In preparing for its IPO, Bitmain, a Chinese bitcoin-mining services firm, has provided detailed insights into its operations. As one of the largest business entities in the industry and occupying as it does a central position in the industrial organization of bitcoin, Bitmain’s filings reveal a lot about the forces behind cryptocurrency economics.
BitMain Technologies Holding Company is the world’s largest producer and seller of bitcoin mining equipment. On Wednesday, September 26, they filed a much anticipated (draft) prospectus for an IPO on the Stock Exchange of Hong Kong. Since it’s a draft, Bitmain felt free at this time to omit facts and figures from the prospectus about the number of shares that have been issued, how many new ones they plan to issue, when they want to do this and what they guess the price new shares might fetch. After a quick glance those details appear to be pretty much all that Bitmain held back. The draft prospectus – called the “application proof” – covers 438 pages.
First, some facts
Bitmain has made a lot of money since it started operating in 2014. A lot. The prospectus states that Bitmain had revenues in the first six months of this year of $2.85 billion, of which $1.1 billion was EBITDA (or earnings before interest, taxes, depreciation and amortization). The company conducts its own mining operations and has formed some investor pools for which it provides mining services. It has also dipped its toes into AI hardware. However, the lion’s share (94%) of its revenues during the period came from sales of its bitcoin mining equipment. In the first six months of 2018, Bitmain sold about $2.68 billion worth of hardware into a market operating under the cloud of a declining bitcoin price.
Bitmain’s figures show that 2017 presented two very different half-year views of the market for bitcoin mining technology. In the first half, Bitmain sold $221 million worth of miners, which was more than its total sales for all of 2016 but less than 10% of its 2017 total sales. Clearly, Bitmain’s prospects improved during the second half of 2017 when the price of a bitcoin rose from about $2,500 to about $15,000. Bitmain doesn’t provide monthly figures, so it is not possible to tell how sensitive hardware sales have been to the bitcoin price this year – whether sales fell off after the bitcoin price came down or there was steady demand throughout the period.
As mentioned, Bitmain provides mining services to third parties, “farm” services and pool services. Farm services are where Bitmain provides equipment custody services to miners, and pool services are where Bitmain participates in pools with other miners and shares in the pools’ profits alongside them. Both of these lines of business contribute small, stable shares of Bitmain’s revenues.
Bitmain had been expected to report a dominating position as a major miner in its own right by virtue of its available financial resources, access to cheap electricity at its locations around China and its ability to deploy the best new technologies before anyone else. In fact, Bitmain surprised with modest results from its mining operations, reporting revenues of less than $100 million for the first half of this year, off from the $158 million it reported for the second half of last year.
In the early days of bitcoin mining, back when college students mined profitably on their laptops, the technology of choice was the GPU or “graphical processing unit”. GPUs welcome programming and configuration. They are deployed ubiquitously, for example in laptops, cell phones and, especially, in gaming consoles. Big names in GPU production are NVIDIA and AMD, and as the price of bitcoin rose and the demand for bitcoin mining rose, their GPU card sales rose. Bitmain had been founded in 2013 to take a different approach – to produce and utilize chips that were designed solely to mine bitcoin. These chips are application specific integrated circuits or ASICs.
Because they are dedicated to one task, ASICs execute that task efficiently. In bitcoin mining the task at hand is hashing, a process of taking data of an indeterminate size and producing a cryptographic hash of fixed size. The process of bitcoin mining entails generating large numbers of cryptographic guesses FIRST so the spoils go to the fleetest hasher. Since only one miner wins each time and the reward is a (fixed) number of bitcoins that have value, investing in better technology makes economic sense. This is where Bitmain comes in. Its ASICs power mining “rigs” that it sells to interested parties around the world. Since there is a random factor in solving the bitcoin problem alternative approaches can still be successful, so GPU approaches aren’t obsolete but it seems that the fastest hashers win the most often. Bitmain has had few competitors as ASIC producers until recently.
Bitmain has continually updated its technology and produces a line of miners called Antminers. Due to consistently high demand for mining rigs, consumers’ irritation at delays in shipping and receiving their Antminers are frequently noted in the press. Antminers are often configured to run in parallel and are set up in racks that allow access and air circulation. Antminers have a variety of distinguishing characteristics; energy efficiency seems to be targeted in the latest models.
Bitmain’s prospectus indicates that its flirtation with AI applications may be turning into something serious. There are statements that hint at a serious commitment of engineering resources into AI, but a cursory reading of the document does not reveal that Bitmain has made serious commercial inroads in the field.