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Cryptocurrency Mining Equipment Makers — How much for an IPO?

Just 10 months ago, at the very nadir of the initial coin offering (ICO) fever, some of the largest cryptocurrency mining equipment manufacturers started mulling their own offerings — but not ICOs mind you, that would be far too pedestrian — instead, the masters of the mining universe, companies with biblical names like Canaan Creative Co. as well as less biblical names like Bitmain mulled their very own IPOs. Had they somehow (through superhuman effort) managed to launch their IPOs in the early months of this year, it’s entirely possible that they would have rocked eye-watering earning multiples by now. Instead, 10 months later, the cryptosphere and the capital markets in general are an entirely different creature. Against the backdrop of the Dow dropping 296 points or 1.2% on Friday, capping off another roller coaster week of steep losses and fleeting rebounds and tech heavy Nasdaq tumbling 2.1% as slowing revenue growth from Amazon and Alphabet giving investors the jitters as they start to question the somewhat dubious valuation of tech stocks — Iceland’s cryptocurrency mining startup Bitfury is also mulling throwing its hat into the IPO ring. But has the IPO ship already sailed (and sunk) for cryptocurrency mining companies? Or could they be just the fillip that both the cryptocurrency and capital markets need?

Not so long ago, selling cryptocurrency mining equipment was a highly profitable business.

1. Limited Track Record

According to pre-IPO investor materials, Bitmain believes that it will achieve a US$14 billion market capitalization upon IPO, with Hong Kong’s Hang Seng Index being the intended forum for such an IPO. No matter how you slice and dice that number, it is somewhat optimistic.

In 2017, at the very height of cryptocurrency fever, Bitmain brought in US$2.5 billion in revenue, almost all of it from sales of its cryptocurrency mining equipment, at least according to its investor decks. And in the first quarter of this year alone, it raked in a further US$1.9 billion. Over in Iceland, Bitfury posted revenue of US$450 million for the first 12 months through March.

But let’s not forget for one minute that both periods of Bitmain’s and Bitfury’s spectacular revenue numbers (let’s not question their veracity at this stage) dovetail with the highest peaks in cryptocurrencies, with Bitcoin busting through the fabled US$20,000 mark. Those days are well and truly behind us. Whether or not there will be another such run-up again is less clear.

Bitmain doesn’t just derive its income from selling shovels and pick axes, it also mines in its own right.

Plus as recently as May this year, in an interview with Bloomberg Businessweek, Bitmain’s co-founder, Jihan Wu was touting their company’s prowess in artificial intelligence (AI), claiming that it was a natural adjacency for the chip-making company. In that interview he said,

“Artificial intelligence requires lots of computations.”

And according to Wu — that makes AI like Bitcoin mining, which is best done by a custom chip or an application-specific integrated circuit or ASIC.

There is a tenuous link between AI and Bitcoin mining at best and a suggestion of such a strong link sounds more like marketing rather than technical speak. To be sure, the early days of AI required computers to “learn,” by consuming repetitive mountains of data, but even some of the biggest investors in AI such as Google have moved on from the repetitive churn and burn method of machine learning, instead developing neural networks, more in tune with the way humans learn — through association as opposed to pattern repetition and identification.

And while a February report by Bernstein Research estimated that the company might be generating profits of US$3 billion per year, that was then — this is now.

Already, chip makers who were manufacturing cryptocurrency-specific chips for home rigs such as Nvidia (manufacturer of some of the world’s most coveted GPUs) and AMD have all seen their shares take a battering as demand for cryptocurrency mining chips plummeted in line with the fall in value of major cryptocurrencies such as Bitcoin and Ethereum (both as much as 80% down from their all-time highs).

If chip makers that are already listed on NASDAQ are struggling with demand for their cryptocurrency mining chips, what more a cryptocurrency-specific chip manufacturer’s IPO?

2. Community Risk

Ignoring that these cryptocurrency mining companies’ IPOs have used an opportunistic period of earnings report to plot future growth, there is also the larger issue of community resistance.

When Satoshi Nakamoto, Bitcoin’s eponymous and pseudonymous creator minted the first Bitcoin — the idea was to create decentralized cryptocurrency that anybody could mine. The development of ASIC cards and centralized mining pools was probably not within his, her or their contemplation at the time, as Bitcoin took on a life of its own and sparked off its very own cottage and now multi-billion dollar industry. But that doesn’t necessarily guarantee that centralized cryptocurrency mining initiatives are evergreen.

Decentralization was the stated goal. The reality is a little more complex.

For instance in April, Bitmain released a US$800 miner for Etherum, which had hitherto been seen as ASIC-resistant. The move set off a very intense and at times personal debate within Ethereum’s developers over whether the cryptocurrency should be forked — split off into a new version — that would render Bitmain’s miners useless. And while the decision was ultimately taken by Ethereum’s developers to keep the peace with Bitmain, there’s no guarantee that the status quo will be indefinite. Which puts sufficient downside risk of Bitmain’s main source of income — ASIC miners into question. While it’s likely that given Bitmain’s dominance of Bitcoin mining through its mining pools, Bitcoin is unlikely to fork to topple ASIC cards, that’s not to say that the decentralized ethos of the cryptocurrency community will not one day induce a shift in preference of a non-ASIC mine-able cryptocurrency, which would draw Bitmain’s very raison d’être into question.

3. ASIC Improvements are Slowing

Unlike Moore’s law, which states that the number of transistors in a dense integrated circuit doubles almost every two years, it appears that at least when it comes to cryptocurrency mining chips, that law does not apply — at least to Bitmain. According to a report by BitMEX Research, three successive generations of Bitmain chips have failed, while competitors have released miners that outpace Bitmain’s flagship miners in performance. Competition in the space is notoriously fierce and the performance gains that can be squeezed out of each subsequent ASIC iteration are starting to plateau. According to Sanford C. Bernstein analyst, Mark Li, Bitmain’s attempt to make a new chip using more advanced manufacturing technology didn’t pan out and two other projects also failed, leaving it flatfooted against rivals such as Canaan.

4. Redundancy Risk

Finally, Bitmain and the other cryptocurrency equipment manufacturer’s bet on supplying shovels and pick axes to cryptocurrency prospectors may not ultimately pan out. With the prices of cryptocurrencies sorely depressed and having stayed at these levels for so long, countless cryptocurrency miners have decided to take their mining rigs offline — because at least for now, electricity is still paid for with fiat currency such like the dollar. What that could do is to put millions of dollars worth of disused cryptocurrency mining equipment back on the market.

Mining facilities such as these can easily become specific surplus stock when cryptocurrency prices are low enough.

The other thing to consider is that when more cryptocurrency miners pull out of mining, the computational puzzles to secure the cryptocurrency blockchain, such as the one for Bitcoin become progressively easier — requiring less sophisticated and dedicated equipment such as ASIC rigs to mine Bitcoin. Which means that older mining rigs and less advanced ASICs with their discount prices on the second hand market, now become feasible, adding to the downside pressure on companies such as Bitmain and Canaan.


Their value proposition was supposed to be straightforward — just as Levi Strauss went to California during the gold rush and was forced to sell mining equipment to gold miners (such as the blue jeans he became famous for) instead of mine for gold himself (he arrived late and all the best spots had been taken) — cryptocurrency mining equipment makers were supposed to be selling the shovels and the pick axes of the cryptosphere to miners and to help make investors a killing in the process. Or at least that was supposed to be the story. But as we’ve seen, the cryptosphere moves at a mind-boggling rate. What is true for one moment, may not hold true the next and assumptions must always be questioned. The longevity and long term viability of a cryptocurrency chip maker are not a given.

Given the current market sentiment, as well as the recent malaise in blue chip tech names such as Amazon, it’s hard to see cryptocurrency mining equipment makers raising sufficient coin (no pun intended) in the current market. And that news will no doubt bring cheer to the Cypherpunks who have always held true to the decentralized ethos of Bitcoin. We may never find out who Satoshi Nakamoto is, but what we can safely assume based on the limited communication that he, she or them made, they had never intended so much power to be concentrated in so few hands on the Bitcoin blockchain. Companies such as Bitmain, which is believed to have supplied 85% of the world’s Bitcoin-specific ASIC cards are anathema to that decentralized ethos. Perhaps they can consider an ICO?

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The purpose of ALTCOIN MAGAZINE is to educate the world on crypto and to bring it to the hands and the minds of the masses. This article was written and composed by Patrick Tan on ALTCOIN MAGAZINE.



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Patrick Tan

Patrick Tan

CEO & General Counsel of Novum Alpha, a quantitative digital asset trading firm with regulated funds catering to accredited and institutional investors.