The secret behind Wu Jihan's marriage to 500.COM

Author | Qin Xiaofeng Editor | Hao Fangzhou

Produced by | Odaily Planet Daily (ID: o-daily)

On January 26, the two-year internal strife at Bitmain came to an end with a reconciliation between James and Wu. After only 20 days of silence, Wu Jihan became active again and successfully dominated the headlines of the crypto market.

On February 16, 500.COM Lottery Network (NYSE: WBAI), a U.S.-listed company, announced that it had reached a share swap agreement with Blockchain Alliance, a subsidiary of BitDeer, to acquire the BTC.COM mining pool business (including mining pools, domain names and wallets ) in full.

According to Bitmain’s previous settlement plan, BitDeer and BTC.COM belonged to Wu Jihan after Bitmain was split.

As one of the few "water-selling businesses" in the crypto market, mining is also one of the few sustainable and profitable industries besides exchanges . Especially now that BTC prices are soaring, mining pools are making a lot of money.

Why did Wu Jihan choose to sell BTC.COM at this time? Is it to cash out or to go public through a backdoor listing? Is BTC.COM's valuation of $120 million overvalued? What is the background of the acquirer 500.COM?

BTC.COM mining pool worth $180 million?

The most concerning issue in this acquisition is the transaction amount and the bet agreement.

In fact, this acquisition was not a cash transaction, but a targeted issuance of shares.

According to the official announcement, 500.COM will issue 44,353,435 Class A common shares with a par value of US$0.00005 per share, accounting for approximately 10% of the company's outstanding shares on January 31, 2021, in exchange for all the issued and outstanding shares of Blockchain Alliance Technologies Limited held by Blockchain Alliance after the completion of the reorganization. The transactions to be carried out under the share swap agreement include the transfer of all mining pool businesses under BTC.COM of Bitdeer Technologies Holding Company ("Bitdeer" Chinese name: Bit Deer) BTC.COM, BTC.COM domain name and BTC.COM cryptocurrency wallet (collectively referred to as "BTC.COM mining pool business") to the company. The first delivery transaction is expected to be completed by April 15, 2021.

It should be noted that the common stock of 500.COM is not exchanged at a 1:1 ratio with "each American depositary share" (ADS), but 1 ADS = 10*common stock. According to the share price on February 16, 1 ADS = 27 US dollars, and the value of the shares issued in this private placement is about 120 million US dollars.

In addition, the two parties also signed a bet agreement:

• If the BTC.COM mining pool business can achieve net operating profit in fiscal year 2021, 500.COM will issue additional Class A common shares to Blockchain Alliance at par value per share; when the net operating profit exceeds US$20 million, 500.COM may issue up to 22,176,718 Class A common shares (approximately US$60 million based on the current share price), accounting for approximately 5% of the company's outstanding shares as of January 31, 2021.

• If the BTC.COM mining pool business incurs a net operating loss, 500.COM has the right to repurchase portion of the Class A common stock held by Blockchain Alliance at par value per share; when the net operating loss is greater than US$10 million, 500.COM may repurchase up to 4,435,344 Class A common shares, representing approximately 1% of the company's outstanding shares as of January 31, 2021.

According to this plan, BTC.COM is actually sold for a total value of US$180 million (US$120 million acquisition + US$60 million bet).

The question is, is BTC.COM really worth $180 million? The answer is: yes.

According to data from 2019, BTC.COM's annual revenue was $26.2256 million, when the average BTC price was $7,365.21. Now that the price of BTC has soared to more than $50,000, an increase of more than 7 times, the revenue of BTC.COM mining pool has naturally increased several times.

(Note: The main source of mining pool income is handling fees, which are denominated in the currency standard.)

Moreover, as a leading institution in the industry, BTC.com mining pool has long been ranked first, and now often ranks among the top three. It is already a mature operating project with no major problems in sustained profitability. Therefore, it is more reasonable for BTC.COM to be valued at over 100 million US dollars, and the consideration of 120 million US dollars is also a pricing and recognition of BTC.COM by the capital market.

(Data from BTC.COM)

Of course, BTC.COM’s profitability is only one of the considerations. 500.COM places more emphasis on the influence of its shareholder Jihan Wu.

"500.COM values ​​Mr. Wu Jihan's influence in the industry more than 10 years, as he has been involved in mining machines, mining farms, and mining pools." A person close to 500.COM told Odaily Planet Daily, "Since 2017, the 500.COM team has had a lot of business cooperation with Bitmain. The opportunity for this acquisition was that 500.COM purchased a total of 15,900 mining machines in January and February this year. The mining industry still lacks the mining pool puzzle, so it was natural for the two giants to join forces."

500.COM: The former leader, competing in the crypto mining industry

After the BTC.COM acquisition was announced, everyone asked the same question: Who is 500.COM? Why did they acquire Wu Jihan 's company?

Founded in 2001, 500.COM is China's first company to provide online lottery services. It went public in the United States in 2013, with annual sales peaking at more than 7 billion yuan, and was once the leader of China's Internet lottery industry.

However, like the crypto market, Internet lottery has also been subject to national rectification. In April 2015, the Ministry of Finance, the Ministry of Civil Affairs, the State Sports General Administration and other eight ministries and commissions jointly issued a document to ban the sale of Internet lottery tickets. Internet lottery companies ushered in a cold winter, and 500.COM's business plummeted, which had a profound impact.

In the following four years, 500.COM changed its leaders five times, constantly adjusted its business, and launched precious metals, funds and other projects one after another, but still saw no improvement.

Tiger Securities data shows that in the past five years, 500.COM has been losing money, with the highest net loss being 651 million yuan. Fortunately, the company's operating income has always been positive, and its operating profit loss has gradually decreased.

(Image from Tiger Securities)

After several changes of leadership and transformation, 500.COM began to explore the encryption industry , which has also been an important choice for many US stock companies in the past two years.

Take this year as an example. In order to cope with the inflation pressure of the US dollar, many US-listed companies including MicroStrategy and Tesla began to invest in Bitcoin, among which Tesla has invested US$1.5 billion.

Unlike the above companies, 500.COM chose a more stable, safer and more compliant way to enter the circle - entering the mining industry. In the crypto market, mining is one of the few sustainable and profitable industries besides exchanges.

Odaily Planet Daily has counted 500.COM’s mining layout in the past two months: from purchasing mining machines to acquiring mining sites and mining pools, completing the integration of the mining industry chain.

However, according to relevant sources, 500.COM did not enter the encryption industry this year.

As early as 2016, 500.COM-related investors began to participate in early investments in the cryptocurrency industry, including exchanges, mining farms, mining machines, public chains , and Dapp applications. However, due to compliance and risk preference issues of listed companies, the above investments are mostly individual shareholder investments or other fund entities.

Today, 500.COM chooses to enter the market through its own brand. On the one hand, this is because the qualifications, compliance, environmental assessment, and filing of the selected partners are relatively complete, making them suitable for inclusion in the US-listed company entity; on the other hand, it is also a formal way to convey to the outside world the message of its move to the encryption market.

"In general, the 500 team is a veteran in the cryptocurrency industry. After years of industry experience, they decided to increase their holdings in Bitcoin mining to achieve overall transformation. For the future cryptocurrency market, we have demonstrated with practical actions that we are optimistic about it in the long term. When a certain cryptocurrency becomes a recognized settlement medium, we have no reason not to continue to increase our holdings. 500.COM is willing to build the infrastructure for this distributed ledger settlement network." A person familiar with the matter told Odaily Planet Daily.

However, the competition in the mining industry is also very fierce, and the monopoly of giants is serious. For 500.COM, how to gain a firm foothold and gradually expand its market share has become a difficult problem before it.

The acquisition of BTC.COM is to fill the last gap and make 500.COM's business structure more complete, becoming a "closed-loop mining" business platform that integrates mining machines, mining farms, mining pools, self-owned computing power, and managed computing power. At the same time, it can also use Wu Jihan's influence in the mining circle to accelerate the development of 500.COM.

What benefits does Wu Jihan get?

500.COM, as the acquirer, aims to switch to crypto mining; what benefits will BTC.COM and Wu Jihan, as the acquired parties, gain?

Many people interpreted the sale of BTC.COM as a signal that Wu Jihan was cashing out, but this is not the case.

On the one hand, when Wu Jihan and Zhan Ketuan reached a settlement, they received $600 million in cash, so they are not short of money in the short term. Moreover, regardless of bull or bear markets, mining pools can bring continuous disposable income, just like a golden hen that keeps laying eggs. In addition, the current market conditions are good, so Wu Jihan has no strong motivation to cash out.

On the other hand, the shares acquired in this acquisition cannot be cashed out quickly. According to the agreement, Blockchain Alliance has agreed to lock up the Class A common shares acquired in this transaction as agreed.

Odaily Planet Daily believes that Wu Jihan has two main goals: to supplement BTC.com's computing power, regain the first place, tokenize the computing power, and issue computing power coins; and to enter the traditional capital market, and does not rule out the possibility of a backdoor listing in the future.

(1) Supplement BTC.COM computing power and return to the first place

With the entry of exchanges such as Binance into the mining industry, former mining pool giants such as BTC.COM are also having a hard time. Their computing power continues to decline, and their profits are naturally affected.

Currently, the BTC.COM mining pool accounts for 9.76% of the total BTC network computing power, ranking fourth, and is gradually losing its first-mover advantage.

500.COM has a large amount of computing power through the acquisition of Lotto Interactive Entertainment. As of September 2020, the computing power carried by Lotto Interactive Entertainment's three data centers accounted for 6.27% of the BTC network computing power at the time, not including the 15,900 mining machines purchased in January and February this year.

Looking at the distribution of Bitcoin computing power in all major mining pools, 6% of the total network computing power is also indispensable for BTC.COM. In particular, the gap between the top mining pools is not large. Once 500.COM's computing power enters the BTC.COM mining pool, it will help BTC.COM successfully surpass F2pool, which currently ranks first, and return to the first place.

This is exactly what Wu Jihan values. After leaving Bitmain, Wu Jihan did not lose interest in mining, but was planning a new layout. The acquisition of BTC.COM was born in this context.

According to people familiar with the matter, after the acquisition is completed, 500.COM and BTC.COM (Wu Jihan) will rely on the existing computing power to tokenize the computing power and issue computing power coins.

From the perspective of miners, hashrate coins can be used to hedge risks and obtain benefits in advance. For investors, hashrate coins provide a new mining model. Investors who could only trade in the secondary market can use hashrate coins to hold Bitcoin hashrate in the primary market and receive Bitcoin rewards like miners.

At a time when competition in the mining industry is fierce, the emergence of computing power coins has provided the mining circle with a new way to play, and has also provided mining pools with a new channel for attracting customers, bringing in incremental growth.

In January this year, CoinIn, the number one BTC mining pool, issued its own computing power coin pBTC35A, and Binance also launched the computing power coin BTCST.

Now, it is also expected that 500.COM & BTC.COM are about to issue computing power coins.

(2) Entering the capital market and listing through backdoor listing

It is well known in the industry that Wu Jihan has always had a dream of going public. He switched from Hong Kong stocks to US stocks, and even after a series of failures, he still did not give up.

Now, Canaan, the second largest company in the market, and Ebang International, the third largest company , have gone public, leaving only Bitmain, the first largest company. But Wu has lost control of Bitmain, and the only company he can fully control is BitDeer.

This acquisition is most likely a signal that Wu Jihan is entering the traditional capital market.

If all results are completed successfully, Blockchain Alliance (Jihan Wu) will hold up to 13.04% of 500.COM's total shares, becoming its second largest shareholder.

“It is not ruled out that in the near future, more cryptocurrency assets will be incorporated into 500.COM’s listed company in the United States. As to whether it is related to Wu Jihan’s industry, we will have to wait and see,” said a person familiar with the matter.

Finally, it is worth noting that Sequoia China is not only a shareholder of 500.COM, but also a shareholder of BitDeer. Capital is also active behind the cooperation between the two.

"Sequoia China is an investor in both institutions, so the cooperation came naturally," a person familiar with the matter revealed.

Summarize

In general , 500.COM's acquisition of BTC.COM is the result of the mutual needs of both parties.

500.COM is trying to transform and enter the crypto mining industry; while Wu Jihan wants to further consolidate his position, integrate the industrial chain of mining machines, mining farms, and mining pools, and at the same time enter the traditional financial market. In the future, it is even expected to package and list mining pools and other businesses.

The industry is highly competitive and is in a reshuffle phase. Whether 500.COM and Wu Jihan can achieve their respective strategic goals will only be tested by time.