Following a flurry of high-profile rumors and research into released financial documents, Bitmain’s application to HKEX offers some concrete insights and transparency into the largest mining player in the cryptocurrency space.
General Finances and Transparency
The application to HKEX is currently just a draft subject to review and more hearings by HKEX. Much of the document is also redacted, including the number of shares to be sold in the IPO, the total valuation, and the official timetable for the public sale.
A definitive takeaway from Bitmain’s application is their dominance in the industry. Bitmain employed Frost & Sullivan as their business consulting firm for the prospectus, who evaluated Bitmain’s total market share in ASIC-based cryptocurrency mining at 74.5 percent in 2017. Bitmain experienced exponential growth in revenue over the last few years. Their revenue increased from $137.3 million in 2015 to $2.517 billion in 2017. Further, their revenue increased from $274.5 million in the first 6 months of 2017 to $2.845 billion in the first 6 months of 2018.
However, Bitmain does qualify their exponential growth over the last few years in comparison to expected growth in the future by saying:
“Nevertheless, given the volatile nature of cryptocurrencies and that our business and financial condition correlate with the market price of cryptocurrencies, we may not be able to sustain our high historical growth rates.”
Bitmain explicitly identifies a multitude of risk factors (starting on page 38) associated with their business model. Primary risks stem from uncertain regulatory environments and challenges in balancing supplies of mining hardware since their demand correlates directly to a highly volatile cryptocurrency market.
Bitmain is currently sitting on total cryptocurrency assets worth $886.9 million in primarily Bitcoin, Bitcoin Cash, Ether, Litecoin, ZCash, and Dash along with some others. Overall, this represents 28 percent of their total assets as of June 30, 2020. Their asset holdings in cryptocurrencies are generated through sales of mining hardware in cryptocurrency, proprietary mining, and shares of the rewards from the mining pools that they operate. Bitmain currently operates BTC.com and Antpool, two of the largest mining pools in the world that accounted for approximately 37.1 percent of Bitcoin’s aggregate hashrate.
Although much of the information on Bitmain’s expenses and ongoing business plans are heavily redacted, there are still some fascinating takeaways throughout the application.
Notably, Bitmain has raised $784,750,000 in private investments over 3 rounds since August 2017. The discount rate compared to the expected IPO price is redacted; however, the cost per share paid jumped from $0.10 in August 2017 to $1.30 in August 2018, a substantial increase.
Bitmain sold 1.62 million sets of mining hardware in 2017 along with 2.56 million in the first 6 months of 2018 alone. Their significant growth in mining sales over the period also precedes the release of their next-generation ASIC mining chip announced just last week. Bitmain pulled in revenue of $2.684 billion in the first half of 2018 from mining sales alone.
Bitmain also currently manages 11 mining farms that contributed to $21.8 million in revenue in the first half of 2018. This mirrors BitMEX’s conclusion from leaked documents that Bitmain substantially scaled back its mining farm operations. However, Bitmain is currently constructing 3 mining farms in the U.S. in Washington, Texas, and Tennessee as well as in Quebec, Canada.
The total amount of land owned by Bitmain consists of 7 properties with an aggregate GFA of 56,800 square meters. They also have leased 50 properties with a GFA of more than 99,700 square meters in the People’s Republic of China.
Similarly mirroring BitMEX’s conclusions on Bitmain’s released documents is the notion that Bitmain vastly overestimated sales of mining equipment during the meteoric rise in cryptocurrency prices and popularity at the end of 2017. According to Bitmain, the useful life of proprietary Bitcoin mining hardware is only 180 days with a residual value of only 30 percent. The residual value is what Bitmain would receive for disposal of the asset towards the end of its lifecycle.
Where this becomes interesting for Bitmain, is that — according to their application — they increased their mining equipment inventories by $1.039 billion in the first half of 2018, indicating they have been unable to sell more than $1 billion in equipment. With their expected useful life of proprietary mining hardware at only 180 days and upcoming next-generation ASIC chips on the horizon, their overestimation of the demand for mining equipment is rapidly becoming an enormous sunk cost. According to Bitmain:
“In early 2018, we anticipated strong market growth for cryptocurrency mining hardware in 2018 due to the upward trend of cryptocurrencies price in the fourth quarter of 2017, and we placed a large amount of orders with our production partners in response to the anticipated significant sales growth. However, there had been significant market volatility in the market price of cryptocurrencies in the first half of 2018. As a result of such volatility, the expected economic return from cryptocurrency mining had been adversely affected and the sales of our mining hardware slowed down, which in turn caused an increase in our inventories level and a decrease in advances received from our customers in the first half of 2018.”
Bitmain’s IPO prospectus to the HKEX provides some valuable information for gauging the mechanics and size of the cryptocurrency mining market. Further, it offers some useful insights into challenges facing Bitmain moving forward and their massive potential in growing parallel to the blockchain and crypto space. They have demonstrated problems with balancing inventory and demand, but that is the nature of their business model with the demand tethered directly to the volatile cryptocurrency market.