Last week, ASIC mining giant Bitmain filed documents to go public in Hong Kong. For those readers that haven’t had the chance to review the Application Proof, all 438 pages are available here. We performed a deep dive on the document for our clients, but we noticed consistent confusions amongst the broader crypto community about specific aspects of the filing that we think should be clarified. Particularly, we noticed confusion as it relates to Bitmain’s accounting for cryptocurrency balances.
According to the filing, at the end of June 2018, Bitmain reported $886.9M worth of cryptocurrencies on its balances sheet, net of $102.7M for impairments:
One consistent concern that we’ve heard is that Bitmain’s reported crypto balance does not accurately reflect the current fair market value of their balances. That’s true, but that’s because of the way cryptocurrencies are recorded on the balance sheet for accounting purposes.
Bitmain receives cryptocurrencies in three ways: payment for mining hardware, fees from operating its two mining pools, BTC.com and Antpool, and the proprietary mining of cryptocurrencies. It accounts for cryptocurrencies it receives at cost, meaning there’s an identifiable crypto to fiat rate for every transaction. The total cost carried on the balance sheet is a weighted average cost of all Bitmain’s cryptocurrency balances.
The reason its crypto balances are carried at cost is that cryptocurrencies have been classified as intangible assets for accounting purposes. Most frequently, intangible assets represent items like patents, trademarks, customer lists, and goodwill. But because cryptocurrencies represent “identifiable non-monetary assets that lack physical substance” with “indefinite useful life”, Bitmain has classified them as intangible assets.
Every quarter, or whenever circumstances dictate, Bitmain tests these assets for impairment under IAS 36. An impairment charge is incurred when the recoverable amount is lower than the carrying amount reported on the balance sheet. It’s important to know that Bitmain only marks assets down, never up. This important to know because in the context of the 2017 crypto market rally, its balances were never adjusted up to reflect higher prices.
In 1H18 as prices fell, Bitmain recorded an impairment charge against these crypto balances that totaled $102.7M against a carrying cost of $989.6M. This represents a write-down of only 10.4% versus the carrying cost. This may seem small given the 69% drop in the price of Bitcoin Cash and 53% drop in Bitcoin through June, but keep in mind Bitmain never wrote up the value of its balances to begin with.
When Bitmain disposes of cryptocurrencies (i.e. sells them), it does incur a gain or loss on the income statement. This is simply the difference of the sale proceeds compared with carrying cost. So, while Bitmain also incurred a $102.7M write-down in the value of crypto portfolio in 1H18, it also recorded a gain of $181.3M on disposition during that same time frame. How did this happen? It’s possible that Bitmain realized gains on disposition early in the year when prices were still high. Then as prices came down through the year, it’s likely that the assets were deemed impaired by the end of June.
To better understand this, let’s use an example of how this works through accounting journals.
Let’s assume Bitmain sells some mining ASICs for 1 BTC and that BTC is trading at $10,000 (remember those days?). The first journal entry (there’s some simplification here) would look like this:
Then let’s assume the price of Bitcoin then drops by 25% by the end of the next measurement period (quarter). The recoverable amount, assuming no transaction fees, is now $7,500. Bitmain would now record an impairment charge (expense) for this loss and it would run through the income statement.
Now let’s assume during the next quarterly period, Bitcoin goes back up to $9,000 and Bitmain sells it for cash. The following entries would look like this:
There are numerous other scenarios, but the basic mechanics should remain the same. Once you understand that cryptocurrencies are treated as intangible assets, the accounting picture becomes more clear. A more important concern would be the sheer amount of Bitcoin Cash that Bitmain owns, which we estimate at around 5% of the total tokens outstanding.
We think there are more important balance sheet items to focus on for Bitmain, like inventory. Using some simple assumptions, it appears that Bitmain’s balance sheet inventory amounted to over 50% of the Bitcoin network hashrate at the end of June. That to us is much more alarming than how they account for their crypto balances.
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