BTC MINING GIANT BITMAIN SHIFTS TO BCH AMIDST UPCOMING IPO
- Introduction to Bitmain
Bitmain Technologies Ltd is a diversified cryptocurrency mining company operating from Beijing. The “Crypto Unicorn” primarily generates revenue through the production and sale of ASIC devices for BitCoin mining, however they have also expanded operations to alternative cryptocurrencies, and are actively investing in various cryptocurrency enterprises. Bitmain is the brainchild of its billionaire founder Jihan Wu. The company profited a total of 2.3B USD across 2016, 2017 and Q1 2018 and has recently entered into the IPO stage – potentially one of the largest of all time.
Bitmain is a massive operation. It generated a revenue of $2.5B in 2017 and around $300M in 2016. In comparison, Coinbase generated a revenue of just $1B during the same period. Fundamentally, it is the timing of Bitmain’s IPO which has raised suspicions given that the company has been gradually shifting its holdings from BitCoin to BitCoin Cash over the past few months.
- Upcoming IPO
It has been revealed that Bitmain is seeking an Initial Product Offering worth $18B at a market capitalisation of $50B underwritten by China’s ABC Capital Management with the company to be listed on the Hong Kong Stock Exchange. Bitmain raised $50M and $400M across Series A and Series B funding respectively and has raised an undisclosed amount during the pre-ICO stage. Participation within the pre-ICO stage required a minimum investment of $5M. Participants included Tencent Holdings, Softbank Group, China National Group and billionaire Lei Jun, the founder of Xiamoi Inc, an expanding consumer electronics company. Bitmain has the potential to experience one of the largest IPOs ever, with numbers pointing towards an IPO even bigger than Visa’s.
- AntPool and recent investments
Bitmain runs and own AntPool; the second largest mining pool in the world. In 2017, Bitmain machines accounted for 66.6% total mining volume and Bitmain-run pools covered 40% of the total BTC mining network. Additionally, Bitmain oversees its own international mining operation and made $100M, $1.1B and $1B USD in 2016, 2017 and Q1 2018 respectively. As Bitmain’s control over total BitCoin mining edges closer to 50% there are concerns that the company may suffer the same regulatory fate as GHASH.
In terms of involvement in outside projects, Bitmain is invested in BizKey which is a cryptocurrency point-of-sale system, incubated DEx.top which is a decentralised exchange, financed Circles, added an ETH extension to Opera, bankrolled block.one and partnered with Huawei on a mobile crypto app. Most recently, they have disclosed an investment in tribeOS which is a BCH advertising network
- Leaked documents and the shift to BCH
Much controversy has arisen due to leaked documents from Bitmain’s pre-IPO investor desk, in particular the image attached below. While the document does not provide us with a definitive certification of Bitmain’s cashflow, it highlights that the multinational corporation has been systematically liquidating its BTC holdings to purchase massive amounts of BCH between December 2016 and March 2018.
The first column in the document is Quantity, followed by Average Price (in USD) and Asset Value (in thousands of USD). The document demonstrates that between 31st December 2016 and 31st March 2018, Bitmain’s BTC holdings have gone from 71,560 BTC to 22,082 BTC while their BCH holdings have risen from 0 BCH to 1,021,216 BCH.
Bitmain’s stake in BCH represents 5.9% of the total 17.3M BCH in circulation and 12.5% of the 8.4M BCH that has been moved since the network’s August 2017 hard-fork. Data from the BCH “Rich List” points towards Bitmain holding between 664,000 and 1.33M BCH.
While the above figures do not necessarily mean that BTC is being traded for BCH, at the very least Bitmain is selling BTC to cover the expenses associated with acquiring BCH through other methods, such as mining and ASIC device sales.
Much concern has been raised since the release of this information. In fact, George Kikvadze, the Vice Chairman of the Bitfury Group, tweeted “Why would you sell off Gold in exchange for yellow plastic?” in response to the leaked document. It seems that Bitmain is deeply tied to BCH either by choice or necessity.
BCH has experienced a sharp decline through 2018 against both the USD and BTC. BCH is a far more illiquid asset than BTC, with no OTC market opportunities and far less BCH buyers in a bearish market compared to BTC. Additionally, over 2018 BTC has asserted a market dominance of 50%.
There are two fundamental perspectives explaining Bitmain’s shift towards BCH, as set out below.
- Two sides of the same coin
During a Coin Geek conference held during June 2018, Bitmain’s founder Jihan Wu responded “Yes, exactly!” to the question “Miners are still supporting BitCoin Core. Is that a short-term profitability play?”. Mr Wu’s attitude points towards an informed move towards BCH. Bitmain has been investing in BCH projects for some time, including tribe OS as above. Perhaps Bitmain sees greater potential in BCH than BTC. This narrative is supported by the fact that Bitmain has been deepening its stake in BCH even as market conditions worsen. They have been unwilling to sell any mined BCH and have used up resources which would have been better spent mining BTC because the company has plans for BCH.
Analysis indicates that the motivation behind doing so may lie in the proposal labelled “Wormhole” which is a proposed “layer for building smart-contracts on the BCH blockchain”. Currently, the two largest cryptocurrencies, BitCoin and Ethereum, struggle with issues on two sides of the same coin. While Ethereum support Smart Contracts, its blockchain is plagued by a lack of scalability. BitCoin, on the other hand, has an established network which tackles scalability well but has no support for Smart Contracts and struggles with market saturation. It seems that Bitmain is placing itself in a favourable position for when this proposal comes to fruition. This would explain the committed deepening of stake in BCH, as well as the ludicrously high potential IPO valuation.
While the above points towards Bitmain acquiring BCH with a view of realising gains by innovating within the BCH infrastructure, not everyone shares this rosy vision. The competing perspective is that Bitmain foolishly entered into BCH positions and has timed its IPO to create a bullish market so that it may dump the otherwise illiquid asset in order to mitigate the losses it has been experiencing since acquiring BCH. Those who support this perspective characterise Bitmain’s relationship with BCH as a “death spiral”.
Bitmain acquired 159M USD worth of BCH after dumping 89M USD worth of BTC in the first 3 months of 2018. This accounted for roughly 70% of the company’s valuation per the leaked documented above. In April 2018, AntPool was accused to have artificially pumped up the price of BCH by more than 25% after announcing that it would be burning a segment of mining rewards. In June 2018, AntPool accounted for 43% of all blocks mined on the BitCoin network.
Analysis demonstrated that since its sale of BTC, the drop-in value of BCH and the general state of the crypto markets has meant that Bitmain has lost over $500M in Q1 2018. Additionally, as previously mentioned, BCH is an extremely illiquid asset with limited acquisition in bearish conditions and no OTC options.
While Bitmain has divested approximately 25% of their BCH over Q1 2018 without a significant market turn, should it continue making losses it may dump support for BCH, leaving the network susceptible to a 51% attack and ruining their investment. Given that Bitmain generates the bulk of its revenue through ASIC miner, with a new one normally released each year, it is additionally worrying that Bitmain has not released a new mining device for a while.
What this means is that Bitmain’s illiquid BCH assets cannot be realised until a bullish market emerges and until then these assets are closer to liabilities as the BCH network relies fundamentally on Bitmain continually investing hardware and electricity to keep the chain alive through mining operations. Should this perspective be taken as fact then Bitmain’s IPO is nothing more than an attempt by the MNC to mitigate the losses it has made in Q1 2018 through poor-performing positions in BCH by engineering a bullish market for it to dump the otherwise illiquid asset.
Bitmain controls an extraordinary amount of global mining power, with recent figure placing its control through AntPool at 44% globally. This is worrying. It was not long ago that GHASH faced regulatory control because its mining pool exceeded the mining power threshold of 51%. This opens the BitCoin Network up to a 51% attack. In such an attack, BTC may be double-spent. This is the same as using counterfeit money and leads to inflation. The more pressing concern is that should Bitmain gain 51% control over BTC mining, they will have effective control over the BTC network and can influence the price of BTC by influencing the demand for BTC by altering transaction fees and times based on where they would like the market to go. This has the added concern of the conceptually decentralised BTC network losing its freedom from capital markets as the network would fall under the control of Bitmain. This would render BTC an incredibly unsafe investment.
Bitmain’s acquisition of 5.9% of the total BCH circulating supply, as well as its fundamental role in BCH mining can point towards to possibilities per the above perspectives. We will either see BCH experiencing organic growth as its value increases with the addition of a Smart Contract layer through the “Wormhole” proposal. Alternatively, we may see the BCH network crash as Bitmain dumps BCH closer to the IPO stage when we anticipate there to be a bullish crypto market. We believe that the optimistic perspective is a close approximation as to future events.
- ABC Capital Management and other investors
ABC Capital Management is a principal investment firm specialising in early venture, middle stage, late stage and growth capital investments and is based out of China. It is expected that ABC Capital Management will be underwriting Bitmain’s IPO. ABC’s board shares strong relationships with Aida Pharmaceuticals, Guangzhou Development Group, China Yangtze Power Co, Hubei Energy Co, Shanghai Oriental Pearl Group, China Venture Capital and China Venture Capital Research Institute. It is noteworthy that Guangzhou Development Group also participated in Bitmain’s pre-IPO stage.
ABC’s investment will place Bitmain under its effective control based on how shares are allotted. Any part controlling ABC will control Bitmain by proxy. Bitmain controls large amounts of the BTC and BCH network’s mining operations and has considerable holdings in BCH. There is potential for market manipulation within BTC and BCH to be manifested through Bitmain via the exercise of power by investors.
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