When thinking about any specific initial public offering, it’s helpful to take a step back and ask the most basic of questions. Why do companies go public at all? Why are there capital markets in the first place? What’s the point of selling shares in a company? The answer is, of course, in order to raise money that will ultimately be reinvested in growth at the price of sharing profits with stockholders.
The long-anticipated Bitmain IPO is imminent, and investors may want to take a step back and ask themselves the same basic question. Why is Bitmain going public in the first place? We can always just give the standard answer that no doubt has some truth to it. Bitmain wants to raise money to grow the company, and that’s perfectly legitimate. But in the case of Bitmain, there are extenuating circumstances that make an IPO almost imperative, and that could be dangerous for initial investors.
Consider Bitmain’s balance sheet. You can find it on page 216 of their Application Proof to the Hong Kong Stock Exchange. As of June 30, 2018, the company held USD $887M worth of cryptocurrencies. Most of that is held in Bitcoin Cash (BCH). On June 30th, the USD price of BCH was around $728, which means that Bitmain holds about 7% of the BCH market cap, more than the currency’s average 24-hour trading volume. Bitmain only held (as of June 20) $343M in cash or cash equivalents.
In mainstream industries, market leaders constantly lobby for more and more government regulation and protection that basically builds a protective wall to keep out competitors. It is highly unlikely that Bitmain, or any other contender for market leader in this industry, will be able to do this. While governments may tolerate the cryptocurrency industry to a greater or lesser extent, a symbiotic (or parasitic, depending on what side you’re on) relationship between government and cryptocurrencies is a nonstarter.
Further, the industry’s customer base is concentrated, easily identifiable, and interconnected. It doesn’t take much effort to advertise to the movers effectively and efficiently. This all is of course a wonderful thing, but at the same time it serves to keep any one firm from being too dominant.
Up until now, Bitmain has been dominant, but its dominance has only been through the infant bubble phase of the cryptocurrency industry. As BCH as the true Bitcoin and altcoins gain more acceptance, other firms will enter the fray – indeed many already are – and profit margins for everyone will start to fall until the market eventually finds equilibrium. For Bitmain, profit margins have already fallen substantially, from 41% in 2016 to 26% this year. They will continue to fall as competition from other mining rig manufacturers ramps up – such as from challenges Canaan, eBang, Whatsminer, and more.
Bitmain’s IPO valuation will be based on growth projections that will be based on the financial disclosures it has already made, disclosures based on the past, on the beginning of an entire industry in the rare phase when it was on fire. Its initial wild success as one of the first movers in mining are unlikely to be sustained long term. The blitz is over, both in terms of the initial lack of competition, and in terms of the price of cryptocurrencies themselves in the medium term. If Bitmain’s initial market cap is based on growth projections using its early growth figures as a starting point, its share price will likely start to deteriorate as mainstream investors begin to realize that those growth figures are unlikely to be sustained.
Hash War Dangers
Making financial matters even more risky for Bitmain and its IPO, Bitmain is preparing to fight a very expensive hash war over the BCH protocol, which will upgrade on November 15. This hash war could lead Bitmain to perilously deplete even more cash or cryptocurrency reserves.
In the upcoming BCH hash war, Bitmain is backing Bitcoin ABC, the historically lead full node implementation for BCH which it has been supporting since the BCH was birthed However, due to disagreements with Bitcoin ABC’s technical roadmap which seeks to change the original Bitcoin protocol, CoinGeek (the largest BCH miner) is backing a new competing BCH implementation called Bitcoin SV. Bitcoin SV, which stands for Satoshi Vision, is designed to fulfill the vision set out by Satoshi Nakaomoto’s original Bitcoin white paper and protocol. Unlike other competing BCH implementations such as ABC, Bitcoin SV’s roadmap is to restore the original Satoshi protocol, keep it stable, enable it to massively scale, and allow major businesses to confidently build on top of BCH.
It has been reported that Bitmain is preparing to activate 90,000 to even 150,000 new mining rigs in Xinjiang, and itself operate them to support Bitcoin ABC in the hash war. If that is true, one must wonder whether customers who have ordered mining rigs from Bitmain but have not yet received new rigs will be happy to know units are being re-directed for Bitmain’s own purposes.
The hash war comes at a fragile time for Bitmain and its IPO, and should make Bitmain’s investors and shareholders ask this simple question: is Bitmain’s ideological view of changing BCH so important as to risk depleting huge amounts of Bitmain’s remaining cash and cryptocurrency reserves for a long period of time?
The concept of an IPO for a cryptocurrency mainstay is itself something of a conflict of interest. A company in the business of mining decentralized, private currency that competes with government central-bank-controlled fiat, itself utilizing centralized government-regulated markets in order to raise fiat cash, can leave a sour taste in your mouth. The deeper you believe in BCH as the future of money, the harder it is to square the circle here.
Bitmain needs this IPO for itself, but it is doubtful that the broader crypto-community needs it as a whole. In a year or two, that dichotomy may become glaringly evident.
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