BitMEX Research Report丨ASIC War: A look at the top 5 mining machine manufacturers

Original source: BitMEX Research Institute

Translated by: Apatheticco

Abstract: This article reviews the history of Bitcoin ASIC miner manufacturers, especially the energy efficiency ratios of several major mining machines. The report analyzes the five largest mining machine manufacturers in the market today, focusing on Canaan Creative and its declining profitability after its IPO. The article also evaluates Ebang International’s recent IPO prospectus, commenting on the challenges faced by the group in terms of market positioning, profitability and geopolitics. This article also evaluates MicroBT (Shenma), which has performed very well in the market and gained a lot of market share from Bitmain, which still seems to face poor corporate governance. In summary, this article believes that after the Bitcoin halving in 2020, both the ASIC manufacturing industry and the mining farm operation field are likely to further consolidate.

Figure 1 – Reported mining energy efficiency ratio (J/TH) vs. product release date

(Source: Mining machine manufacturer website, BitMEX Research)

(Note: only ASIC manufacturers that are still producing machines as of June 2020 are included)

Overview

Just four years after Bitcoin was launched, in early 2013, the first Bitcoin ASIC miners, the Avalon 1, were delivered. However, it was Butterfly Labs that first announced the development of an ASIC miner, in June 2012. Butterfly Labs received tens of millions of dollars in orders but failed to deliver. Bitcoin conferences and meetups in late 2012 and early 2013 were filled with frustrated customers asking when their miners would be shipped. Butterfly Labs was finally shut down in 2014 at the request of a US court. This left Avalon to dominate the market in 2013. However, from early 2015 to early 2018, Bitmain had the best energy-efficiency ratio products, and therefore dominated the market. At the peak of the 2017 bull market, Bitmain had a market share of about 75%.

Figure 2 – Estimated market share of ASIC miners by manufacturer (TH/s sold)

(Source: Bitmain IPO prospectus, Canaan Creative IPO prospectus, MicroBT presentation PPT, BitMEX Research)

Nowadays, competition is becoming increasingly fierce, and the strong products of new manufacturers such as MicroBT have attracted people's attention and continuously seized the market share of Bitmain. MicroBT's share in 2019 was about 35%, but Bitmain is still the first in the industry.

Canaan Creative

As we mentioned in our December 2019 report, Canaan acquired the Avalon name in 2014. It was the first Bitcoin ASIC manufacturer to enter the securities market, and at the time BitMEX Research believed that this was very savvy, at least from the company's perspective, and it was very well executed in terms of corporate financing.

Since the IPO, the company has performed worse than we expected, with a full-year net loss of $149.8 million in 2019, compared to BitMEX Research’s estimate of a loss of $30 million. Such large losses were due to large inventory and prepayment write-downs, which totaled approximately $103 million in 2019. The IPO prospectus included a write-down provision for the first six months of 2019, which was only $100,000, but the total for the full year was $103 million. Figure 3 below shows the significant drop in inventory and prepayment balances in the fourth quarter of 2019.

Figure 3 – Selected Canaan balance sheet items (US$ million)

(Source: Company data, BitMEX Research)

The fact that the write-down was so large and occurred so soon after raising $90 million in the IPO should have caused some distrust in the market. In fact, we had expected slowing sales and moderate write-downs due to the difficult market conditions caused by the Bitcoin halving, weak prices, and overinvestment in the 2017 market bubble, but the actual situation surprised us. Investors seem to be unimpressed by Canaan's stock, which has fallen 77% since its listing, while Bitcoin has risen 17% in the same period, as shown in Figure 4 below.

Figure 4 - Canaan’s stock price vs. Bitcoin price

(Source: Bloomberg)

On May 22, 2020, the company announced its results for the first quarter of 2020. Canaan reported revenue of $9.8 million, a year-over-year increase of 44.6%, and a net loss of $5.7 million.

Figure 5 – Canaan’s quarterly revenue (US$ million)

(Source: Company data, BitMEX Research)

Figure 6 – Canaan’s quarterly gross profit (US$ million)

(Source: Company data, BitMEX Research)

Perhaps the most interesting part of the results was the earnings call, where management provided an update on market conditions and prospects for its next-generation products. In part, the company blamed the coronavirus pandemic for relatively weak sales in the first quarter.

Since February this year, the outbreak of the COVID-19 pandemic has had a negative impact on us, especially in terms of logistics. Between February and March, we saw an increase in the price of BTC, but the COVID-19 pandemic is still not fully under control and has had a serious impact on us, so we still see the stock price falling. But we are confident that in the coming months, especially in the last two quarters of 2020, the third and fourth quarters, we will launch new products.

(Source: Q&A session of Canaan Creative’s first quarter 2020 earnings conference call)

The company also said that as the mining industry continues to consolidate, the average size of orders is increasing. In discussions with MicroBT and Bitmain, we heard the same message.

Even after the halving, we have received more and more inquiries, and the quantity is large, potential order inquiries, and the volume is also large. We see that customers are increasingly key customers or large customers.

(Source: Q&A session of Canaan Creative’s first quarter 2020 earnings conference call)

As for the technology level, Canaan said that 5nm products will be available by 2021. Management also mentioned the new Avalon 1146 pro, which has an energy efficiency ratio of 42 J/TH, while the current Avalon A1166 has an energy efficiency ratio of 47J/TH. The new Avalon 1146 pro may still put the company behind Bitmain and Bitmain, whose latest products have an energy efficiency ratio of 30 J/Th. Therefore, it is these two companies that have established a leading advantage to some extent, and competitors can only catch up.

We believe that 5nm is a more advanced technology and requires a longer cycle to mass produce. Therefore, we believe that such products may not be mass produced until next year. Our star product will be 1146 pro, which is about 42 J/TH. This is our product in the second half of the year. We are working with three foundries: SMIC, Samsung and TSMC.

(Source: Q&A session of Canaan Creative’s first quarter 2020 earnings conference call)

Looking ahead, it may be a challenge for the company to regain investor trust after the write-down shortly after its listing. Meanwhile, the geopolitical environment may also pose challenges. Canaan is listed in the United States, but given trade, the COVID-19 pandemic and political tensions in Hong Kong, it may become more difficult for Chinese listed companies to stay in the United States in the future.

On the other hand, the company has successfully raised $90 million from the US market. After a successful IPO, the group's net cash position was $59.9 million at the end of 2019, but by the first quarter of 2020, this figure had dropped to $12.5 million. As we have said before, given the technological leadership of MicroBT and Bitmain, ASIC manufacturing is a cash-intensive and difficult industry, and if Bitcoin does not have a strong bull run, then Canaan's path forward may be challenging. However, unlike its peers, Canaan's financial situation is transparent. All of Canaan's peers may also be troubled by cash flow issues, and the transparency that Canaan provides due to its listing will be greatly welcomed and can eliminate a lot of uncertainty from the perspective of customers and other stakeholders.

Ebon

In April 2020, Chinese ASIC manufacturer Ebang filed for an IPO in the United States after a previous attempt to go public in Hong Kong in 2018 failed. After looking at its recent prospectus, we can see that, like Canaan, the company has suffered a lot of losses due to declining sales and inventory write-downs. The prospectus shows that Ebang's total losses reached $30.6 million in 2019 on revenue of $109 million. Its revenue fell 66% in 2019, which was more severe than Canaan's 47%. However, compared to Canaan, Ebang's losses were not as severe, with a negative net profit margin of 38%.

Ebang Financial Overview (US$ million)

(Source: IPO prospectus, BitMEX Research)

As for the risk of further write-downs, we think the risk here is lower than that of Canaan, as there are already a lot of write-downs. More important than this is the lower risk level on the balance sheet. As of December 31, 2019, the company had $13.1 million and $13.3 million in inventory and prepayments on its balance sheet, respectively. While we think the risk of write-downs is still high, the losses are not as high as Canaan's figures in the fourth quarter of 2019.

In 2018 and 2019, we recorded $61.8 million of write-downs on potentially obsolete, slow-moving inventory and lower cost or market adjustments and $6.3 million of write-downs on cost of revenue due to the significant decline in the price of Bitcoin, which had a material negative impact on our profitability. If the price of Bitcoin declines significantly in the future, we may need to make similar write-downs again.

(Source: Yibang 2020 IPO prospectus)

Ebang launched its first product, the Ebit E9+, in late 2016. As shown in Figure 1 above, the company has never really been a market leader in terms of energy efficiency for quite some time. The energy efficiency of Ebang's latest product is about 57 J/TH, which lags behind all the other 4 companies mentioned in this report. As for the market outlook, in the prospectus, the company acknowledged that the market environment is challenging considering the epidemic situation.

The recent market panic caused by the global COVID-19 outbreak has caused a sharp drop in the price of Bitcoin in March 2020. We expect that our business and operating results may be significantly adversely affected by the global market panic in the near term. The recent COVID-19 outbreak has significantly affected our business, and we expect that it will have a material adverse effect on our operating results and financial condition.

(Source: Yibang 2020 IPO prospectus)

Given the current political tensions between China and the US, Canaan’s deteriorating earnings after the IPO, and Ebang’s relatively weak market positioning in terms of product energy efficiency, we believe it will be very difficult for Ebang to successfully conduct the IPO in the US. However, under the current volatile market conditions, who knows what will happen.

Bitmain

The largest player in the space, Bitmain, is still a private company and failed to IPO in 2018. An IPO seems to be still on the agenda, but it is overshadowed by the power struggle between the two company founders, Zhanketuan and Wu Jihan. As a reminder, according to the 2018 IPO prospectus, Zhanketuan owns 36.00% of Bitmain and Wu Jihan controls 20.25%.

Until the above management challenges are resolved, it is hard to imagine a successful IPO for Bitmain. In our report on Bitmain’s 2018 IPO plans, we mentioned other mistakes the management team seemed to make, such as using the group’s free cash flow to buy too much Bitcoin Cash. The public markets are even less tolerant of such power struggles. Allocating capital in this industry can be very difficult, and we think the management team needs to improve in order to make the right long-term decisions.

As for the technology, as shown in Figure 1 above, Bitmain has lost its lead in energy efficiency over the past year or so, falling behind MicroBT and, at certain times, Innosilicon and Ebang. We believe this may be due to some failed tapeouts at Bitmain. Despite the poorer energy efficiency, Bitmain has maintained its market leadership due to its strong manufacturing capabilities and strong relationships with key players in the supply chain. Bitmain’s latest product, the Antminer S19 Pro, has a reported energy efficiency of 30 J/TH and will put Bitmain back at the forefront of the industry along with MicroBT. Therefore, given Bitmain’s scale and manufacturing capabilities, we still believe Bitmain could be one of the key players in the industry moving forward, despite the group’s poor corporate governance issues.

MicroBit

MicroBT (whose products are trademarked as Shenma Miner) is a relatively new company. The company was founded in 2016 and launched its first product in early 2017. The company was founded by Dr. Zuoxing Yang, former design director of Bitmain, who many believe drove Bitmain's early success. We believe that Zuoxing Yang is MicroBT's largest shareholder. When he left Bitmain, he was sued for allegedly violating Bitmain's patents. Coindesk reported in December 2019 that he was arrested for embezzling approximately $15,000, which may be related to his time at Bitmain. However, as far as we know, these issues are now resolved. The company informed us that they completed a funding round in January 2019 at a valuation of $700 million, but did not disclose to us the amount of money raised or the identity of the investors.

MicroBit’s Tape-out Status

(Source: Conversation with company representative Elsa Zhao, BitMEX Research)

The company has performed well over the past few years and has captured a considerable market share from Bitmain. MicroBT has a market share of about 35% based on Bitcoin network computing power (see Figure 2 above). At the same time, unlike many competitors, the company has a 100% track record in tapeouts, with product delivery for all 4 tapeouts (see the table above). Note: "Tapeout" refers to "trial production", which means that after the circuit is designed, a few or dozens of pieces are produced for testing.

Throughout most of 2019 and until today, MicroBT’s products have been more energy efficient than Bitmain, with the Whatsminer M30S++ having an efficiency of around 31 J/TH. However, this is slightly behind Bitmain’s new Antminer S19 Pro (30 J/TH). Given that MicroBT has been leading the way for the past 18 months, it seems likely that the next generation of MicroBT products will be able to retake the lead.

According to our conversation with company representative Elsa Zhao, MicroBT currently has 80 employees, 32 of whom are R&D personnel. Its hardware R&D base is in Beijing, and its software R&D bases are in Shanghai and Shenzhen.

MicroBT sales volume (number of mining machines sold)

(Source: Conversation with company representative Elsa Zhao, BitMEX Research)

Regarding the industry outlook, Elsa Zhao, marketing manager of BitMEX, also expressed a similar message of mining consolidation in an interview with BitMEX Research.

The customer base is increasingly moving away from China. The payback period has lengthened due to Bitcoin's halving, and is now well over six months based on the current difficulty and price. At the same time, the average customer size is growing significantly, and customers are now larger funds, no longer small businesses or individuals. Three to five years ago, there was only one leading company in the industry, and in the past one or two years, a few top companies have also joined the competition. But from now on, there will be 2 to 3 industry-leading companies. After Bitcoin's halving, competition becomes more intense, and only the most competitive miners will survive. The market is likely to consolidate further.

in conclusion

Perhaps one of the main conclusions of the report is that there is a lot of room for improvement in the governance of ASIC mining companies. However, given that a highly volatile and capital-intensive industry like Bitcoin ASIC manufacturing can seem mysterious and opaque to traditional investors, it is perhaps not surprising that these governance issues have arisen.

Based on our analysis of the aforementioned IPO prospectus, Canaan’s financial results, and discussions with industry insiders, we have come to the following conclusions:

1. Competition in the ASIC manufacturing industry has become increasingly fierce, and Bitmain’s dominance has been greatly reduced over the past 18 months or so.

2. The ASIC manufacturing industry will continue to consolidate. We believe that only 2 to 3 players will survive in the long term.

3. After the halving, mining farms are becoming increasingly integrated, and new investments may come from well-funded entities, the number of which will become smaller and smaller.

4. The lifespan of ASIC miners could be significantly extended, with the current generation likely to continue operating for several years.

5. Although China still dominates ASIC manufacturing, geographically, China is losing share of the mining farm operation business to Europe and North America.