IPO stranded, mining machines unsalable, and transformation uncertain: the year of Waterloo for mining machine manufacturers

In 2018, when several leading companies in an industry plan to go public, it is often not the best time for the industry, but rather a sign that a cold winter is approaching.

Three companies that monopolize more than 90% of the global market share of virtual currency mining machines: Ebang Technology, Canaan Creative and Bitmain, have successively applied for listing to the Hong Kong Stock Exchange this year. Although they are regarded by industry insiders as the blockchain industry entering the mainstream vision, multiple signals such as ICO shrinking, digital currency prices entering a downward channel, and stricter supervision in various countries all reflect the trend of an impending cold winter in the virtual currency market.

At the end of the year, the winter is colder than previously imagined. The three representative companies in the industry have all fallen into different degrees of trouble on the road to IPO, and their future is uncertain. Among them, Ebang Technology is still processing its IPO due to suspected false capital increase and lawsuits; Bitmain is still busy responding to various inquiries raised by the Hong Kong Stock Exchange due to its involvement in the BCH computing power war and other reasons; Canaan Creative, which has the least historical problems among the three companies, also failed to survive the 6-month effective review period required by the Hong Kong Stock Exchange, and its listing application expired on November 15.

The biggest problem for the three mining machine manufacturers is the future prospects of the virtual currency market, which is often hot and cold. At the same time, as the virtual currency market represented by the POW mechanism is expected to gradually become saturated in the future, how can they guarantee investors continued profitability under such prospects?

This is also the biggest concern that the Hong Kong Stock Exchange currently has for the three companies that have applied for IPOs. A person close to the Hong Kong Stock Exchange told Tencent's "Qian Wang" that if the digital currency market continues to be bearish, their future financial data cannot be predicted under the current business model of mining machine sales, so how will the exchange explain to investors?

As early as the beginning of the IPO, the three companies had prepared for this problem. They all presented themselves as chip R&D and manufacturing companies, and also promoted their investment in AI (artificial intelligence) business to show that digital currency is not their only or main business.

In addition to its efforts on AI, Canaan has even tried to expand its customer base to a wider range of ordinary consumers. At this year's 7nm mining chip launch conference, Canaan released TVs and heaters that can mine, intending to extend the mining scenario to the home appliance field and provide incremental growth.

However, these increases have not yet been reflected in the financial data. It does not seem to be a feasible path for ordinary users to accept that the income they earn is not enough to compensate for the high energy consumption of electrical appliances.

On the R&D side, in addition to the investment in AI, the iteration speed of mining machine chips has also accelerated, the industry competition has become increasingly fierce, and the cost has also increased. On the sales side, the serious imbalance between supply and demand a year ago no longer exists. The previously popular mining machines may not be sold even if they are promoted at the mines.

With IPOs stranded, mining machines unsalable, and transformation uncertain, mining machine manufacturers seem to have entered the sea between Scylla and Charybdis, caught in a dilemma.

A shareholder of Canaan Creative told Tencent's "Qianwang" that the IPO application was invalid mainly because the Hong Kong Securities Regulatory Commission has always been very cautious about the IPO of mining machine manufacturers, which has never had a precedent before, and the Hong Kong Stock Exchange is concerned about the business model and regulatory situation. Therefore, after the six-month validity period has passed, it does not mean that the IPO will stop. Canaan Creative can re-apply for listing to the Hong Kong Stock Exchange, of course, the prerequisite is to submit the latest financial data.

An investment banker in Hong Kong bluntly stated that judging from past financial data, 2017 was the best year for mining machine manufacturers, so 2018 is also the best year for them to complete their listing. If they miss the 2018 window period when the financial data is the best, it can only be said that future opportunities will be even slimmer.

Very profitable, but difficult to make money sustainably

Since Canaan Creative submitted its IPO application in May 2018, Ebang Technology and Bitmain also submitted applications to the Hong Kong Stock Exchange in June and September respectively and disclosed their prospectuses.

The mining machines of the three companies are named Avalon, Ebit and Antminer, which together account for more than 90% of the market share. In 2017, when the virtual currency market was booming, the sales performance and profits of the three companies increased several times or even dozens of times.

Good financial data is the cornerstone of their confidence in listing on the Hong Kong stock market. Canaan Creative, the first to take the lead, hoped to raise US$1 billion in IPO funds at that time, with a valuation of RMB 100 billion.

But several months later, Canaan Creative and Ebang Technology, which submitted their applications earlier, have yet to pass the Hong Kong Stock Exchange's hearing, which began to be seen by the market as a signal of anxiety.

In October, anxiety became reality. Due to an unexpected involvement in a P2P crash, Ebang Technology, one of the three mining machine manufacturers, was accused of accepting funds from a P2P company to inflate its operating income, and was involved in a lawsuit, which affected its IPO process.

Investors pointed out that there was a fund transaction of up to RMB 520 million between Cui Hongwei, the wife of the actual controller of Yindou.com, and Ebang International. After the collapse of Yindou.com, the platform investors demanded that Ebang Technology pay back the money. However, according to Qianwang, RMB 380 million of this fund transaction was the money that Cui Hongwei, the wife of the actual controller of Yindou.com, paid to Ebang Technology to purchase Yibit mining machines, but it was impossible to confirm whether the funds came from the P2P platform.

However, even if this incident did not occur, the continued profitability issues that continue to plague mining machine manufacturers and the regulatory situation regarding virtual currencies are enough to trip up their IPO process.

"The most crucial thing still depends on the opinion of the Hong Kong Securities and Futures Commission, but their attitude has always been cautious." A person from the sponsoring investment bank close to one of the three mining machine manufacturers revealed that they have done a lot of communication work for this, but it cannot dispel their doubts.

On November 1, the Hong Kong Securities and Futures Commission issued new regulations on virtual assets, requiring that funds with more than 10% of their assets under management (AUM) in virtual assets can only be sold to professional investors. Any funds and brokerage institutions investing in virtual assets must register with the SFC.

In a public statement, Ashley Alder, CEO of the Hong Kong Securities and Futures Commission, said that after the new regulations are released, virtual currency-related funds and sales platforms can only be sold to professional investors and need to be registered with the Hong Kong Securities and Futures Commission.

The change in regulatory attitudes has added another hurdle for mining machine manufacturers, who are already dealing with the problem of sustained profitability. Canaan Creative's IPO fundraising target was reduced from US$1 billion to US$400 million, but it still exceeded the six-month application validity period.

Ebang Technology, which submitted its listing application one month later than Canaan Creative, is also approaching the deadline. Even though the status disclosed by the Hong Kong Stock Exchange is still "in progress", the aforementioned investment bank person said that with multiple problems such as the new regulatory policies and P2P disputes, it is almost impossible for Ebang Technology to pass the application within the validity period.

At present, the industry leader Bitmain is still the most promising. However, the impact of new regulatory rules, AI transformation results, and its recent involvement in the BCH (Bitcoin Cash) computing power war on the progress of the IPO remains to be seen.

It’s better to shut down

As the capital market suffered setbacks, the business on which the three mining machine manufacturers rely most for cash flow was also facing a crisis.

The price of Bitcoin has continued to plummet in recent times, and coupled with the dry season in hydropower-rich regions such as Sichuan, mining farms can only rely on relatively expensive thermal power, which has already broken through the cost price of multiple mining machines. In other words, the income from mining is not enough to pay for electricity and management fees.

According to data from F2Pool, one of the largest mining pools in China, older mining machine models including Ant S7, T9, and Avalon A741 have already reached the shutdown price.

Even though the decline in Bitcoin’s overall network computing power has led to a decrease in mining difficulty due to the Bitcoin Cash hashrate war, fear has spread among miners, who are the biggest source of cash flow for the three companies.

On November 20, at a mining discussion organized by Golden Finance, a miner issued a call for help, "The price of the currency is not far from being unplugged. I beg all the experts, how can I find a way out?"

The next day, there were rumors that some mines were liquidated and miners left. Tencent's "Qianwang" learned from various sources that some small and medium-sized mines in Xinjiang and Inner Mongolia had no choice but to sell their mining machines second-hand to liquidate them amid the continued decline in coin prices. A mining machine that was sold for as much as 20,000 yuan a year ago was now sold for only more than 1,000 yuan.

A miner who owns more than 2,000 mining machines in Xinjiang told Tencent's Qianwang that he has mined more than 30 bitcoins in the past few days. According to the current quotation, his income is 2.6 million yuan, but the electricity bill is as high as 2.8 million yuan in the same period. "The more I mine, the more I lose. I might as well just shut down my machines."

But shutting down does not mean stopping losses. Another miner who owns more than 20,000 M3 mining machines said that the market price of these mining machines exceeded 10,000 yuan more than a year ago. "I bought them at 6,000 yuan because of many connections and because I purchased in large quantities." But with today's coin prices and computing power, these mining machines have reached the shutdown price, so no one is interested in second-hand stores. "It's basically equivalent to a pile of scrap metal. Just more than 20,000 mining machines are equivalent to a loss of more than 100 million yuan.

This is completely different from what Tencent's "Periscope" saw a year ago in Shenzhen Huaqiangbei Market, a major sales center for mining machines. At that time, the price of a single Bitcoin was approaching the 100,000 yuan mark. In the hot market, the supply and demand of mining machines that can bring huge wealth were seriously unbalanced. The original ex-factory price of mining machines was around 10,000 yuan, but the price was hyped up to more than 30,000 yuan, but it was still in short supply.

"As long as you have the goods, you are the boss." A merchant said. Second-hand mining machines discarded by some miners have also become popular. "For example, the Antminer S9, some mines have stopped operating for various reasons, or bought the latest machines and discarded them, and one can still be sold for more than 20,000 yuan."

A mining farm owner in Sichuan experienced this kind of madness. At the end of 2017, he replaced the old mining machines in the mine and entrusted them to a familiar merchant in Huaqiangbei to resell them. "The second-hand machine that I used for a year was actually more expensive than the price I paid for it."

The industry is in a downturn, and the supervision of mines is also tightening. According to industry media Cong Daily, mines in Guizhou and Xinjiang were recently required by relevant departments to shut down power for rectification. The rectification began on November 5, and relevant government departments conducted joint law enforcement actions on local mines.

The government checked the tax, capital flow and customer information of the mining farms, required the mining farms to register with the real-name system, and required the local mining farms to sign a guarantee letter, which clearly stated the requirements: "According to the needs of the public security department's network information security work, our company will implement the company's business real-name system to a higher standard in the future. For customers who have not completed the latest standard real-name system, the data center will have to suspend related work such as reinstallation, restart, migration in and out, etc."

The AI ​​dream

Long before the IPO, the three companies were prepared for the industry's prospects. They presented themselves as chip R&D and manufacturing companies, and also promoted their investment in AI (artificial intelligence) business to show that digital currency is not their only or main business.

With the help of the computing power technology accumulation of Bitcoin mining machines, they can replicate the computing power experience in mining to the world's most cutting-edge technology field - artificial intelligence.

According to a person from Canaan Creative, among the elements for realizing artificial intelligence, algorithms are generally the most valued one, while computing power has been neglected. In terms of algorithms, chip manufacturers AMD and NVIDIA are at the forefront of deep learning through the graphics cards (GPUs) they design and produce. However, after years of accumulation and development, algorithms have become very mature, and computing power has become the biggest shortcoming restricting artificial intelligence. "Why can't some artificial intelligence robots walk upright? The fundamental reason is still computing power."

At the chip level, Bitmain's product strategy director Tang Weiwei predicted that just as Bitcoin mining chips have gone through the process from CPU to GPU to ASIC dedicated chips, artificial intelligence chips will also repeat the process from CPU to GPU to ASIC.

"Graphics processors represented by GPUs drove the first wave of artificial intelligence... But with the development of the industry, with the maturity of deep learning algorithms, and with the rapid evolution of system architecture, the number of dedicated chips (i.e. ASICs) will exceed that of GPU chips by 2020," Tang Weiwei said confidently.

Bitmain launched its AI-based chip brand “Suanfeng” in January 2018, and Canaan Creative is also making related moves at an accelerated pace.

"In the field of chips, this is an opportunity for China to catch up with, or even surpass, the United States." At the launch ceremony of Bitmain's "Suanfeng", Wang Jun, director of AI product technology, said excitedly.

However, AI is obviously a business that requires huge investment but has little obvious benefits. The three mining machine manufacturers, especially Bitmain, are currently adopting what the industry considers to be "using mining to support AI", using the profits from mining machine sales to subsidize the research and development of artificial intelligence.

Bitmain founder Wu Jihan once publicly told the media that this is a natural choice. He expects AI chips to account for 40% of Bitmain's revenue within five years. Another Bitmain founder, Zhan Ketuan, also revealed in an interview that Bitmain has 300 people working on AI chip R&D, which exceeds the size of the R&D team for Bitcoin mining chips.

However, in the field of AI chips, mining machine manufacturers are facing a very strong lineup of opponents. Top players such as Google, AMD, and Nvidia should not be underestimated in terms of R&D funding support, technology, and data accumulation.

After all, even Nvidia, a leader in the chip field, has been affected by this round of virtual currency decline, and its stock price has plummeted by more than 20% since the release of its third-quarter financial report.