Are mining machine giants destined to fail just like hip-hop singers?

Originally a marginalized "underground" niche traffic star, he became well-known to the public because of an opportunity with wide influence; although he once had the hope of "entering the mainstream" with the support of a large number of "career fans", he was ultimately not tolerated by the mainstream due to high policy barriers or personal problems.

This description is perfectly appropriate whether it is used to describe the hip-hop singer who became popular last summer with Wu Yifan's "freestyle", or to describe the mining machine tycoon whose net worth once exceeded 10 billion yuan due to the bull market in cryptocurrency prices.

The amazing thing is that the two even have intentional or unintentional intertextuality in their names and behaviors. For example, Ouyang Jing and Gai are to Zhan Ketuan and CSW (“Australian Satoshi”); for example, the daily vocabulary of the two is incomprehensible to outsiders, and they often want to “battle” with each other.

In the first two hours of the morning of November 16, 8:00 pm, cryptocurrency circles around the world watched the "BCH hard fork battle" between the BCH ABC chain supported by Bitmain and the BSV chain led by CSW. This "battle" had no results other than causing a collective plunge in virtual currencies, and even the winner was not determined. However, under the passionate live broadcast hype of the cryptocurrency media, it created a long-lost climax in the cryptocurrency circle that had been silent for nearly a year.

However, this fork war, which was like a "Super Bowl" in the cryptocurrency circle, did not stir much in the blockchain circle or even in mainstream public opinion. In contrast, Canaan Creative, another mining machine giant that was reported by the media as "failed to go public", made a weak presence in the technology media.

Mainstream losers

Do you still remember the first episode of Hunan Satellite TV's "Singer 2018" program at the beginning of the year? Gai, a hip-hop singer who stood out from "The Rap of China", made a stunning appearance as the starting lineup. His song "A Laugh in the Ocean" with a unique style but undiminished passion made him, who was originally out of place, the second place in that episode.

Even though the "non-mainstream" kings are like weird clowns in the mainstream world, they still never give up any opportunity to stand out in the public eye. This is true for Gai and "Mining Tyrant".

In May 2018, mining machine giant Canaan Creative submitted an IPO application to the Hong Kong Stock Exchange. Morgan Stanley, Deutsche Bank Group, Credit Suisse and CMB International served as joint sponsors. Its fundraising target was originally expected to be US$1 billion, and later positioned at least US$400 million. In the prospectus, Canaan Creative positioned itself as a "fabless IC design company that provides advanced semiconductor solutions for complex computing problems."

This is not the first time Canaan Creative has attempted to enter the capital market.

Canaan Creative's first listing target is the A-share market. In 2016, A-share listed company Luyitong planned to acquire all of Canaan Creative's equity for RMB 3.06 billion. Relevant information shows that the shareholding ratios of the top two shareholders in this acquisition are similar, so it was interpreted by the market as a "backdoor" listing.

However, the listing plan was ultimately shelved as the promised performance and valuation disclosed in the prospectus were deemed difficult to achieve.

Canaan Creative's second target was the "second best" NEEQ. In August 2017, the National Equities Exchange and Quotations, the operator of the NEEQ, conducted three rounds of inquiries on Canaan Creative's application for listing, but the final result was still inconclusive.

Due to the many restrictions on domestic capital exit channels, Canaan Creative finally "retreat from Hong Kong" in May this year. According to Qifeng Finance's inquiry, as of November 15, Canaan Creative's IPO application processing results at the Hong Kong Stock Exchange showed "invalid". According to Qifeng Finance, "invalid" means that a company failed to complete the feedback on the Hong Kong Stock Exchange's questions within the 6-month effective review period, so the application materials previously submitted are invalid.

Strictly speaking, "invalidation" does not mean failure to go public, but at least it means the deadline is "suspended". That is, if the company wants to continue the listing process, it must submit the materials again.

In fact, Canaan Creative’s current experience is just a microcosm of mining machine companies seeking to go public.

Following in the footsteps of Canaan Creative, Ebang International, which submitted an IPO application to the Hong Kong Stock Exchange in June this year, also had a bumpy road. It is reported that Ebang International applied for listing on the New Third Board three years ago. Although it was successfully reviewed at that time, it was eventually delisted from the New Third Board in 2018 and then turned its attention to Hong Kong. In this regard, the director of Ebang International explained that this move was due to the inactivity of listing transactions on the New Third Board.

However, almost at the same time as Canaan Creative was sentenced to death, sources also revealed that Ebang International’s IPO plan this year could not be completed.

Another mining machine giant, Bitmain, submitted an IPO application for the Hong Kong Stock Exchange in September this year. As an absolute "mining tycoon" that accounts for more than 70% of the total network computing power, Bitmain is considered by the industry to be the most likely case for a successful listing. The latest news also shows that a temporary stock code of Bitmain appears on a trading platform.

However, a query by Qifeng Finance on the official website of the Hong Kong Stock Exchange showed that the IPO application processing status of Ebang International and Bitmain on the official website of the Hong Kong Stock Exchange is still only "under processing", and the two parties have not released any official news.

The "mining tyrants" are just like Gai, who still appeared in the preview of the second episode of "Singer 2018" but was determined to withdraw from the competition due to rumors. Perhaps they are also waiting for an admission letter from the mainstream world together with thousands of "coin people".

Origin determines destiny

Gai still withdrew from the competition.

Countless people feel sorry for him, after all, he tried hard. Whether it was participating in mainstream variety shows or deleting past "tainted works", he even changed his bohemian Weibo name "Gai Ye only recognizes money" back to the unrecognizable but serious "Gai Zhou Yan". Every step of the transformation was carefully taken. But the mainstream just couldn't tolerate him, just as the capital market couldn't tolerate "mining tyrants".

Of course, there are obvious reasons. The IPO of Ebang International was suspected to be suspended by the Hong Kong Stock Exchange, which is most likely related to its suspected illegal transactions with the P2P platform "Yindou.com". According to media reports, about a month after Ebang International submitted its listing application, Yindou.com issued an announcement stating that its actual controller Li Yonggang had lost contact, funds could not be redeemed, and operations were about to be stopped. The police reported that Yindou.com had been filed for suspected illegal fundraising.

Relevant information shows that from December last year to February this year, Cui Hongwei, the wife of Li Yonggang, the actual controller of Yindou.com, transferred nearly 525 million yuan to Ebang International. In March and April this year, Ebang International transferred another 380 million yuan to Cui Hongwei, and the remaining 145 million yuan is unknown. Ebang International has not yet made an official announcement on the details of the transfer and refund.

It is reported that some victims of Yindou.com believe that a large amount of funds raised by Yindou.com have flowed into Ebang International, which is preparing for a Hong Kong listing. Ebang International's prospectus shows that from 2015 to 2017, the company achieved revenues of 92 million yuan, 120 million yuan, and 978 million yuan, respectively. Among them, Ebang International's revenue in 2017 increased by nearly 9 times year-on-year; the victims suspect that this is due to the inflow of funds from Yindou.com used to inflate its sales revenue.

However, according to industry data, in 2017, thanks to the rapid development of Bitcoin, Bitmain and Canaan Creative, like Ebang International, achieved a substantial increase in revenue, with Bitmain's growth rate reaching 808.72%. As for whether the company has inflated its sales revenue, it is impossible to determine based on current evidence. However, due to this, Ebang International is reported to be cooperating with the investigation, and its listing progress may be affected.

Bitmain, the only one left among the “Big Three” mining machine companies, is also embroiled in lawsuits. It disclosed in its IPO application that it had received $400 million (about RMB 2.775 billion) in Series B financing from three investment institutions, Sequoia China, DST Global and GIC Private Limited, but the latter two subsequently denied the information. Therefore, within just one month after submitting its IPO prospectus, Bitmain was tainted with the stigma of “misleading investors with false statements.”

In fact, Ebang International and Bitmain are more like PGone. Even if they failed in the capital market, they at least died clearly. The silent annihilation of Canaan Creative can better represent the original sin of mining machine companies going public - born rebellious, and fate is determined by birth.

Qifeng Finance once explained in detail the financial situation and operating risks of Canaan Creative, Ebang International and Bitmain in the article "The Madman's Diary of the "Three Giants of Mining Machines"". The reasons that hinder mining machine companies from being accepted by the capital market are nothing more than their own business and external supervision.

From a business perspective, mining machine manufacturers that rely on the cryptocurrency ecosystem for survival also more or less include encrypted digital currencies in their revenue forms, which involves issues such as the value of digital currencies and tax compliance.

First, the high volatility of the price of coins will bring obvious instability to corporate finances. For the "mining tycoons" whose main business is highly concentrated in the manufacturing of mining machines, their ability to create sustainable value for investors is questionable. The prospectus shows that from 2015 to 2017, the price of Bitcoin increased from more than US$400 (about RMB 2,774.68) to US$14,000 (about RMB 97,100). Corresponding to the market, the three "mining tycoons" ushered in exponential growth.

However, by 2018, as the price of Bitcoin plummeted, the operating dividends of mining machine companies began to disappear. Take Bitmain as an example. Due to the fluctuation of cryptocurrency prices, the company suffered an impairment loss of US$103 million.

Secondly, there are no tax provisions for virtual currencies in Chinese law, and there is no consensus on whether digital currencies should be recognized as "intangible assets" as currently defined by mining machine companies. This is also one of the variables in whether mining machine companies can go public.

From the perspective of supervision, the biggest risk for blockchain practitioners is "policy risk", which is a commonplace. As early as when Canaan Creative failed to acquire Luyitong through a backdoor listing, the latter announced that the suspension of asset restructuring was due to changes in objective factors such as the domestic securities market environment and regulatory policies. In other words, this is also a necessary stage for every new thing.

The self-proclaimed glory of hip-hop singers and mining machine companies and the market's perception of them constitute a twisted arrogance and prejudice. Judging from the current trend, the fate of marginal traffic players will inevitably shift from "I am not born strong, I am just born to be strong" to "I am not born to be strong, I am just destined to be cold."

Curve Breakout Guide

Many investors have told Qifeng Finance that the current capital market obviously does not "leave a seat" for blockchain companies. But no matter what, there are counterexamples to everything. Gai, who withdrew from the competition, can still try his luck in mainstream online variety shows. Apart from the domestic exit channel, the world capital market has also set up several successful cases as a sign of hope.

According to incomplete statistics, at this stage, the entities planning to go public in the blockchain field mainly include three categories: mining machine companies, digital currency exchanges, and cryptocurrency financial service providers.

HIVE Blockchain, the light of the mining industry, landed on the Toronto Stock Exchange in Canada in September 2017, barely being the world's first listed mining machine company; the encrypted digital currency exchange Allcoin was listed on the CSE (Canadian Stock Exchange) in September 2013; and LongfinCorp, which was listed on the Nasdaq through Reg A+ at the end of 2017, is a financial services company. It is reported that after acquiring the blockchain company Ziddu, it began to provide financial services based on cryptocurrency.

The key word for overseas listing practices of blockchain companies is innovation in capital exit channels. Take the CSE mentioned above as an example. It is a traditional stock exchange that actively embraces blockchain technology. In February this year, CSE launched an innovative securities clearing and settlement platform using blockchain technology. The platform will enable companies to issue traditional equity and debt through tokenized securities, and these securities will be provided to investors through security token issuance. It is said that this is similar to the "STO" (Securities Token Offering Financing) that has been widely discussed recently.

Qifeng Finance previously mentioned STO in the article "Tesla's former employees are interested in Jia Yueting: I have 20 million, but I want to invest 900 million in FF". In fact, although Jia Yueting's acceptance of investment in blockchain companies has not been confirmed, there are indeed precedents of successful "blood transfusion" through STO. Hippy, VP of Red Bank Fund, said that the blockchain project "tzero" had raised funds through STO in October this year, "but they were originally ICOs, and later they were converted to STOs because the SEC did not approve them."

In short, the path of "saving the country by taking a roundabout way" is still open.

Back to China, although the regulatory policies currently issued by my country are diametrically opposed to ICO and corresponding virtual currency transactions, from a macro-strategic perspective, the country has always been sending friendly signals to blockchain. At the same time, industry investors generally believe that as foreign countries continue to mature in innovative exploration of capital exit from blockchain projects, China will also accelerate the pace of supporting emerging start-ups to go public, and the "Science and Technology Innovation Board" that has recently sparked widespread discussion may be a precursor.

Of course, no matter how a blockchain project is listed, it must "work hard on internal strength and pay attention to compliance." Based on this, it has to be said that mining machine companies are still relatively well-qualified among the many blockchain companies. On the one hand, there is room for transformation in business, and on the other hand, they have money.

According to reports, on October 17, 2018, Bitmain released the artificial intelligence chips BM1880 and BM1682, indicating that Bitmain has entered the field of artificial intelligence from a cryptocurrency company. Bitmain CEO Wu Jihan once said that he hopes that the company's AI revenue will account for 40% within five years and gradually get rid of the title of "mining machine manufacturer".

To this end, He Yiping, director of the Financial Research Center of the School of Economics and Management at Tsinghua University, said in an interview with the media that in the future, even cryptocurrency companies will have to have blockchain thinking. First, the problem of talent reserves must be solved, and secondly, there must be corresponding landing scenarios to help companies train and cultivate economic models.

For traffic stars who are born on the "margin", it will take time to put aside their past grudges. But as long as the external environment and internal governance go hand in hand, "great order" can still be expected after "great chaos".

Gai still has a chance, just like the pending mining machine companies, the unknown is also good news.