Mining giants go public: the road to transformation is long and arduous

According to media reports on July 31, Canaan Creative, the world's second largest Bitcoin mining machine manufacturer, has reportedly submitted an application for listing to the U.S. Securities and Exchange Commission (SEC) to raise US$200 million.

This also means that Canaan Creative has become the first "mining machine giant" among the three major domestic mining machine manufacturers (the other two are Bitmain and Ebang International) to officially go public in the United States.

This is not the first time that a mining machine manufacturer has applied for a listing, nor is it the first time that Canaan Creative has submitted an application for a listing.

With the rapid development of digital currency, the mining machine industry plays the role of a producer of digital currency. The importance of the mining machine industry can be seen in Chapter 6 of the Bitcoin white paper released by Satoshi Nakamoto:

“By convention, the first transaction in each block is a special transaction that generates a new coin, which belongs to the creator of the block. This rewards nodes for supporting the network and provides a way to release coins into circulation - in this system, there is no decentralized authority to release those coins anyway. This steady addition of a certain number of new coins into circulation is like gold miners constantly consuming their resources to add gold to circulation. In our system, the resources consumed are CPU working time and the electricity they use.”

It can be seen from this passage that the essence of mining is "printing and distributing currency without a centralized background". Mining is a fair process of distributing currency. Mining is a game of competition between miners. This game has no administrative threshold. As long as you are willing to consume resources and capital, you can join in.

The mining machine is the infrastructure that supports this game. The mining machine is a computer used to earn Bitcoin. This type of computer generally has professional mining chips and mostly uses graphics cards to work, which consumes a lot of power. Looking back at history, Bitcoin hardware mining has gone through CPU-GPU-FPGA-ASIC-Canaan Creative 7nm ASIC chip. The iteration of mining hardware equipment and mining methods has promoted the growth of Bitcoin network computing power and the rise of mining costs. The growth of computing power and the rise and fall of Bitcoin prices have affected the development of the former.

According to official data, Canaan Creative was founded in 2013 and has become the world's leading supercomputer chip developer. In the same year, a mysterious figure in the cryptocurrency circle also saw the business opportunity of mining machines - "Baomao", whose real name is Jiang Xinyu. He is one of the first Chinese bigwigs to come into contact with Bitcoin. He is thin, has messy hair, and wears shorts and flip-flops. Although he looks like a "loser", he is indeed a genius.

In 2001, 15-year-old FC was admitted to the Junior Class of the University of Science and Technology of China from Shaoyang No. 1 Middle School in Hunan Province with a national total score ranking 11th.

In 2009, at the age of 23, Kaomao obtained a master's degree from the University of Science and Technology of China with his thesis "Building a Secure Thread Mechanism Using Formal Methods";

In 2011, FC went to Yale for a PhD program, but dropped out midway and did not get his PhD.

In 2011, he co-authored a paper with his USTC classmate David Fan titled "Code Optimization and Program Specification Transformation in Proof-Proof Compilers", which was published in the domestic journal "Miniature and Microcomputer Systems", Issue 7, Pages 1400-1405.

At the same time, FriedCat heard David talk about Bitcoin and started studying Satoshi’s paper…

In June 2012, Butterfly Labs (an American Bitcoin mining hardware manufacturer) announced the pre-sale of ASIC mining machines with a computing power of 5GH/second. On July 12, Fried Cat and David registered Bitquan Information Technology Co., Ltd. in Shenzhen.

On August 7, BakedCat and David conducted an IPO (now called ICO) on the GLBSE exchange, and the name of the issued stock was Asicminer. The total share capital was 400,000 shares, 59% of which was held by BakedCat Company (Bitfountain), and the issue price was 0.1 BTC/share, with a total of 163,962 shares issued. According to the exchange rate at the time, about 1 million RMB was raised.

Wu Jihan and Xiaoqiang (Xie Jian, Rock Xie) both invested 1,000 BTC, and both received 10,000 shares, plus 2,500 free shares. On August 9, FriedCat posted on the bitcointalk forum: "ASICMINER: Entering the Future of ASIC Mining by Inventing It", introducing the FriedCat mining machine and responding to external doubts.

Inspired by the plan of Butterfly Labs in the United States, Zhang Nangeng, a doctor from Beihang University who had been working on FPGA mining machines and was known as "Pumpkin Zhang" and the founder of Canaan Creative, made chips and mining machines one month ahead of BBQ in January 2013, and named them "Avalon" (Avalon is an important island in the legend of King Arthur, a holy place in Celtic mythology, and the central belief of the ancient Druid religion). This is the world's first Bitcoin mining machine using a dedicated chip, a milestone in the history of Bitcoin.

Unlike FC, Zhang Nangeng did not raise funds through crowdfunding, but directly through pre-sales. The pre-sale method is very peculiar: no delivery date is promised, no after-sales service is provided, no change of delivery address is accepted, and finally no delivery or refund is made.

Although many people think that Zhang Nangeng is either a lunatic or a liar, there are always exceptions. The Avalon mining machine, which was priced at 9,200 yuan per unit, received hundreds of orders within a few days, and within less than two months, the previously placed orders were shipped. At that time, an Avalon mining machine could mine an average of 10 bitcoins per day. According to the bitcoin price at the time, people who bought the mining machine could get their money back in as fast as two days. Because the Avalon mining machine did not achieve large-scale mass production at the time, only a few hundred units were pre-sold, and the last mining machine was sold at 400,000 yuan per unit.

In the early days of Avalon mining machines, Zhang Nangeng was almost the only one working on it. The production capacity was limited, and only 1,500 mining machines were delivered in the first three batches. In April 2013, Zhang Nangeng and his partner Li Jiaxuan founded Beijing Canaan Creative Information Technology Co., Ltd.

At that time, FC had already prepared to build the "FC Mine" in Gongming Street, Shenzhen. On the 23rd, near a science and technology park, an agreement was signed and the "May 1st official launch" was launched. Wang Song (partner of the FC factory and a good friend of David) said, "Only half of the room (mining machines) are placed, accounting for 42% of the total network computing power." At the same time, FC gradually withdrew from mining activities in major mining pools and started independent mining (Solo mining). The deployed computing power fluctuates between 30T and 40T.

In May 2013, the computing power market became the world of FriedCat. Because the computing power was too large and concentrated, Wang Song said that for two consecutive months, "it caused panic in the community about 51% attacks twice."

How profitable is it to sell mining machines?

According to the first quarter financial report of 2013, the total dividend paid by FC was 67,515.09 bitcoins. The amount of dividend per share paid was: 0.023544 bitcoins on February 28, 0.019163 bitcoins on March 6, 0.025998 bitcoins on March 20, and the amount of dividends was decreasing from March 24 to April 3, with the lowest dividend per share falling to 0.002556. The dividend gradually increased after 2013, reaching the highest point of 0.036222 bitcoins on May 15, and 0.026538 bitcoins on May 29. At this time, the average price per share of FC was 2.5 bitcoins, which was 25 times higher than the value per share at the time of IPO.

In July 2013, Avalon sent an order for 10,000 chips to Switzerland. At this time, the stock price of BBQ rose to 5 BTC/share, and the stock return reached more than 500 times. About 140,000 BTC was distributed to shareholders, and the peak computing power reached 47T.

In August 2013, Avalon sent another batch of orders. At this time, Baked Cat sold 20,000 coins and prepared to develop 40nm chips. In September 2013, Avalon mining machines finally began to be supplied in large quantities.

As the share price of BBQ climbed and the price of Bitcoin soared, Wu Jihan became a multimillionaire. The huge profits from chips and mining machines gave him new inspiration, and he decided to do it himself. In October 2013, Wu Jihan founded Bitmain. Soon after, technical guru Zhan Ketuan joined.

At that time, the key to the realization of mining machine chips was to reduce the power consumption ratio, that is, power consumption/computing power (W/THash). The lower the power consumption ratio, the less power the chip consumes for the same calculation. To achieve this goal, either technical methods are used for detailed optimization, but it is time-consuming and laborious, or more advanced technology is directly adopted (a mining machine called GHash appeared in Ukraine, with a computing power of 8 times that of the baked cat, using 55nm-level technology), but it is expensive. Wu Jihan, who has become a multi-millionaire, is not short of money. Therefore, for Zhan Ketuan, an IC veteran, the difficulty of developing a Bitcoin mining machine chip is not technology, but capital. Fortunately, Wu Jihan paid for it. Not long after, the first generation of chips using TSMC 55nm, S1380 and Antminer S1, were successfully developed. Due to the huge advantages in technology, S1 has a lower power consumption ratio than other mining machines. Bitmain's sales exceeded 100 million, and it successfully completed the original accumulation.

Canaan Creative and Bitmain were rising rapidly, but FC was unable to keep up. In October 2013, the development of the second-generation chip for FC's mining machine encountered problems and delivery was delayed. The computing power of the entire network of FC's mining machine dropped rapidly, leaving less than 4%.

The price of Bitcoin will directly affect the shipment volume of mining machine manufacturers, and the price of Bitcoin will be affected by various factors (policy supervision, etc.), causing transactions to rise or fall.

In the history of Bitcoin development, 2014 was a "magical" year.

On the one hand, the Bitcoin network computing power reached 100PH/S; HMRC (British tax authority) classified Bitcoin as an asset or private funds, which means that no VAT will be charged on Bitcoin mining or exchange; the US government auctioned more than 29,000 Bitcoins confiscated from Silk Road, indicating that Bitcoin is no longer considered an illegal transaction currency; the first Bitcoin derivative transaction was conducted; Microsoft, Dell, etc. accepted Bitcoin payments;

On the other hand, 2014 was a year of great depression for Bitcoin. At its lowest point, the price of the coin was less than 900 RMB, a drop of 88% from the peak at the end of 2013 and the beginning of 2014. Mt Gox exchange also went bankrupt in the same year.

In January 2014, the third-generation chip BE300 developed by the BBK team was launched, and samples were available at the end of April. In May, BBK began selling chips;

In September 2014, FC invested in a mine in Huai'an. Junyi, who had been an agent for FC's products, introduced Lin Qingxin, a native of Fujian, to FC. Lin Qingxin claimed to be a shareholder of Shuanghui Group. According to media reports, during their first meeting, Lin Qingxin slapped his pilot's license on the table and said that he could help FC build a new mine in Huai'an, "in the name of a cold storage, and could enjoy subsidies from the Jiangsu Provincial Government", but the condition was that FC would pay the electricity bill first, and Lin Qingxin would invest in the mine with the venue plus 0.4 cents per kilowatt-hour of electricity.

"After we put 6,000 mining machines in, problems arose," said Wang Song. "It was not a design problem, nor a process problem," but rather Nantong Fujitsu's "poor packaging technology" during chip packaging, which resulted in "air between the gel and the mount" inside the chip, which expanded when heated and "the chip would burst."

In 2014, Kaomao's business was declining, Zhang Nangeng's Canaan Creative suffered a loss of 250,000 yuan, and its chip and mining machine businesses came to a halt. However, Bitmain went against the trend and put into production the 28nm-based Ant S1384 chip and S5 mining machine.

In an interview in 2015, Wu Jihan said, "Low price of bitcoins is often a good thing for the mining industry. Only competitive manufacturers can survive." In 2015, the market rebounded, and the only high-performance mining machine on the market was the Antminer S5. Canaan survived the cold winter, but because of the missed opportunity, Bitmain became the world's largest Bitcoin mining machine manufacturer, and Canaan ranked second.

Canaan Creative did not admit defeat, and the market also gave Canaan Creative the opportunity to prove itself - rapid financing.

Rapid financing also brought about rapid growth in business revenue.

According to Canaan Creative's 2018 prospectus, between 2015 and 2017, Canaan Creative's operating income was RMB 47.699 million, RMB 316 million, and RMB 1.308 billion, respectively, and its profits were RMB 1.511 million, RMB 52.544 million, and RMB 361 million, respectively, a 200-fold increase in three years.

In stark contrast to the financing situation and rapid business growth is Canaan Creative's bumpy road to listing:

(1) First battle in A-shares

In June 2016, Luyitong, which had been listed on the A-share market for one year and four months, began planning its first major asset reorganization, and the target of the reorganization was Canaan Creative.

Luyitong plans to acquire all the shares from Canaan Creative's 14 shareholders by paying 1.061 billion yuan in cash and issuing shares to pay 1.999 billion yuan, with a total transaction price of 3.06 billion yuan.

If the acquisition is successfully completed, Canaan Creative will go public through a backdoor listing and become a wholly-owned subsidiary of Luyitong. Zhang Nangeng will also hold 6.73% of the shares of the listed company, with a net worth of more than 500 million.

However, the acquisition was ultimately terminated due to objective factors such as the domestic market environment and regulatory policies. Canaan Creative's first and closest attempt to a successful listing came to an end.

(2) Switching to the New Third Board

After that, Canaan Creative disappeared from the capital market for nearly 10 months. When it reappeared, Canaan Creative was already preparing for the New Third Board.

In August 2017, Canaan Creative began seeking to be listed on the New Third Board. Unfortunately, in September of that year, the wind of regulation of cryptocurrencies and transactions suddenly hit.

During its move to the New Third Board, Canaan Creative received four inquiries from the Stock Transfer Company on October, November 7, November 21, and November 30 of that year, respectively, and was asked about the impact of factors such as the policy environment and its ability to continue operating.

In March 2018, influenced by external factors, Canaan Creative finally failed in its listing on the New Third Board.

(3) Fighting the Hong Kong Stock Market Again

After failing in the New Third Board, Canaan Creative did not choose to remain silent like last time.

On May 15, 2018, Canaan Creative regrouped and embarked on the journey of listing again. This time, their target is the Hong Kong Stock Exchange.

Bitcoin is both a success and a failure. In 2018, the digital currency market encountered a cold winter and the regulation was still unclear. The profits and development prospects brought by the mining machine business could no longer support Canaan Creative's listing on the Hong Kong stock market.

On November 15, information on the Hong Kong Stock Exchange’s official website showed that Canaan Creative’s IPO application had expired.

(4) IPO in the United States

On July 31, 2019, Canaan Creative, the world's second largest Bitcoin mining machine manufacturer, is said to have submitted an application for listing to the U.S. Securities and Exchange Commission (SEC) to raise US$200 million.

Canaan Creative has repeatedly applied for listing, and its competitor Bitmain is not to be outdone.

On the evening of September 26, 2018, Bitmain submitted its prospectus to the Hong Kong Stock Exchange, officially launching its listing plan. The application subsequently failed. The reasons were analyzed in detail by Finace Run in the article "A Generation of Mining Tycoon Wu Jihan: His Heart Is Tired of Being a Freelancer".

Unlike BBK and Bitmain, Canaan does not mine or operate mining pools. Most of the leadership hopes to keep this status so that it can better achieve an IPO in the future.

Bitmain is "running rampant" in the world of Bitcoin. Wu Jihan initiated a dispute over capacity expansion and founded Bitcoin Cash (BCH), and then set off a battle over computing power. BCH hard forked into BCHABC and BCHSV. In the battle over computing power, Wu Jihan called on the BTC network to support BCH. The right to speak for BCH is in the hands of a few capitalists, which is not completely decentralized. Wu Jihan and Bitmain are controversial.

Chips almost determine half of the success or failure of mining machine manufacturers, but the long-term path must also be considered, and mining machine manufacturers urgently need to transform.

As early as 2017, Bitmain announced its entry into the field of artificial intelligence chips and launched the "Suanfeng" series of cloud AI chips. But Bitmain did not stop there. According to the official website, its artificial intelligence products include artificial intelligence chips, artificial intelligence cloud/edge products, and artificial intelligence terminal products.

Canaan Creative also announced the "ABCD" project - AI, Block chain, Cloud computing and Data. In September 2018, Canaan Creative released the first generation of edge computing AI chip - Canaan K210, which is positioned in the two fields of artificial intelligence and edge computing, mainly used in the IoT market, and has been widely used in face recognition access control, intelligent pest monitoring, intelligent image meter reading and other fields.

Canaan Creative has a multi-dimensional layout and is also experiencing active markets.

From a technical point of view, Canaan's technical level is still under discussion. Industry insiders said that the ASIC chips used in mining machines are customized chips for specific fields. The chip structure is relatively simple, and the computing power and efficiency are directly customized according to the needs of specific algorithms; AI chips require massive computing, high flexibility and efficient data interaction efficiency.

In addition, chip production is divided into front-end design and back-end design. Canaan Creative is currently limited to the front-end design and research and development of chips, and then outsources production to TSMC. It cannot independently complete the mass production of chips.

From a policy perspective, the listing supervision policy is becoming stricter. On July 26, the Hong Kong Stock Exchange issued a major regulatory document, "Consultation Conclusions on Backdoor Listings and Other Shell Stock Activities". The document mentioned that backdoor listings have become popular in recent years, and the market has seen a large number of related activities. On the one hand, investors purchase control of listed issuers to obtain their listing platforms (rather than related businesses) in the hope of eventually listing through backdoor listings. On the other hand, listed issuers take corporate actions (such as selling businesses) in order to sell their listing platforms. These activities create opportunities for market manipulation and weaken investors' confidence in the market.

Some people are optimistic, while others are bearish. A subculture against ASIC chips has been formed. With Monero changing its mining algorithm to fight against ASIC, and an Ethereum developer announcing at a conference that they are researching algorithms to fight against ASIC, digital currencies have formed a huge culture against ASIC chips.

In summary, the road to listing for Bitcoin mining machine manufacturers represented by Canaan Creative may continue to be bumpy.

There is no consensus on either blockchain or cryptocurrency business on a global scale. Whether this field qualifies as a business with actual value and can support the sustainable development of listed companies depends entirely on the subjective judgment of regulators, which actually involves great uncertainty.