Do mining machine manufacturers have no future?

Canaan Creative, a mining machine manufacturer that failed in both A-share and H-share listings, has recently secretly submitted its prospectus to the US Securities and Exchange Commission. In terms of computing power, Bitmain, Canaan Creative, and Ebang International occupy the first, second, and third place in the world in terms of market share respectively.

In 2018, they all expressed their willingness to go public and submitted prospectuses to the Hong Kong Stock Exchange. Judging from the financial data alone, the three prospectuses are impeccable: the compound annual growth rate of revenue exceeds 300%, and the gross profit margin is much higher than that of traditional manufacturing. Fortunes are sought in danger. There are many uncertainties in the mining machine industry. The future market of virtual currencies is unknown, and regulatory policies are not yet clear. In the face of uncertainty, the story that the three manufacturers tell investors is that they are about to enter the AI ​​chip market.

But the Hong Kong Stock Exchange did not buy it. The CEO of the Hong Kong Stock Exchange, Li Xiaojia, once publicly explained why he refused to allow mining machine manufacturers to go public - they made money from business A, but suddenly said they wanted to do business B, so the listed business A would not be sustainable.

It is uncertain where the mining machine industry will go, but one thing is certain, that is, the pure mining machine business has no future.

The ups and downs of the mining machine business

Mining machines are popular along with virtual currencies. Today, when digital currencies have no practical use, mining machines are regarded as investment products. The current market value of a mining machine is the discounted future mining yield of a mining machine. The price of mining machines fluctuates with the rise and fall of digital currencies. When digital currencies became popular around the world, mining machines became popular.

At the end of 2017, Bitcoin reached a record high of $19,666. 2015-2017 was also the golden three years of explosive growth for mining machine manufacturers. In just three years, Bitmain's revenue increased from $137 million to $2.517 billion; Canaan's revenue increased from 47.699 million yuan to 1.308 billion yuan; and Ebang International's revenue increased from 92.14 million yuan to 978 million yuan - the three companies' revenue compound growth rate exceeded 300% in the past three years.

Taking Bitcoin mining machines as an example, Canaan Creative delivered 294,500 mining machines in 2017, with a market share of 20.9% in terms of delivery volume, ranking second in the world; Bitmain ranked first in the world with a market share of 66.6%; and Ebang International ranked third in the world.

Before the mining machines came on the market, miners generally used graphics card mining machines to mine. High-performance computer graphics cards can significantly improve computing power, but the supply of graphics cards is far less than the demand. Graphics card manufacturer Nvidia once benefited from the miners' enthusiasm for mining, which once caused Nvidia's old customers and gamers to be unable to buy high-end graphics cards.

The only purpose of a mining machine is to mine. Mining machine manufacturers design chips specifically for mining, which makes the computing power of mining machines far exceed that of ordinary graphics cards. Chinese companies have absolute voice in this field.

While expanding the market, the gross profit margin of mining machine manufacturers is also increasing. Take Canaan Creative as an example, the company's gross profit margin increased from 29.1% to 46.2%. The prospectus also shows that a mining machine that sells for more than 20,000 yuan in Huaqiangbei, the global electronic product trading market, has a factory price of only 2,000 yuan. This makes the pricing space and gross profit margin of mining machines more imaginative, and it once became the hottest business in the world, and mining machine manufacturers have also become the object of institutional pursuit.

However, the biggest risk faced by mining machine manufacturers is that the production of mining machines is not a sustainable business. A graphics card retailer in Huaqiangbei revealed that when miners bought most graphics cards, Nvidia did not expand the mining machine market, but instead issued a notice to dealers that they must give priority to supplying gamers. It is obvious that Nvidia believes that old gamers will continue to contribute to the company's revenue, but miners who are on the cusp of the trend may not.

The intensive submission of prospectuses by mining machine manufacturers was interpreted by the outside world as a signal that the industry's growth had peaked. They wanted to go public when revenue and profits were at a high level, and reality soon proved this assertion. Since 2018, the price of mining machines has fallen along with the decline in the price of Bitcoin. By the end of 2018 and the beginning of 2019, the profit of a single retail mining machine was as low as 10 yuan. The mining machine market was cold, and some mining machine dealers even changed their careers. The prospectuses submitted by mining machine manufacturers have not been moved, and the Hong Kong Stock Exchange, which has always been tolerant, has also rejected them.

In mid-2019, as the price of Bitcoin rebounded, mining machine manufacturers resumed their listing process, and it was still unknown whether the SEC would approve it. However, as the market environment warmed up, traditional Internet giants such as Facebook also entered the digital currency field.

Ma Tianyuan, a senior researcher at Huobi Group, said that for mining machine manufacturers, the entry of digital currency into mainstream society is both an opportunity and a challenge. Production capacity and chips are the core competitiveness of mining machine manufacturers, which can limit the entry of small players, but traditional chip industry giants can break through these barriers and even overtake others. After the giants personally enter the market, mining machine manufacturers will face tremendous pressure.

Mining with mining machines is not the only way to generate digital currency. "There will be more diversified incentive mechanisms in the future, and many behavioral mining methods have emerged. The incentive mechanism is essentially a means to encourage miners to maintain the network and full nodes." Ma Tianyuan said.

What is the prospect of transformation to AI chips?

In fact, even Bitmain does not believe that mining machines can be a sustainable industry. The pure mining machine business has no future. They generally choose to bet on AI chips.

Bitmain believes in making money in silence, and company executives rarely face the media. However, the company once held a press conference to introduce the progress of AI chips, but did not mention mining machines and requested the outside world to focus on AI chips.

Bitmain stated in its prospectus that the first two uses of the funds raised from the listing are "to improve our R&D capabilities and expand production of cryptocurrency mining ASIC chips and blockchain applications" and "to improve our R&D capabilities and expand production of AI ASIC chips and AI applications." Coincidentally, Canaan Creative's prospectus shows that the first two uses of the funds raised from the listing are "to develop ASIC chips for artificial intelligence algorithms and applications" and "ASIC chips for blockchain algorithms and applications."

AI chips are also ASIC chips. The three factors that determine the development of AI are algorithms, computing power and data. Algorithms and computing power are determined by chips. According to the conception of mining machine manufacturers, mining machine chips exceed ordinary chips in computing power, and the company's R&D experience in mining machine chips can be extended to AI chips.

But AI practitioners disagree with this story.

The head of the chip business of an AI company headquartered in Shenzhen believes that mining requires a large number of repeated logical operations, and mining machine chips only need to repeat a large number of simple logical operation units, and the design is relatively simple. However, AI chips not only require massive operations, but also require high flexibility and efficient data interaction efficiency to cater to the rapid and changeable evolution of deep learning algorithms and adapt to the "wonderful ideas" of neural networks. There is a big gap between the algorithms of mining chips and AI chips.

This is also the reason why the Hong Kong Stock Exchange refused to allow mining machine manufacturers to go public. Li Xiaojia once said in public: "For IPOs, the core principle of the Hong Kong Stock Exchange is suitability for listing. Is the business model introduced by the proposed listed company to investors suitable for listing? For example, you made billions of dollars through business A in the past, but suddenly said that you would do business B in the future, but (business B) has not yet achieved any results - or the business model of business B is better, then I think the business model of business A that you used for listing is not sustainable. In addition, the supervision did not care before, but later the supervision began to care, then can you still do this business and make this money?"

The pure mining machine business has no future, and the story of AI chips has failed to convince practitioners and regulators. Mining machine manufacturers may be lucky enough to enter the U.S. securities market, but for any company, listing is not the end.