Bitmain – What’s Happening to the Billion Dollar IPO?

Thom Thompson

Thom Thompson

Contributing Editor

Thom Thompson is a derivatives specialist who has worked in product design, business development and regulatory roles for the CFTC, the Chicago Board of Trade, The Clearing Corporation, Swiss Exchange, Eurex and Eurex Clearing.

For the first three quarters of 2018, investors and analysts speculated about when, then if, Bitmain would go public. During a pre-IPO private fund raising, reports leaked out that Bitmain was valuing itself at $15 billion or maybe even $18 billion. During the third quarter bitcoin, which drives industry development, traded at around $6,500, shooting up briefly to the $8,000 range.

Those summer 2018 bitcoin prices were $3,000 higher than current ones. Is it any surprise that Bitmain’s IPO may not launch after all?

According to the recent unconfirmed reports, the Stock Exchange of Hong Kong has chilled to the idea of allowing any bitcoin mining equipment firm to list on its exchange given their business models in light of current market conditions. (The SEHK says these reports are just rumors.) Earlier this year media stories had already claimed that Bitmain’s IPO was doomed because, they said, a string of major potential investors turned down the chance to buy into pre-IPO Bitmain. Those reports were later confirmed by a number of potential institutional investors.

Bitmain is not the only mining equipment company unlikely to complete its proposed IPO at the current price level for bitcoin. Two other smaller Chinese bitcoin mining equipment firms, Ebang and Canaan Creative, are also unlikely to launch their IPOs in Hong Kong. That does not mean, however, that we can’t appreciate the enormous strides Bitmain made in getting to the point where it enjoys a 60 percent market share in bitcoin mining. Its aspirations to go public once seemed feasible, even inevitable (when bitcoin was priced 5 or 6 times greater than today’s levels).

This is the fourth article I have written about Bitmain, and I have become keenly interested in how the company will evolve and what it means for high-performance cryptocurrency mining in general. Most other whale-sized entities in crypto provide services and software-as-a-service. Bitmain, on the other hand, is a nuts-and-bolts (integrated circuits and software, really) company whose fortunes are tied to designing, assembling and distributing what amounts to a physical cog in the bitcoin machinery in competition with other firms that produce mining-dedicated IP as well as major chip fabricators which produce programmable circuits.

According to the prospectus, some 800 Bitmain engineering staff work (were working?) to design the best, most efficient means to hash the bitcoin protocol. The chips they design are manufactured in Taiwan and assembled back in mainland China. Bitmain’s unique selling proposition, simply, is manifested in its intellectual property, the application-specific integrated circuits (ASICs) it designs and sells.

Bitmain announced on September 26 that it had filed its draft prospectus for an IPO with the Stock Exchange of Hong Kong. The document offers a comprehensive description of its businesses, its finances and its prospects. It lines up with the disclosures expected of any company listing on a major stock exchange like the SEHK. The actual prospectus had been foreshadowed by rumors and stories in the media that Bitmain was not likely to pursue an IPO because its reportable numbers would be questionable, because it faced unexpectedly strong competition, because its design juggernaut was failing to innovate, etc.

Bitmain, however, reported very healthy revenues ($2.8 billion) and net profits ($743 million) for the first half of 2018 with plenty of credible, supporting detail. Bitmain skeptics pointed out that the prospectus showed that Bitmain’s profit margin had narrowed from earlier periods. The cheering section noted, though, that it was quite a first half – $743 million profit for a five year-old company! While there were some financings on the balance sheet, and cash flow included some sales of cryptocurrency holdings that clouded the picture slightly, the company’s ability to design and produce ASICs that can dominate the mining equipment market appears to be solid.

But the question is how much does anyone – any new investor, especially – care when bitcoin’s price hovers in the mid-$3,000s? When hash rates keep going up?  When cryptocurrency energy consumption gets more and more controversial and electricity bargains get harder for mining companies to find? Bitmain identified these and other risks in its prospectus, but the probability of their being realized seem a lot clearer in December 2018 than when they were first written down in early summer.

Bitmain’s challenge in this environment is like that of any design and manufacturing company – it needs to figure out how to be profitable when demand for its product falls. In a $3,500-bitcoin world, miners are not looking to upgrade equipment or expand operations. Reportedly, they are culling their racks of older machines to save money on energy and they have no intention of replacing them with new technology.

In a move to diversify, Bitmain is already working on developing ASICs for artificial intelligence applications, but it is too early to have any confidence about the initiative’s prospects. Supposedly, the diversification away from cryptocurrency should imply greater stability for the company and might encourage not only investors but the listing authorities at the Stock Exchange of Hong Kong.

How is Bitmain doing right now? Well, they can’t say because they are in the quiet period before their IPO. Some observers have speculated that this is one of the reasons Bitmain filed the draft in September when bitcoin prices were already a third of their previous high value and the demand for mining equipment had slowed.

Publishing its draft IPO prospectus gave Bitmain the opportunity to show off some very impressive numbers without anyone expecting the company to keep up that level of performance given today’s market conditions. Analysts can pick through the documented evidence of its brilliant successes and are left to speculate with how Bitmain is doing now.

Current market conditions challenge Bitmain’s survival, and it may need fresh capital from investors in order to keep the lights on. While the SEHK might have concerns about the appropriateness of Bitmain shares for retail investors, Bitmain’s disclosures may calm current institutional investors and smooth the way for future private placements.

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