What could Bitmain and Janet Yellen possibly have in common? I know, the title seems a bit off base, but the answer is quite intriguing actually. First, we have to understand that the Fed has several different roles, and not all of them are alike. The Fed monitors inflation and price stability, and those two things are not related to Bitmain, yes I know.
But the Fed also does something else, something highly important to the financial markets, and Bitmain plays a similar role in the bitcoin market. Namely, the Fed sets interest rates. You have to understand that interest rates are a lever through which the Fed affects the flow of money, interest rates function to determine the value of money. When they want loose money, or to provide easy access to money, they lower interest rates. When they want to tighten the flow, they increase them. Now keep in mind, I personally think the Fed has lost control over the financial markets, or let’s say their control is not as strong as people think. They’ve essentially backed themselves to the wall with their monetary policy, they can’t really increase rates anymore because that would do too much damage to the economy, and keeping rates this low breeds a form of financial speculation that will lead to another financial crisis due to speculation and the excesses of human greed.
But, insofar as the Fed decides interest rates, and consequently the flow of money, they are essentially able to manage how and where money is directed. Now here comes the Bitmain parallel. Bitmain is the manufacturer of the pre-eminent mining equipment known as ASIC miners. Suffice it to say that like the Fed, they are pretty much a monopoly. Take it one step further and posit that bitcoin has now earned itself the privelage of being money. I mean, we have consensus, we’re getting much better at fungibility, and because of the blockchain we can make a good argument that bitcoin has intrinsic value that no fiat currency hitherto has had. So Bitmain manufactures money, just like the Fed. Now, when Samsung came out with the new ASIC chip, everyone talked about how Bitmain had a challenger and that maybe their hegemony was about to be toppled. Everyone thought next generation technology would possibly render them less powerful, not so.
As the largest printer of money in the world (i.e. bitcoin miner), Bitmain has a similar power to the Fed’s in terms of setting interest rates. Namely, they set the price of miners, and by doing so, they can control the flow of money. In fact if you think about it, because miners are the most capital intensive part of bitcoin mining, the fact that Bitmain can lower or increase their prices means that they control an investors return on capital- exactly what the Fed does by controling the cost of money (i.e. interest rates). A perfect example of this was when Samsung announced that they are working with Houlong mining to provide the new chipsets for ASICs. All of a sudden, with the threat of competition and lower bitcoin prices, Bitmain decided to lower the cost of the s9 miner- coincidence? I say not.
Bitmain will contniue to dominate the manufacturing of miners irrespective of technological advancements. They will simply adjust their prices to provide more attractive return on investment for investors, thereby diminishing any advantage of new chip developments. In time, Bitmain will also develop new chipsets, and the playing field will normalize. Technological advancement in the mining sector will occur on an even playing field so to speak. Bitmain’s leadership will not easily be taken away, if and when the competition begins to take some of that business, Bitmain will respond with their own set of competitive advantages or offerings and once again reinsert itself as a go to supplier.