A Look into Bitmain’s Bitcoin Mining Scale via BitFuFu

To what extent the world’s largest miner manufacturer is competing against its customers

Bitmain, the Chinese bitcoin mining hardware giant, imported more than 50 EH/s of Antminer S19XPs to its U.S. subsidiary since 2023. The flood of inventory sparked doubts as to the extent of Bitmain’s proprietary mining activity, which competes against the customers who are buying equipment from them.

Recent filings from BitFuFu, a Bitmain-backed cloud mining platform going through a reverse merger in the U.S., shed light on how nearly 65% of BitFuFu’s cloud mining and self-mining revenues in the first half of 2023 went to Bitmain’s pocket.

This article takes a look at how Bitmain profits from a substantial amount of hashrate that it leases to and hosts for a highly dependent subsidiary, which Bitmain incubated in-house and has a 5% stake.

Background

BitFuFu is headed and controlled by Liang (Leo) Lu, a former Bitmain executive who joined in July 2018 to co-found Bitmain’s cloud mining department. Lu left Bitmain in November 2019 shortly after Jihan Wu’s return in a coup, a sign of Lu taking siding with the ousted Bitmain co-founder Micree Zhan.

Under Wu’s leadership in 2020, Bitmain incubated Bitdeer, an in-house cloud mining department at the time, while the two co-founders engaged in a series of legal fights for Bitmain’s control.

In January 2021, Wu and Zhan settled their year-long fight in a deal where Zhan would regain control of Bitmain and Wu would step down to spin off Bitdeer, which later turned into the publicly-traded mining giant of today. BitFuFu’s business resumed on track following the settlement. It increased the cloud mining revenue from $19.35 million in the first half of 2021 to $56.51 million in the second half.

In January 2022 following a crypto bull market, BitFuFu initiated a business combination proposal to merge with Arisz Acquisition Corporation (NASDAQ: ARIZ) to go public in the U.S.

As of then, Lu and Bitmain own 90% and 5% of BitFuFu, respectively, and the remaining 5% was registered under an employee stock options plan. BitFuFu also indicated in the initial business combination proposal that Bitmain and Antpool will collectively commit $70 million in equity investment to increase their stakes as part of the reverse merger.

The transaction deadline for the business combination has been postponed multiple times as a result of the bear market. But in January 2024, Bitmain and Antpool increased the committed investment from $70 to $74 million in a sign that the transaction is moving along.

It may seem that Bitmain is only a minority stakeholder, but the reality as shown by BitFuFu’s filings is that its business operation is almost entirely dependent on Bitmain. In addition, through 2022, BitFuFu has emerged as a direct competitor to Bitdeer with not just cloud mining but also significant self-mining hashrate. It seems the fight between the two former Bitmain clans was never over.

15.2 EH/s

When BitFuFu filed for the merger in January 2022, it was mostly known as a cloud mining company with a hashrate capacity of only 3 EH/s.

However, it substantially increased the total hashrate under its management from 3 EH/s at the beginning of 2022, to 11.1 EH/s and 15.2 EH/s as of the end of 2022 and the first half of 2023, respectively.

“As of June 30, 2023, BitFuFu had approximately 131,000 miners under management, among which 105,800 were leased miners [TheMinerMag’s emphasis], 20,600 were BitFuFu’s self-owned miners, and 4,600 were customers’ hosted miners, representing a total mining capacity of 15.2 EH/s,” the company said.

Notably, it was Bitmain that leased the miners to BitFuFu. Not only that, Bitmain provided hosting facilities for BitFuFu in “a number of regions and countries” to power up the leased miners. As of June 30, 2023, BitFuFu had access to about 374 megawatts in 17 sites through Bitmain primarily in the U.S. (North Carolina, South Carolina, Texas, and North Dakota), Portugal, Kazakhstan, and Laos.

With the leased and proprietary miners, BitFuFu began mining bitcoin for its account in H1’22 in addition to offering cloud mining solutions to retail customers. The table below breaks down BitFuFu’s revenue and cost of revenues since 2021.

Bitmain dependency

As the table above shows, for the first half of 2023, BitFuFu made a cloud mining revenue of $75.16 million and a bitcoin mining revenue of $55.91 million by producing 2,253 BTC. It discontinued the equipment sales business and kept a small hosting revenue.

A majority of the miners and sites that BitFuFu used to power the hashrate and generate cloud mining and proprietary mining revenues were provided by Bitmain. Because of that, BitFuFu recorded $87.43 million as the cost of goods sold that was incurred to Bitmain for H1’23 including miner rental fees and hosting fees.

That number represents 78% of BitFuFu’s total cost of goods sold, net of depreciation and amortization, and is nearly 65% of BitFuFu’s total revenues in the same period. And such dependency has significantly increased since 2021 from 21% to 78%.

Essentially, Bitmain made $87.43 million in the first half of 2023 via BitFuFu’s proprietary mining and cloud mining revenues. That was close to the bitcoin production by companies like CleanSpark in the same period, which mined 3,935 BTC.

Since Bitmain increased the imports of S19XPs in the second half of 2023, BitFuFu likely experienced stronger revenue growth and hence incurred more costs to Bitmain. As of June 30, 2023, BitFuFu already had $42.9 million due to Bitmain.

$22k per Bitcoin

Given BitFuFu’s high dependence on Bitmain, it is worth analyzing the two companies as one single entity. From that perspective, Bitmain and BitFuFu effectively made a revenue of $131 million from the utilization of proprietary hashrate through self-mining and cloud mining in the first half of 2023. That equals 5,208 BTC and BTC equivalent mined based on bitcoin’s average prices during the period, as illustrated in the chart below.

The utilization of proprietary hashrate includes any activities besides direct bitcoin mining, such as power sales, cloud mining, or power credits. By that standard, BitFuFu and Bitmain’s combined bitcoin and bitcoin equivalent production via proprietary hashrate would dwarf most publicly traded mining companies except Core Scientific and Marathon.

At such a scale, Bitmain and BitFuFu’s all-in cost of bitcoin production from proprietary hashrate was estimated to be around $22k during H1’23. BitFuFu said its average raw electricity cost of the period was $0.0738/kWh, which was up 7.6% compared to the same period in 2022.

To reduce the impact of electricity price increases, BitFuFu said it has been leasing S19XPs since November 2022 to replace the S19j Pro series. That would partially explain Bitmain’s enormous import of S19XPs in 2023.

In addition, Bitmain signed a hosting agreement with Core Scientific in November 2023 to host 27,000 S19XPs with a total hashrate of 4.1 EH/s for a cost of $0.0745/kWh. BitFuFu may be the entity that eventually hosts leased miners from Bitmain at Core Scientific’s facilities.

In any case, it is reasonable to expect that Bitmain and its highly-tied affiliate operate at least 20 EH/s at the moment, most of which are the S19XP models. Meanwhile, Bitmain is gearing up to ship the first batch of S21s to its customers.