitcoin mining space in 2019 alone.

For perspective, bitcoin’s hashing power hit 1 EH/s for the first time around February 2016. It then took the network about 30 months to reach 50 EH/s in September 2018 – even after the 2017 bull run.

But it only took the network 15 months to double that level and reach 100 EH/s in January 2020.

This accelerated growth was made possible by major manufacturers such as Bitmain, MicroBT and Canaan, which have produced and shipped more powerful equipment using more advanced computing chips.

But technological advancement also means new equipment has become much more expensive. With higher barriers to entry than in 2017, the space has been consolidating, squeezing out retail miners.

In 2017, even on the back of bitcoin’s bull run, it might not be so common to hear one customer place a single purchase order worth over $15 million for mining equipment. But things changed in 2019.

“With an order like 100 million yuan [$15 million] in 2017, you might be the biggest miner across the network,” said Xia, whose firm has been mining since 2016. By 2019, “$15 million would only make you just an ordinary big customer.”

Leveraged risk

Traditionally, mining farms would sell fresh bitcoins to fund their operations. However, over the last couple of years, a new market for financial services emerged to help them get working capital even if they want to “hodl” (bitcoin slang for holding rather than selling).

Xia said Spark Capital’s mined assets have been pledged as collateral for loans it took out to pay utility bills and expand operations. The firm is betting it will be able to sell the coins at a higher price later, and in the meantime it’s shortening the time it takes for the machines to pay for themselves.

“We are looking at a longer term when we scale up,” he said.

Echoing that strategy, Dmitry Ozersky, CEO of Eletro.Farm, a farm operator in Kazakhstan, said 90 percent of his clients don’t sell their mined coins regularly, instead waiting for big price surges.

“Some sold at $12,000, but are now waiting for the price to get above $10,000 again,” he said.

Cynthia Wu, vice president and head of custody at Matrixport, Bitmain’s crypto financial services spinoff, said the startup now boasts up to 200 large farms as clients. And out of around $100 million in outstanding loans, the vast majority was borrowed by miners to pay for electricity bills and new construction, she said.

But what goes side by side with that optionality is the risk of having their pledged collateral force-liquidated when bitcoin’s price tumbles more than 50 percent in two days.

With major lenders enforcing an average 60 to 70 percent collateral rate, a borrower would face the imminent risk of their pledged bitcoin being force-liquidated unless they choose to pledge additional assets. That’s even assuming they borrowed when bitcoin’s price was at its recent high of $11,000.

Reluctance to sell

As to the liquidation strategy, Wu said it may vary from jurisdiction to jurisdiction.

“In the U.S., people would sell because this is how they manage their cash flow. But in China, miners are more long-term hodlers, they are more reluctant to sell. In China, it’s a very typical miner mentality: not spending much of what you mine,” she said.

Sharif Allayarov, head of Matrixport’s business in Russia, says the industry’s old-timers, who’ve been out there since 2012 or so, are also usually hesitant to sell.

“Newcomers are trying to jump into fiat as soon as they can, but as they stay in the business and see crypto grow, they are becoming less likely to liquidate fast,” Allayarov said.

Ethan Vera, CFO and co-founder at mining pool Luxor Tech, said there are definitely miners interested in borrowing money to pay bills but “those are usually OGs in the space that are long-time miners and very bullish on it.”

Newcomers want to find ways to limit their exposure to a price drop, he said.

“In general a lot of professionals are entering the mining space in North America. They are from investment banking, corporate finance, oil and gas backgrounds. They historically use financial instruments as a way to hedge their business risk,” Vera said. ”My conversation with these large miners want to find ways to limit their exposure to the value of hashrate and the price of bitcoin.”

Neither are they keen on trading derivatives – at least not in Russia, Runets and Ozersky said. The crypto futures and options market is not mature enough at the moment and miners got into this game to profit from the risk, not to spend money hedging against it, Ozersky said.

However, Matrixport saw some interest for its option product, Wu said. Out of about 70,000 BTC worth of options traded at the platform since the product was launched in October, big miners accounted for around 70 percent.

“They want to be more protected when the market moves,” Wu said. “Miners also want to speculate [on the price] to enhance their yield.”

So long, S9

Meanwhile, the latest overhaul strategy among large mining farms also leads to a legacy issue: What do they do about older mining equipment like AntMiner S9s and equivalent models, which have dominated the mining market since 2017?

With the bitcoin halving two months away, and bitcoin’s price down to the $5,000 range, way under the breakeven point for these older models around $8,000, will they all get shut down soon?

“Everybody is trying to get rid of S9s,” said Eletro.Farm’s Ozersky. Yet, he believes S9s are far from done yet. The bottom line is, it all boils down to a miner’s strategy.

At Bitriver, which is hosting 70 megawatts to power ASICs for his clients, only around 25 percent of the equipment are S9s, Runets said. “Those who wanted to sell them have already sold.”

Spark Capital’s Xia, whose firm already sold all of its S9s, estimates that S9s are only contributing around 20 to 25 percent to bitcoin’s total network.

“People have different strategies: some wanted to switch from old machines to the new ones, some opted to buy old ones cheap, hoping to pay them out quickly,” Runets said.

Those who stick to S9s don’t want to pull the plug even if they are now working on the verge of breakeven, Runets said. “Nobody is switching off, and until the halving, people are going to squeeze everything they can from their old ASICs.”

According to these mining farms, there’s an option to switch S9s to a lower energy consumption at 700 watts instead of 1,600 watts, churning out 9 TH/s instead of 13 TH/s.

Similarly, some, like Electro.Farm and mining pool Poolin, are also offering clients the option to boost the productivity of S9 by pairing up two units into one.

The idea for both options is to increase the overall gross margin so that S9s may just still bring a daily profit – however modest – at an average electricity cost up to 5 cents per kWh.

Cheap juice

Further, there are also individuals or smaller farms that are somehow capable of finding much cheaper electricity than larger farms.

“If you can find an electricity cost of $0.02 per kWh, sure, you can still play with S9s,” said Hashage’s Zheng, referring to the imminent rainy summer season in China that comes after bitcoin’s halving schedule in May.

Individuals in Siberia could even use an S7 with some profit until the end of February, Eremin said. Retail miners, although fewer and fewer, still can be found also in Kazakhstan and in the breakaway region of Abkhazia.

“But here’s another thing: These old ASICs are occupying space and earning less money for the farms as they usually charge a fee off each kilowatt,” Eremin said.

So big farms are incentivized to replace old ASICs with new ones.

For now, Runets said he does not want to see parts of his farm go offline abruptly, so Bitriver is planning to offer temporary energy price discounts to keep its clients’ machines buzzing.

But in the long term, Xia said, “the S17, S19 or MicroBT’s M20 and M30 will become the new S9 in the next cycle.”