Chip Foundries: The Top of the Crypto Mining Food Chain
Marco Streng, CEO and co-founder of Genesis Group — the world’s largest industrial scale crypto mining company with 12 data centers in 6 countries.
TSMC recently began production of chips on the 5 nanometer processing node.
This, of course, isn't a surprise, since TSMC produces most, if not all, of the cryptocurrency mining chips out there, and leads innovation in the crypto mining space. 5 nm signals the next generation in processing nodes, and TSMC has some big customers on its list for access to the limited production run: Apple (for its new iPhone), Intel, AMD, and Nvidia, among others.
What’s notable is the big-name competition, and what that could mean for mining equipment production in the near future. TSMC’s early order list only had one crypto company on it who would use these next-gen chips in new miners. But with such a limited supply produced, and with TSMC likely to take their big-name tech customers first, will any crypto companies be able to get a hold of the 5 nm node?
New chip allocation could have measurable impacts on the crypto mining industry in terms of who can mine when, and at what speeds. You wouldn't think a chip foundry has the ability to affect the entire crypto ecosystem, but it does.
And we often underestimate our reliance.
Evolution of Mining Chips
Why do miners need chips anyway?
In order to mine a block on the blockchain, a miner runs complex algorithms in order to find the right solution to the puzzle. Once they do, they’re given the ability to add the block, gain their transactions, and rewarded with coins. But in order to be the first one to figure it out, a miner has to be fast and powerful — which translated to high processing speeds and low energy consumption.
In the early days of mining, a computer’s CPU was enough to be able to run the algorithms to solve the blocks. But as more miners joined the network, and as mining difficulty increased, more processing power was needed to keep up.
Over time, miners discovered that high-end graphics cards, or GPUs, were able to mine at a much faster rate, so they left CPUs behind. Today, miners use ASIC (Application-Specific Integrated Circuit) processors, which are chips manufactured specifically for mining Bitcoin, making them precise and efficient, with fast speeds at low energy usage. Top-of-the-line ASIC miners can offer a massive 110 TH/sec speed.
Current generation miners are 7 or 10 nm ASICs, so 5 nm chips will usher in the next generation of miners, promising even higher hash rates at the same energy usage — which can give those in possession of the new hardware a competitive advantage in an already speedy industry.
This is why the top of the crypto mining food chain isn't the miners, or the miner manufacturers. Everything begins with the chip foundries.
Top of the Food Chain — With Downstream Effects
Chips not only influence the processing speeds. There's also a timing concern when it comes to miner manufacturing that stems from the chip foundries as well.
If Bitcoin difficulty drops, or the price raises, and more miners want to jump in, manufacturers can’t simply just ramp up their production. Miner production is based on chip availability, and chip availability is dependent upon wafer allocation, which is dependent upon how many customers a foundry has and how many wafers they can allocate. So if manufacturers want to build new machines, they need to plan around chip availability — which may not be predictable.
This timing issue then gets passed downstream to the mining farms, who need to plan out the purchase of new rigs accordingly based on new machine availability, which is based on chip production and allocation. Part of the reason for this inconsistency is that the manufacturers produce miners in batches (not steady), taking into consideration quantities, demand, and competition. But as for right now, the supply — and the bottleneck — remain at the top.
This timing issue could be affected even more by the new 5 nm chip, if those bigger players like Apple, Intel, and AMD compete over bigger parts of TSMC's capacity allocation pie. Bitmain and other mining manufacturing companies may lose out to big tech companies because of price, profit margins, and future planning. If Bitmain is blocked altogether, or only receives a small portion of the 5 nm processors to use to create new miners, where does that leave the mining industry?
The End of Chinese Business in the U.S.?
The other major concern for the Bitcoin ecosystem comes from the Trump administration, who's seeking to prohibit TSMC from taking new orders from Chinese tech company Huawei. This would prevent the largest chip manufacturer in the world from doing business with one of its biggest customers.
What if that ban extended to all Chinese companies — including Bitcoin mining companies, as China is the world biggest producer of mining supplies? This would require the development of a completely alternative supply chain from a new manufacturer, but right now no one can compete on the same scale as TSMC. A ban like this would stagnate chips and stall out the entire mining industry.
But there could be some good to come out of that situation, in that the mining industry would be forced to commoditize. New chip foundries and manufacturers would rise up and fill in the gaps, ensuring that everyone has access to the same kinds of machines that focus on stability and efficiency rather than just speed. It mostly likely won’t happen any time soon, but it presents a way to accelerate the mining manufacturing industry.
In the meantime, we’ll see how the 5 nm chip enters the markets, and what its true impact will be on the crypto mining industry’s future.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.