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Sequoia Capital China Said To Invest In Bitmain's $400M Round At $12B Valuation (chinamoneynetwork.com)
176 points by tristanj 10 months ago | hide | past | web | favorite | 95 comments

From a couple months ago: Bitmain, the largest mining hardware company, made around $4B last year https://news.ycombinator.com/item?id=16449590 https://www.cnbc.com/2018/02/23/secretive-chinese-bitcoin-mi...

So what do they want with the fraction of that as an investment? Is it a political play?

Most likely credibility, publicity, connections and mentorship that major VCs provide.

What kind of mentorship would the management of a company that is doing $4B/year in sales need? I don't mean that sarcastically. I would have thought, "clearly these people figured it out."

It's funny you should say that. Bitmain has dealt very poorly with western miners and developers and repeatedly blamed those "misunderstandings" on "cultural gaps". In the short term they don't need to solve this problem, but one day I expect the pitchforks to catch up with them.

A great example of an executive who has led the rapid development of a business but drastically needed more mentorship would be Travis Kalanik formerly of Uber. Running a large and successful company well is much, much more than just generating revenue and valuation.

Didn't Sequoia invest in them too? You might be right but this is not the best example lol

Second that. Outside of HN an average person, or probably north of 95% Uber riders, neither heard nor care/cared about internal problems at Uber. None of those problems really reflected on qualty of services they provide to the final consumer.

That's untrue. Uber lost huge amounts of market share due to the scandals in 2017.

Sequoia (US) and Sequoia China are separate funds. They share the same brand and work together on some areas, but the funds are separate and the LPs are not the same (some LPs may invest in both funds but not necessarily.)

>Running a large and successful company

Loosing money buy truckloads every day === success?

How did that mentorship work out...

Being evil. This is the group that invested in LinkedIn, PayPal and now recently Facebook after the scandals. If they went out of business, all I would say is, lol

I randomly speculated that this might help them evade some of the financial control inposed by the government?

Given 1) China's recent push for domestic hardware after the ZTE wake up call 2) Impending slow down in crypto mining hardware sales, the VC's connections will be invaluable for diversifying into other hardware products.

Something to get them to $40B/year?

Maybe they need cash to pay for electricity and hardware, so that they don't spend bitcoin now when it's down.

They most likely went short on Bitcoin when the price was high. This is Bitmain they are not just guessing what the price will be they certainly have projections and they know what a crypto bear market is like. Its a very safe position to short Bitcoin when you have the Bitcoin to cover the shorts if the price goes up.

Maybe there's some subtlety I'm missing. If you have a lot of Bitcoin and you want to short Bitcoin, isn't that just called "selling Bitcoin"?

They most likely are underwriting rolling options, most of which expire unused.

Can you currently buy puts on Bitcoin where your counterparty risk isn't highly correlated to the price of Bitcoin?

Wouldn't that be the case for the above if the option underwriter is guaranteeing possession of the underlying bitcoin?

That is only the case for call options, which isn't the case where you're concerned about counterparty risk correlation with the underlier. For put option, they'll need to guarantee enough cash (or cash equivalents) on hand to pay you out if Bitcoin reaches zero.

The carrying cost (or at least opportunity cost) is high for holding large inventories of cash, so it's not very attractive from a business perspective to do so unless there's either a market or regulatory demand to do so.

For when bitcoin mining cease to be profitable. Bitcoin mining rewards halves ever so often.

I would think of their hardware as cryptographic rather than exclusively currency related: even without cryptocurrencies around, you might need that hardware to operate strong encryption, either on your laptop or as a service. I’m not very clear on what are the next requirement and algorithm coming, but it sounds like a reasonable area to invest in.

If you look at it slightly differently: this is a company who was able to be successful in the cut-throat B2B hardware integration business. Even if some of the key aspects of that hardware might not be relevant, they have demonstrated agility at scale, which is valuable. Every company with the same scale in China has been able to negotiate full pivots repeatedly: maps become platform, search engines conversation agents, integrators turn into high-street brands, etc.

The block reward halves approximately every 4 years, and it's currently halfway through the 12.5 BTC reward period. Based on this schedule there will be a mining reward until the year 2140.

In addition to the block reward, the miner who finds each block also gains a fee from every transaction in that block. Ideally this fee stays low, but it depends on network congestion (and what miners are willing to accept, since they choose the transactions that make it into each block). The transaction fee has already hit the equivalent of $50 per transaction, back in late 2017.

Even with improvements such as batching, segwit, and lightning, there is still likely to be sufficient returns to incentivize miners for the foreseeable future.

Bitmain sells a lot of mining hardware. Bitcoin, Litecoin, Dash, and many others.

Expand mining operations. Miners have cash flow issues do and often resort to loans

Definitely a political play and a smart one too.

> Is it a political play?

Given that it's mathematically impossible for BTC to succeed until they change their POW, this doesn't make sense as a political play. Most likely Sequoia is just paying for BTC in advance to get a deeper discount than they'd normally get for buying in volume. It's also possible that they're just selling the BTC as they go and hoping for a short payback period, but while this makes sense financially it's unclear how it would relate to their overall portfolio strategy.

>> mathematically impossible for BTC to succeed until they change their POW

Citation desperately needed, and not random rantings, please.

> Citation desperately needed, and not random rantings, please.

It's just math. The amount of electricity needed to secure the network is directly proportional to the price (or more technically, the profitably of mining). This is because if you don't arbitrage out the profitability of mining, then the network is open to a 51% attack because the marginal cost of adding more hash power makes it profitable to keep adding more miners until you have control of the network. Basically the way the current POW is designed, BTC is only secure as long as it isn't obvious in advance whether or not mining at scale will be more profitable than buying BTC after it's been mined.

So given that for BTC to become a successful reserve currency it would need to be worth at least 100x what it's worth today, that means it would need to use at least 100x as much electricity. But that's more electricity than currently exists, and there's no way it would be feasible for BTC to even use a fraction of that.

This means that BTC can't actually ever reach those price levels, because if it did then it would no longer be secure, so would need to immediately drop back down in price in order to account for (and mitigate) the security risk.

> it would need to be worth at least 100x what it's worth today, that means it would need to use at least 100x as much electricity

Price and electricity usage ARE NOT perfectly elastic. Electricity usage is a product of total hashes mined and difficulty rate. These continue to go up, even when Bitcoin price is falling (see 2014-2015). Additionally, the electricity used did not rise 19x in 2017 even as the price did so.

Hashing generates a certain fixed number of bitcoins per hour, irrelevant of bitcoin or electricity prices. When the price of bitcoin goes 100x up, the potential mining revenue goes 100x in fiat, so rational investors will compete for that by increasing the hash rate of their rigs and buying more hardware that draws more electricity.

The algorithm will compensate and the difficulty will adjust so that the same number of bitcoins is generated, but the new equilibrium will happen at a point where 100x more electricity will be wasted compared to the original state.

The only thing that can change this equilibrium is the halving of the block reward happening every 4 years, or short term adjustments like the ones you mention, where the market is slowly building capacity or does not have enough trust in a price increase to invest in new capacity. On the long run, in a given 4 year window, these even out so that 100x price means 100x electricity.

> it would need to be worth at least 100x what it's worth today, that means it would need to use at least 100x as much electricity

I'm afraid I can't understand how you made such a conclusion. Why bitcoin can't be worth 100x than now using only 2x more electricity?

He is arguing that if BTC price went up 100x, it would be so much more profitable to attack it that it would require a comparable increase in the hash rate (and therefore electricity usage) to deter would be attackers. So either hash rate increases, or BTC loses it's security.

Or the same thing, but stated the other way round, as the profitability of mining increases (due to price rises), more participants are attracted to the market, raising the hash rate and bringing profitability of mining back down to the marginal equilibrium.

Essentially the argument is that cost of mining/attacking is always in rough equilibrium with price, because whenever it isn't someone will take advantage of that in a way which will have the feedback of narrowing the gap again.

«So given that for BTC to become a successful reserve currency»

Your premise is wrong to start with... BTC could be very successful without necessarily being a major worldwide reserve currency!

«But that's more electricity than currently exists»

Not true. Bitcoin currently uses only about 0.2% of the world's electricity consumption (http://blog.zorinaq.com/bitcoin-electricity-consumption/#upd...). 100× would be 20%. Some miners are currently building their own power plants for their mining farms. Getting to 20% is definitely possible.

Doesn't this argument ignore the basic supply and demand of electricity? Even if the supply of electricity remained the same, if the price went up 100x, then that would allow for (1) current energy use of bitcoin, and (2) 100x price of bitcoin, which you said was impossible. That was simple.

Obviously the price of electricity is unlikely to 100x, but I think it's entirely reasonable that jurisdictions start placing taxes on electricity use for crypto miners specifically, which would have the same effect, without affecting the rest of the economy.

Miners will also probably start investing in, and operating, cheaper power sources that are not connected to the grid, if/when those taxes get too burdensome.

>> It's just math.

Good way to start off this rebuttal.

>> The amount of electricity needed to secure the network is directly proportional to the price

OK, this is a good argument, actually. But you are neglecting future improvements in energy, adoptions in solar, and the fact that electricity is not a statically-defined generation amount; there are many, many megawatts available that are not being tapped into - particularly in hydro - due to infeasibility of transmission. This is trivially evident in the number of people moving to Chelan County, Washington, as well as Quebec, amongst other initiatives and movements.

Your "just math" argument neglects... a lot of math, which is what I figured.

Not sure if I totally buy it, but the economic argument here [1] is interesting. Essentially the claim is that proof of stake actually takes just as much resources as proof of work (marginal cost = marginal revenue), as no participant in the market is able to extract a rent.

1 - http://www.truthcoin.info/blog/pow-cheapest/

> But that's more electricity than currently exists

This is not a variable that will remain constant once it starts becoming profitable to invest in power generation solely for the purpose of bitcoin mining.

Ahh... the Dyson Sphere is nigh...

This is why we can’t have nice things.

I don't know; Dyson spheres are pretty damn cool.

I meant, what’s the point of having them when they’ll be used for bitcoin mining?

Does spending >51% of world energy on a finance system not seem excessive?

You may think that it's "just a finance system" but literally everything you touch except dirt and rocks got to where it was because of finance systems.

Yeah, but the current finance systems use far less energy. No single aspect of modern society uses that large a share of energy.

Plus you have the physical limits of making mining special chips more energy efficient...

This is why Ethereum founder calls bitcoin deadcode...as it will continue its decline unless it moves to PoS

4 transactions per second is not very many.

8 gigawatts is a lot.

But that's an artificial limit that has nothing to do with POW.

So you move to Bitcoin Cash, which can do 60 transactions a second. Big deal. It's still orders of magnitude slower than it has to be to be useful.

Blockchains don't scale. Period. If you know of a way to make them scale, publish it and you'll find instant fame and fortune.

The power consumption will continue to increase, and that is purely the fault of POW.

Blockchains don't scale. Period.

If that's your position then changing the POW won't help.

(I know no one cares, but there could be a pragmatic scaling path where you increase on-chain throughput while you do sharding/layer 2 research.)

Can you elaborate?

The Lightning Network is one such initiative for BTC.

>> Blockchains don't scale

They don't need to scale linearly with off-chain transmissions acting as a secondary transmission network.

Does segwit and (eventually) lightning not solve the TX shortcoming?

> It's also possible that they're just selling the BTC as they go and hoping for a short payback period

Sequoia's China team is has more bankers than Sequoia's U.S. team. The investment may have been made with cash-yielding convertible debt.

Or their LP agreement might not allow them to invest in crypto directly, only in companies (generating crypto)

This follows the principle that in a gold rush, you want to be the one selling shovels. Bitmain is the one selling shovels (mining machines) for the Bitcoin boom.

Except it is well known that Bitmain mines with its shovels before selling them. People have reported receiving their machines with dust in them and you can see the changes in mining difficulty corresponding to when they in-house mine and then ship the ASICS out.

Anyway, Bitmain better watch out. Cryptocurrencies are now regularly implementing hash function changes. GPU mining is dying, but not to ASICs but to the more configurable FPGAs instead.

It is not the strongest that survive, but the ones most responsive to change.

That's true. They generally sell their previous generation and mine with the next generation hardware. That way they won't be left sitting with obsolete hardware like other mining companies.

They also are rolling out an ASIC competitor to Google TPU. Bitmain is poised to be be the Nvidia of the custom compute world.

Backdoors, backdoors for everyone.


I have this uneasy feeling that for China, Bitcoin is a weapon of mass [financial] destruction.

You are seeing it as an American. Many Chinese government officials feel the same way as you, except that they think the weapon is pointed at them.

Considering the sheer computing (hashing) power they command internally (mining operations) as well as externally (specialized devices like Antminer), it's more likely that they are in control.

You think "they" are the Chinese government? That's... very much not correct. China's history in "regulating" cryptocurrency is something I think you should research and see what threat it poses their pegged currency markets and restrictions on the population in trading money; restrictions that very much Americans do not have.

We are free to trade Bitcoin and other cryptocurrencies, or exchange USD for pretty much any other currency in the world, and most goods/services. Chinese citizens are, well, not.

Bitcoin is not something a free economy with mostly free trade fears. It is something a controlled, planned market very much fears.

To be fair, all the established governments think that way.

The ability to print money and collect tax is the cornerstone of political power.

The cryptocurrencies attack those foundations and, thus, are going to be prevented from becoming mainstream.

This was "fixed" by the high tech workaround solution of:

    echo “     auth.minerlink.com” >> /etc/hosts

Not only of the Bitcoin boom — Bitmain is developing ASICs for other, smaller crypto currencies (e.g. Sia).

Exactly this. This is really one gigantic wealth transfer from the USA to a few semi-Chinese entities, btw.

The 27 year old American accountant who desires to quit his desk job will send $4,000 of his salary (or more) to buy some Chinese-made machines. The 200 or so major shareholders of Bitmain profit instantly.

The accountant barely profits on his transaction. [1]

[1] some will profit more than others depending on length of time holding assets, but statistically someone ultimately holds the bag.

It would be great if cryptocurrencies regularly switched POW hash functions to disable hardware companies from trying to monopolize the currency with hardware patents. I doubt the companies that own BTC core would allow it though. BTC is now for institutional gamblers.

Although it may seem counterintuitive that would probably lead to more centralization. Andreas explained it very well here: https://www.youtube.com/watch?time_continue=3&v=AcaktuPdQrc

This is actually less secure because the resources needed to perform a 51% attack on a coin are reduced drastically (as you only need 51% of the hashing power for one specific algorithm).

This post on the verge hack demonstrates that quite well, suggesting the attacker only needed as much as 10% of the hashrate, or even as low as 0.4% - https://blog.theabacus.io/the-verge-hack-explained-7942f63a3...

Check out x16r.


Cycles through 16 different algos based on hash of prior block.

See this is a really cool coin. I believe heavily in ASIC and even gpu resistance where possible. I'd be happy to operate an exchange and set up some basic crypto services (gambling) using this coin if you guys have a community of users.

Monero has tried something along these lines:


I just found out about Bitmain's Sophon card, but I don't think you can buy it yet.

As I understand, Sophon SC1 shipped in last October at $600 price, making Bitmain ahead of other competitors. It seems to be out of stock(?) now. Bloomberg reported on this: https://www.bloomberg.com/news/features/2018-05-17/china-s-c...

A perfect example of getting rich from selling shovels in a gold rush

Maybe someone could enlighten me : aren't next gen DLT moving to proof of stake ? doesn't this mean the cryptographic power needs are going to be reduced dramatically ?

>next gen DLT moving to proof of stake

This might happen, but Bitmain's future does not appear to have much to do with blockchain. The company supposedly diversifying into ASIC designs for AI/ML/flavor of the month applications and is expected to do well in the post-Trump political environment, hence the attention by investors.

Yeah, talked with multiple people working for them here in China.

They are hiring a lot of people, even fresh grads, from top universities in China to build ASICs for AI/ML. I got told that the time creating those is already 5-times bigger than the BTC asic team.

How does the political environment affect them?

If I had to guess I would assume the above poster is referencing that there is a push within China's political atmosphere to turn inward and start developing more critical tech at home.

At the heart of all the cheap Chinese android phones is generally a qualcomm chip, much to the chagrin of the Chinese government. BitMain is likely well positioned to take advantage of their governments increased attention and investment in the high tech sector.

Many coins are but it's not sure they will work properly and securely. So far POW is still king.

mine the miners

Selling the shovels during the gold rush.

So Bitmain...sells machines...to make money...but wouldn't they just keep the machines themselves if they were so profitable? I don't get it

So Boeing... sells airplanes... to make money...

In a gold rush, sell shovels...

Holly Guacamole! I misread BatMAN not bItmaIn

The problem with these investments is when they completely implode, it'll taint the investor public's perspective on tech in general and likely bring down the whole sector.

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