This article is a follow-up to Thom Thompson’s earlier article, “Introducing Bitmain,” which you can find here. It is the second in a four part series.

In preparing for its IPO, Bitmain, a Chinese bitcoin mining-hardware and services firm, has provided a detailed look 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 reveals a lot in its filing about the forces behind cryptocurrency economics. The Bitmain story is particularly compelling because no other major company whose fortunes are so closely tied to cryptocurrencies, especially to bitcoin, has ever disclosed so much information about its business.

BitMain Technologies Holding Company, the world’s largest provider of bitcoin mining equipment, filed its draft prospectus for an IPO on the Stock Exchange of Hong Kong in late September. The document indicated that the company had generated more than $742.7 of net profit (about $1 billion EBITDA – earnings before interest, taxes, depreciation and amortization) on sales of $2.8 billion in just the first half of 2018.

Bitmain sells bitcoin- and other cryptocurrency-mining rigs which are based on the application-specific integrated circuits (ASICs) that dominate bitcoin mining. Instead of configuring graphical processing units (GPUs), Bitmain lets miners buy computer servers with chips dedicated to bitcoin mining in devices that optimize energy use.

Bitmain produces and sells Antminers, which Sanford C. Bernstein & Co estimated dominate the bitcoin mining hardware marketplace at an 85 percent market share. Antminer is the brand name for Bitmain’s mining hardware. Bitmain calls itself a “fabless” integrated circuit design enterprise, which means that its business is the design of integrated circuits without fabricating chips. It focuses on the intellectual property of chip design as well as well as the sales and marketing of the devices that operate the chips.

Before delving into Bitmain’s hardware business, let’s take a quick look at the other sources of income that accounted for 5.7% of Bitmain’s reported first half revenues this year, the other 94.3% being in hardware sales. Its own mining operations generated $94.3 million dollars. Servicing mining pools $43.2 million. Bitmain operates the two largest bitcoin mining pools in the world, Antpool and Together they share between 33% and 45% of the bitcoin hashing power, which may imply a fundamental market power that undermines the decentralization aspects of bitcoin. Bitmain also provides infrastructure services to miners (“farming”) brought in $21.8 million.

Bitmain sells a lot of Antminers, in fact more than 2.5 million of them in the first half of this year at an average price of $992 each. To generate most of its revenues, Bitmain sells ASIC-powered mining hardware. It contracts with a third party, publicly listed chip manufacturer, Taiwan Semiconductor Manufacturing Company (TSMC), which fabricates chips according to Bitmain’s design specifications, tests and packages them. Final chips are shipped to other third party service providers to mount the chips into circuit boards, which are then integrated with other components to produce the mining rig. Final products are shipped to and stored at Bitmain’s Chinese warehouses.

Bitmain’s revenues derive mostly from its overseas businesses. About 63% of its gross income was from abroad in the first half of the year, up sharply from last year’s 52%. This probably reflects a massive run-up in interest in cryptocurrency mining propelled by the run-up in bitcoin and other prices late in 2017. Bitmain sold less than a tenth as many Antminers in the first half of 2017 as it did in the first half of 2018.

For a company so dependent on the competitive value of its intellectual property, it’s reasonable that Bitmain’s largest internal expenses come from its R&D. In the first half of this year, R&D accounted for more than $85 million. Of course, Antminer production costs at $1.4 billion – which are outsourced – were the largest contributor in Bitmain’s reported expenses. One expense that Bitmain doesn’t seem to have had this year was a repeat of the $27 million loss from a hacking incident it reported in 2017.  On the other hand, Bitmain reported a loss of about $100 million owing to the falling price of cryptocurrencies, which both their mining operations and inventories experienced in the first half of the year.

Some of the trends reported by Bitmain that underlie its first half performance may augur poorly – or at least less tremendously well – for Bitmain’s prospects. The prospectus notes that gross profits were affected by a decline in the average sales price for Antminers, which, Bitmain asserts, was due to lowered expected returns to mining per machine due to the increasing difficulty of bitcoin mining. There are new, potentially powerful competitors in the ASIC space. And the profit potential for mining at recent bitcoin price levels is not certain.

Another, later article will discuss the risks that beset the bitcoin mining marketplace and how they might affect Bitmain. At any rate, it is interesting to see how Bitmain’s future results measure against a brilliant first half of 2018.


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