The semiconductor industry is very complex and technical with geopolitical, economic, and legal intricacies surrounding it. Bitcoin mining machine manufacturers are dependent on chips from these companies to power their products. The increasing demand for bitcoin mining combined with worsening shortages may affect mining machine manufacturers’ ability to meet market demand in the foreseeable future.

This piece gives an overview of the chip maker market and examines how the companies within this industry view mining manufacturers and the cryptocurrency market.

Semiconductor industry overview

The chip manufacturing sector is highly concentrated. Currently, EUV Lithography, an expensive method necessary to make high-end chips, or ASICs, for the best performing computing processes including bitcoin mining, is mastered by only two companies: Taiwan Semiconductor Manufacturing Co. (TSMC) and Samsung. This has caused a “bottleneck” in the market which, along with an almost two-years old supply-chain disruption, led to the current chip shortage; the biggest in history. Among the victims are Apple, Nintendo, GM, Ford and Tesla.

These chips are desired by Bitmain and other mining machine manufacturers because they contribute to a machine’s computational and thermodynamic efficiency. Advancements in these chips lead to the creation of mining machines with higher hashrates per watt. Just for reference: the Avalon1, which was the first bitcoin mining machine launched back in 2013, had a hashrate of 0.06 TH/s and a consumption of 595 W, or 9916 W/Th. In contrast, Bitmain’s S19Pro runs with 29 W/Th using TSMC’s 7nm chips.

Process nodes, expressed in nanometers (nm), is the metric used by semiconductor companies to publicly communicate how many small transistors can be packaged in a chip. The smaller, the better.

Bitcoin’s slice of the pie

Four of the five main mining machine manufacturers work with TSMC; these relationships are not exclusive. TSMC is attractive because:

1.    TSMC chips are the best performing on the market.

2.    TSMC’s capacity, R&D investments, and CapEx surpasses its competitors

The chart below shows TSMC’s share of the semiconductor industry. They are the undisputed leader in the industry.

Chip makers, specifically TSMC, have been discussing bitcoin and crypto mining for the past four years. The following is an excerpt from a conference call during the height of the 2017 bull run:

We have sized cryptocurrency mining demand carefully. Since it is still in its early stage of development, it is difficult for us to forecast its demand too far into the future with accuracy. However, as long as the cryptocurrency miners can derive positive returns, demand for TSMC wafers will continue. The core technology of cryptocurrency mining, will lead to new waves of semiconductor innovation and demand for years to come."

Mark Liu, Executive Chairman of TSMC, 2017 Q4 Conference Call.

In this call, TSMC management pointed out the growth potential of the crypto mining and mining machine markets. However, throughout their 2018 calls they acknowledged that the cryptocurrency market is immature and not yet stable, referring to the cryptocurrency mining market as uncertain and volatile. In Q4 2021, CEO C.C. Wei said, “I can say that cryptocurrency mining today is more mature than it was two or three years ago. And it remains a volatile market. However, we will continue to work closely with our customers in this field.” With these comments, TSMC management has left the door open to mining machine manufacturers.

Another interesting indirect metric that we can use to gauge the interest of the TSMC team and investors in the crypto market is by counting the number of mentions for the word “cryptocurrency” during their quarterly conference calls.

In Q4 2017, “cryptocurrency” got mentioned 40 times. The mentions of “cryptocurrency” eventually began to significantly decline after Q1 2019 with an absence of interest throughout 2020, and a resurgence in Q1 2021. This suggests that investors in TSMC are less interested in cryptocurrency during the bear markets, or when it fades from the mainstream news cycle.

Chipmaker revenue and mining machine manufacturers

Mining machine manufacturers, such as Bitmain, fall into the “High Performance Computing” segment which represents 39% of TSMC’s revenue. But given the lack of official reports on revenue attributed to mining machine manufacturers, it’s not easy to estimate a more detailed breakdown. On a call in Q1 of 2021, TSMC CEO said that he cannot comment on the percentage of revenue that comes from these manufacturers.

The Wall Street Journal forecasts that crypto will only contribute about 1% of their revenue this year, versus around 10% in the first half of 2018. If this is true, it could imply that mining machine manufacturers are being given less priority vs other customers. Also, based on this statistic and the revenue data below, the rumors that Bitmain is the second largest chip buyer after Apple, must be false. Bitmain has also stated that they don’t have long term contracts with the chip maker, and they source their supplies on a purchase order basis, prepaying the purchase amount. That means there’s no guaranteed level of production capacity allocated to Bitmain.

This forecasted statistic could also be insignificant as it relates to mining machine manufacturers and simply reflect the increasing demand for chips across other industries is outpacing demand from mining machine manufacturers.

Pictured below: TSMC revenue breakdown:

Bitmain’s relationship with TSMC

Lack of long term contracts and accusations of poaching talent from TSMC may indicate a frothy relationship between the two parties.

"We discovered that Bitmain has been poaching Taiwanese research and development talent to speed up its efforts on artificial intelligence chip capability by illegally setting up companies in Taiwan," a spokeswoman of the New Taipei Prosecutors Office told Nikkei Asia.

Since Bitmain does not make up a significant portion of TSMC revenue, it is in their best interest to stay civil with TSMC. The above may indicate that Bitmain wants to manufacture chips in-house, however this is not possible in the foreseeable future. They lack the capacity, infrastructure, and resources. China’s largest semiconductor maker, SMIC, is placed on the entity list (a U.S. blacklist), which limits the company’s access to technology and machinery and bars them from purchasing ASML’s lithography equipment which is needed to manufacture ASIC chips. Read more here.

The bottom line

TSMC leadership was right, the demand for chips has skyrocketed as mining machines  have continued to advance. Most recently with Bitmain’s announcement of the S19XP latest generation hardware. However, the combination of supply chain disruptions and shortages, lack of chipmakers, and the political and social stigma that surrounds bitcoin mining, mining machine manufacturers' ability to keep up with hardware demands as bitcoin’s price and hashrate continue to climb may be impacted.

In addition, the estimates of chip maker’s revenue attributable to mining machine manufacturers shows that the mining hardware market is still very small despite its rapid growth over the past 4 years. This market’s ability to navigate the above challenges has yet to be truly tested.