Bitmain's Hail Mary moment

Leo Zhang

By Leo Zhang

The highly anticipated and controversial Bitmain IPO has finally presented its filing documents in Hong Kong, giving the world a glimpse into the mining giant's business for the first time. Just a few days before the filing, Bitmain announced two new products: the 7nm ASIC miner for Bitcoin, as well as the Antminer DR3 for Decred. Regardless of one's position on Bitmain's business ethics, the IPO is a milestone event for the growing cryptocurrency industry.

Crypto meets Wall Street as Bitcoin mining giant Bitmain files for IPO
(WSJ, by Steven Russolillo)

"Meanwhile, Hong Kong has been one of the world’s worst performing stock markets, down 16% since January’s high. And while Hong Kong has hosted a number of large IPOs this year, many—including Chinese smartphone maker Xiaomi Corp. and internet startup Meituan Dianping —have struggled to maintain initial gains."

The thread below by Katherine from Messari does an excellent job in summarizing the financial stats in the filing:

Bitmain IPO filing summary

Below, we analyze the risk factors in Bitmain's filing, in order to understand the broader market. Let's dive in:

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Bitmain generally categorizes their risks into three buckets: risks associated with the cryptocurrency industry and business operations; risks associated with Chinese regulation; and risks associated with its weighted voting right structure.

The risks associated with the cryptocurrency industry and company operations have their own subset of categories:

1) company performance heavily influenced by the fluctuation of cryptocurrency prices;
2) lack of experience and recognition overseas;
3) Overly dependent on third-parties for product developments.

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"During the six-month ending on June 30th, 2018, we recorded $102.7 million loss on crypto-assets due to cryptocurrency market fluctuation."

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"If cryptocurrency market capitalization drops significantly, declining mining profitability may impact the demand for our machines and our mining services. We may suffer greater loss on the inventory and raw materials. For instance, as of June 30th, 2018, we recorded $391.3 million mark-down on our inventory."

In the filing, Bitmain candidly admits that they misjudged the market due to the bull ride in 2017, and placed massive order from suppliers to meet the anticipated higher demand. This explains why Bitmain is so keen on calling itself a "chip company," and why it has made attempts at selling AI processors to diversify business lines. Despite its attempts, Bitmain is still at the mercy of fluctuations in cryptocurrency market.

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(Source: WSJ)

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"Most of our revenue comes from sales overseas. In 2015, 2016, 2017, and 2018H1, overseas sales constitues 65.3%, 51%, 51.8%, and 62.8% of our total revenue respectively. As we continue to expand globally, we will sell products to new regulatory regions. Our experiences with these new regions are limited, and our brand has low recoginition."

Bitmain deals with the same type of risk all companies selling products globally have to bear. Also, it is interesting that Bitmain admits its brand is not highly recognized overseas. As the largest cryptocurrency miner, the Antminer brand is definitely highly visible, but this doesn't mean the communities necessarily appreciate some of the company's practices.

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"As a fabless integrated circuits design company, we don't have the ability to manufacture integrated circuits. TSMC is our only foundry partner. In 2015, 2016, 2017, and 2018H1, the value of purchases from TSMC constitues 44.8%, 58.5%, 58.6%, and 59.2% of the total amount we spent on purchasing. Maintaining close and stable relationship with TSMC is critical for our business."

Additionally, Bitmain relies on a third-party for chip packaging and other supplies. The filing also discusses various other risk factors such as uncertainty around how market would react once 21 million BTC is fully mined, the rise of new competitors, and cybersecurity threats.

Filing is just the first step in the IPO process. Can Bitmain pull this off and replenish its war chest for even more aggressive expansions? It will be interesting to see how this unfolds.

Technical Updates

Samsung to manufacture ASIC chips for Canadian Bitcoin mining firm
(CCN, by Joseph Young)

"Squire, a Canada-based crypto mining firm, which raised $19.5 million in August to develop sophisticated mining equipment, has signed a deal with South Korea’s largest conglomerate Samsung to manufacture ASIC chips."

Announcing the LN Monitor
(The Bitfury Group)

"Head to the LightningPeach website to see real time information about the LN Monitor. The latest statistics will be shown from the proceeding day ending at 23:00. A timeline gives a person a choice of seeing what they want over a week, month, year, custom, or from when the data was initially generated in 18 September to the present day."

The secret hacker code
(Hackernoon, by Chris Castiglione)

"All hackers (good and evil) share a core belief that information should be free. This was distilled into text for the first time by Steven Levy in his 1984 book Hackers. In the book, Levy outlined The Hacker Ethic — a code of beliefs embraced by nearly all computer hackers. The ethics weren’t crafted by Steven Levy or any one person to dictate how hackers should act, rather they’re a reflection of the hacker culture that has grown organically over many decades."

Perspective on storage capacity

News & Commentary

Introducing USD coin
(Circle Blog, by Sean Neville and Jeremy Allaire)

"In addition to immediate usage on Circle Poloniex and Circle Trade, more than 20 companies are also announcing or launching support for USDC today. Other wallets, exchanges, and software applications can add support for the USDC token through the open ERC-20 standard."

U.S. Judge sides with CFTC on virtual currency oversight
(NYT, by Reuters)

"In its lawsuit against Crater and Nevada-based My Big Coin Pay Inc, the CFTC said the defendants misappropriated $6 million from 28 customers they lured by naming their virtual currency to sound like bitcoin and further claiming it was backed by gold."

Is money about to have an Uber moment?
(Breaker, by JP Koning)

"Having worked through the stack and some of its history, I’m going to make some guesses about what it might look like in 2038. I see three basic themes playing out: 1) a move to unstack parts of the stack, 2) a gradual improvement to the base banknote layer rather than its removal, and 3) a constant shrinking of the timing gap between the communication of a transaction and its settlement."

Deadly. Holy. Rough. Immediate.
(Epsilon Theory, by Rusty Guinn)

"It is our hope that Epsilon Theory can play a small role in keeping this ethic alive. In the meantime, Narrative – both Deadly and Holy – surrounds us, and we will continue to point it out where it exists. Celebrating it, when we think it serves some good purpose. Subjecting it to derision when it is a tool of manipulation and power. Indeed, this is the underlying truth in the multitudes contained in all of us and all our contradictions. It is why we write to be wise as serpents and harmless as doves. It is why we write to act boldly but hold loosely. It is why we write to identify a strong set of core beliefs, yet to subject all else to harsh, regular scrutiny."