The way out for the “mining tyrants”

In China's cryptocurrency field, there are three "mining giants", namely Canaan Creative, Ebang International and Bitmain. The computing power they sell accounts for almost all of the international mining computing power.

For these giants, entering the capital market is a topic of conspiracy among the "mining tyrants".

But the road does not seem to be smooth.

Recently, Canaan Creative, known as the "first blockchain stock in Hong Kong", is once again facing financing difficulties. Almost at the same time, two other "mining giants" are also facing similar challenges.

Today, the development of the cryptocurrency market is facing many obstacles. A person in the cryptocurrency circle told Renminct (public account ID: renminct) that this is mainly due to the decline in the value of cryptocurrency, the decline in trading credibility, the lack of technical talents, and the inability to implement top-level design.

He Yiping, director of the Financial Research Center of the School of Economics and Management at Tsinghua University, said in an interview with Renminct (public account ID: renminct) that if we want to improve these difficulties today, we must focus on applying technology to practice, drive out dishonest companies in the business process, and bring in talents and economists. Although blockchain is not favored in the short term, from a long-term perspective, it may have good development space.

Listing rejected

On May 5, Canaan Creative submitted an IPO application to the Hong Kong Stock Exchange. Morgan Stanley, Deutsche Bank Group, Credit Suisse and CMB International served as its joint sponsors. Its fundraising target was originally expected to be US$1 billion, and later targeted at at least US$400 million.

According to the prospectus, Canaan Creative is a fabless IC design company that provides advanced semiconductor solutions for complex computing problems, especially in high-performance and repetitive computing ASIC chips, and is a leading IC design company.

Data from consulting firm Frost & Sullivan shows that in 2017, Canaan Creative's mining product shipments accounted for 19.5% of total computing power, ranking second in the world.

As a member of the "mining tyrants", Canaan Creative has had an extremely strong growth path from its early days to the present.

From 2015 to 2017, digital currencies have seen a surge in value, and blockchain-related companies have seen their profits rise accordingly. Canaan Creative's revenue in 2015 was RMB 47.7 million, which grew to RMB 1.308 billion in 2017, with a compound annual growth rate of 423.7%; net profit also grew from RMB 1.5 million in 2015 to RMB 360 million in 2017, with a compound annual growth rate of 1,445%.

However, such rapid momentum cannot help Canaan Creative to overcome difficulties in the capital market.

On November 14, according to the latest IPO review announcement of the Hong Kong Stock Exchange, the listing material review process of Canaan Creative, China's second largest Bitcoin mining machine manufacturer, was interrupted. The Hong Kong Stock Exchange's official website showed the status as invalid, and its IPO was declared a failure.

This is not the first time that Canaan Creative has failed in its attempt to enter the capital market, but the third time.

At the beginning, Canaan Creative attempted to list on the A-share market.

In 2016, A-share listed company Luyitong planned to acquire all the shares of Canaan Creative for RMB 3.06 billion.

The materials show that the shareholding ratios of the top two shareholders in this acquisition are similar, and this situation was interpreted by market insiders as a "backdoor" listing.

Because the promised post-listing performance and valuation disclosed in the IPO plan were deemed difficult to achieve, the company was questioned several times by the Shenzhen Stock Exchange.

In the end, Luyitong announced that due to changes in objective factors such as the domestic securities market environment and regulatory policies, this major asset reorganization was declared suspended.

This means that the attempt to enter the capital market has failed.

In August 2017, Canaan Creative made its second attempt, this time targeting the New Third Board.

The National Equities Exchange and Quotations, the operator of the New Third Board, conducted three rounds of inquiries to Canaan Creative. Although Canaan Creative responded to all the inquiries, the results ultimately came to nothing.

He Yiping believes that Canaan Creative failed to go public mainly because similar companies do not have sustainable cash flow and no future. Although mining machine companies like this make huge profits through short-term profits, profits do not mean sustainability. As a listed company, an important obligation is to bring sustainable returns to investors through operations. If there is no sustainable ability, it will naturally not be able to go public.

Misfortunes never come singly

In addition to Canaan Creative, the other three "mining giants" are Ebang International and Bitmain.

Bitmain's main business focuses on the design and sales of digital cryptocurrency mining equipment and digital artificial intelligence ASIC chips.

The prospectus shows that Bitmain is the world's largest ASIC-based cryptocurrency mining machine company, accounting for 74.5% of the global market share. Among them, Bitmain's main income comes from four aspects, namely mining machine sales, mining pool operations, mining field services and self-operated mining.

Compared with Bitmain, Ebang International mainly designs, produces and sells blockchain processors. It also has the ability to design ASIC chips. Its development can be traced back to Zhejiang Ebang in 2010.

At that time, Ebang International was mainly engaged in communication network access equipment. After the rise of blockchain technology in 2014, Ebang International began to develop, produce and sell blockchain processors BPU, also known as mining machines.

According to data from Bernstein and iResearch, the top three manufacturers in the global Bitcoin BPU market accounted for 90% of the total sales revenue and computing power sold in 2017. Among them, Ebang International ranked third with a market share of 11%. In addition, Bitmain ranked first, accounting for 75% of the market share, and Canaan Creative ranked second, accounting for 14% of the market share.

In addition to their main businesses, the business profit proportions of the "mining tyrants" are also very similar.

As of 2017, Bitmain’s mining machine sales amounted to US$2.263 billion, accounting for 89.9% of its revenue; Ebang International’s blockchain business accounted for 94.6%, and Canaan Creative’s mining machine sales accounted for 99.1%.

Because their main businesses are similar, their development trajectories and trends in catering to the overall digital currency environment are also similar.

In the three years from 2015 to 2017, the prices of digital currencies represented by Bitcoin soared. In 2015, the price of a Bitcoin was more than US$400, and in 2017 it was US$14,000, a 35-fold increase.

During this period, the three major "mining giants" developed at a rocket-like rate.

From 2015 to 2017, Canaan Creative's main business revenue had a compound annual growth rate of 423.7%; its net profit had a compound annual growth rate of 1445%; during the same period, Bitmain's revenue increased from US$137 million to US$2.518 billion, and its net profit increased from US$48.603 million to US$701 million; Ebang International's revenue also increased from RMB 90 million in 2015 to nearly RMB 1 billion in 2017.

By 2018, as the price of Bitcoin plummeted, the business situation of the "mining tyrants" was not optimistic. Take Bitmain as an example. Due to changes in cryptocurrency prices, the company suffered an impairment loss of US$103 million.

In addition to the difficult operating situation, cryptocurrencies also face risks in other areas.

Bitmain's prospectus shows that the company is facing the risk of "issuing new laws, rules and regulations regarding the cryptocurrency industry in which it operates and strengthening the enforcement of existing laws, rules and regulations."

The IPO application of Ebang International stated that the market does not accept blockchain technology and even loses confidence, which is not conducive to the development of cryptocurrencies such as Bitcoin and will hinder the prospects of upstream mining machines. In addition, there are uncertainties in the economic returns of cryptocurrency mining activities, the popularity of Bitcoin, and the regulatory environment in China and overseas markets.

Brothers in distress

After Canaan Creative planned to list on the Hong Kong stock market in May 2018, Ebang International followed suit in June and submitted an IPO application on the Hong Kong stock market. In the same year, Bitmain also submitted its prospectus.

In addition to Canaan Creative, it is also difficult for the other two "mining giants" to go public.

Previously, in 2015, Zhejiang Yibang successfully landed on the New Third Board, but was delisted from the New Third Board in 2018 and then prepared to enter the Hong Kong market.

Regarding why the company was delisted, a director of Yibang International once revealed that trading on the New Third Board was not active, so it was in the best interests of the group to switch from the New Third Board to the Hong Kong market.

Recently, the Hong Kong Stock Exchange halted the IPO of Ebang International. It is reported that Ebang International is suspected of participating in illegal fund-raising, mainly involving illegal transactions with the P2P platform Yindou.com.

Almost a month after Yibang International submitted its application for listing, on July 18, Yindou.com announced that its actual controller Li Yonggang had lost contact, funds could not be redeemed, and operations were about to cease. The police reported that a case had been filed against Yindou.com for suspected illegal fundraising.

From December last year to February this year, Cui Hongwei, the wife of Li Yonggang, the actual controller of Yindou.com, transferred 524.9 million yuan to Yibang International. From March to April this year, Yibang International transferred 380 million yuan to Cui Hongwei, and the remaining 144.9 million yuan went to unknown destinations. The victims of this illegal behavior believe that the above more than 500 million yuan of funds belong to Yindou.com investors and Yibang International should return them.

Affected by this, Yibang International is cooperating with the police investigation and the listing time has been affected.

Bitmain also had a difficult time. Just one month after submitting its listing application in September, it was found by relevant authorities to have "misled investors with false statements." Bitmain stated in its prospectus that it had received $400 million in Series B funding from Sequoia China, Russian investment firm DST Global, and Singapore government investment company GIC Private Limited. Both DST Global and GIC subsequently denied the allegations.

Bitmain's listing is erratic. After Bitmain applied for listing in September 2018, the Hong Kong Stock Exchange did not include Bitmain in the list of pending issuers disclosed on September 14. A person close to Bitmain told China Entrepreneur that Bitmain has temporarily shelved its listing plan due to the current negative public opinion.

On September 20, Calvin Ayre, founder of digital currency information website Coingeek, broke the news on Twitter that Bitmain will terminate its IPO and try to restructure. Jiemian News reporter learned from an insider close to Bitmain’s senior management that Bitmain has indeed terminated its IPO.

When Bitmain’s listing was basically “sentenced to death”, the latest news came out. On November 5, the Hong Kong Stock Exchange was suspected to have a temporary code for Bitmain, with the number 90027, and Bitmain’s listing was suspected to have been approved.

However, there is still no definite information confirming Bitmain’s listing until now.

Challenges and Breakthroughs

In He Yiping's view, both cryptocurrency companies and blockchain companies face great difficulties.

Cryptocurrency companies mainly include mining companies, mining machine companies and exchanges. He Yiping said that in the development process of these companies in the past two years, they made a lot of money due to the blind speculation of investors. Due to the strong speculative nature, they are not sustainable. If everyone realizes that the currency circle is not profitable, then the sales of mining machines will inevitably decline and the traffic of exchanges will also be frustrated.

He Yiping believes that the development of the cryptocurrency circle has just started. In the past, there was an overabundance of virtual coins, it was easy to make money, and bad money drove out good money. Many technicians originally had the ambition to engage in technological research and development, but when they saw that money came so easily, they had no motivation to develop and apply technology.

Blockchain companies also face difficulties. He Yiping believes that the first is technology. Today's blockchain technology is imperfect, slow, the ecological construction is not sufficient, and the talent is limited. For blockchain teams, it is not enough to have only a technical team, because they do not have enough experience in building ecological models and economic models, which requires a large number of economic talents. In general, this process is very slow, and blockchain companies involved in currency are condemned by everyone, and everyone has doubts about the credibility of blockchain companies. These are all difficulties.

In order to achieve a successful breakthrough, a series of companies led by Bitmain began to try to transform.

On October 17, Bitmain officially released the terminal artificial intelligence chips BM1880 and BM1682. As a cryptocurrency company, the research and development of chips represents Bitmain's entry into the field of artificial intelligence.

Currently, Bitmain's revenue mainly comes from mining machines and other related businesses. In the first half of this year, mining machine sales accounted for as much as 90%. However, Bitmain CEO Wu Jihan hopes that within five years, AI revenue will account for 40% and gradually get rid of the title of mining machine manufacturer.

He Yiping said that in the future, even cryptocurrency companies must have blockchain thinking and try to break through technical bottlenecks. For technological research and development, it is not enough to have only paper and theoretical technology. Implementation and application require very complex economic models and ecological models, which require sophisticated design. Therefore, the first thing to do is to solve the problem of talent reserves, and secondly, there must be corresponding implementation scenarios to help companies exercise and cultivate the construction of economic models.

He Yiping believes that in the past two years, a large number of people working in the currency and blockchain circles have made a lot of money from them. If they do not do practical things in the future, their survival will definitely face a crisis.

(Editor: Zhang Chen)