The three major mining machine companies all went to the Hong Kong Stock Exchange. Who will be the world's first blockchain stock?

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The three major mining machine companies all went to the Hong Kong Stock Exchange. Who will be the world's first blockchain stock?

In 2018, Bitmain, Canaan Creative and Ebang International successively submitted listing applications to Hong Kong. In the future, the first wave of listing of the world's first batch of blockchain startups may appear since Satoshi Nakamoto invented Bitcoin in 2009. The three companies are mainly engaged in the sales of digital currency mining machines, designing ASIC mining machine chips, and adopting the fabless foundry model. They have their own advantages and disadvantages in the market competition. Among them, Bitmain's prospectus shows that in 2017, the company has become the second largest chip design company in China and one of the top ten in the world in terms of revenue.

Competing for supremacy in the Central Plains: Competitiveness analysis of blockchain mining machine companies

In terms of market share, the industry is in a "three-legged race". According to a report by iResearch Consulting, three mining machine companies monopolize nearly 88% of the Bitcoin mining machine market, among which Antminer, owned by Bitmain, has become the leader in the market with a market share of more than 60%.

In terms of operating performance, in absolute terms, Bitmain's operating income and net profit in 2017 were more than 10 times that of Canaan Creative and Ebang International; but in terms of ROA and ROE, the profitability of the three major mining machine companies is generally higher than the industry average. Among them, Canaan Creative's ROA and ROE have increased for three consecutive years, performing the best among the three companies.

In terms of R&D capabilities, the three companies are competing for the lead, each with its own strengths and weaknesses. Bitmain's R&D funding is much higher than that of Canaan Creative and Ebang International. However, from the perspective of the proportion of R&D expenditure to revenue, Bitmain's R&D expenditure to revenue is relatively low, maintaining below 5% for many years, while Canaan Creative and Ebang International's R&D expenditure to revenue ratio has remained at a high level. In addition, under the pressure of transformation, Bitmain has devoted a lot of resources to the research and development of the AI ​​field, and the continued low investment in mining machine chips has brought a certain degree of impact on Bitmain's business.

Be prepared for danger in times of peace and worry about chaos in times of governance: the main risks faced by mining machine companies

In terms of regulatory risks, countries around the world tend to improve regulation of digital currencies, but the Chinese government has not yet officially issued laws and regulations on virtual currencies. This uncertainty in regulatory policies may have an adverse impact on corporate business operations and operating performance.

In terms of market risk, the main source of risk is the high volatility risk of encrypted digital currency prices. The operating income of mining machine companies is mostly in the form of encrypted digital currency, and the sales of mining machines are also closely related to the price of digital currency. Therefore, this market risk has a huge impact on the company's sustainable operating capabilities.

For the three mining machine companies, Bitmain's inventory turnover rate is slightly higher than that of Canaan Creative and Ebang International, but still lower than the industry (electronic equipment industry) average; in 2017, Canaan Creative and Ebang International's inventory turnover rates rebounded, but Bitmain's inventory turnover rate declined instead.

In terms of accounting risks, cryptocurrencies are identified as intangible assets with an indefinite useful life and are valued using the weighted average cost method rather than fair value. The impact of this is that when the price of cryptocurrencies plummets, the company's asset size and net profit face the risk of a sharp decline, but this risk cannot be reflected in the balance sheet; in addition, the company's operating income is mostly in cryptocurrencies, but this part of the income cannot be included in the company's cash flow statement, which means that the company's operating cash flow may continue to be negative in the report, which cannot correctly reflect the company's operating conditions and short-term viability.

Reinventing the old and welcoming the new, looking to the future: The AI ​​transformation path of mining machine companies

AI is the next technological trend. Like blockchain, AI is based on computing power. High-speed computing power and data processing are the basic elements of AI. The development of AI chips by mining machine companies is their main strategy to expand their business and diversify their operating risks. Currently, Bitmain and Canaan Creative have begun to layout the AI ​​chip market.

Risk Warning: At present, the domestic supervision of the blockchain industry is still unclear, which brings certain uncertainties to the future operation of enterprises. In addition, the digital currency market is currently characterized by high speculation and high volatility, which brings high risks to the operation of enterprises. The above risks may lead to the failure of enterprises to successfully go public.

Report Content

1. The three major mining machine companies all went to the Hong Kong Stock Exchange. Who will be the first blockchain stock in the world?

On September 26, 2018, Bitmain officially submitted its prospectus to the Hong Kong Stock Exchange. As a unicorn company in the blockchain field in mainland China, Bitmain's move has attracted strong attention from the market. If successful, Bitmain will become the third company with different voting rights to be listed on the Hong Kong Stock Exchange after Xiaomi and Meituan. In addition, Canaan Creative and Ebang International have submitted listing applications to Hong Kong earlier this year. In the future, the first batch of blockchain startups in the world may see the first listing wave since Satoshi Nakamoto invented Bitcoin in 2009.

Ebang International was established in 2010. According to its prospectus, Ebang International initially focused on developing telecommunications business, covering data communications, optical fiber transmission and microwave transmission equipment, and its customers are major Chinese telecommunications operators, such as China Mobile, China Unicom and China Telecom. In early 2014, the group's R&D team began to develop blockchain computing equipment, and launched its first self-branded Ebit E9 mining machine in early 2016. In 2018, it was delisted from the New Third Board and listed in Hong Kong.

Canaan Creative, the world's second largest Bitcoin mining machine manufacturer, was founded in 2013. Its main product is the "Avalon Miner". The company's founder, Zhang Nangeng, is famous for developing the first batch of encrypted digital currency mining machines with built-in ASIC chip technology. In addition, from 2013 to 2017, Canaan Creative successfully developed and mass-produced 110nm, 55nm, 28nm, and 16nm mining chips. In 2018, Canaan Creative successfully developed and mass-produced 7nm ASIC chips, which is a full generation ahead of its main market competitor , Bitmain's 16nm Ant S9 mining machine, with higher computing power and lower power consumption, and will have an advantage in the future competition for the Bitcoin mining machine market share.

Founded in 2013, Bitmain's main business areas are designing cryptocurrency mining and artificial intelligence ASIC chips. With the collapse of Bitcoin prices in 2014 and the market recovery in early 2015, as well as the advantages of its own mining machines with high energy and low consumption, Bitmain has successfully risen to become a leader in the blockchain industry, especially the blockchain mining machine market. According to ICWise, in 2017 , Bitmain has become China's second largest chip design company in terms of sales , and in the " 2017 China Unicorn Enterprise Development Report" released this year, Bitmain ranked 107th with a valuation of US$ 1 billion .

In terms of business model, the three mining machine giants, Bitmain, Canaan Creative and Ebang International, all adopt the foundry model, that is, the mining machine company is only responsible for the front-end logic design, back-end physical design and sales, and outsources the foundry and packaging testing work to third-party suppliers. This asset-light chip design model reduces the asset cost of the mining machine company, allowing the business focus to be placed on chip research and development and mining machine inventory management, ensuring the rapid development of the company.

Taking Bitmain as an example, Bitmain is mainly responsible for the front-end and back-end processes of ASIC chip design. Bitmain determines the parameters of the chip, builds the basic logic of the design, draws up a preliminary physical layout and performs back-end design verification. After passing the tape-out (trial production), the drawings are sent to the wafer foundry for large-scale production. In terms of wafer foundry, Bitmain's orders are handled by TSMC, and the manufactured chips are sent to Sun Moon Gang and Changdian Technology for packaging and testing; after the chip production is completed, Bitmain will commission a third-party service provider to perform PCB assembly and general assembly. It is worth mentioning that according to a report by Business Weekly, with the popularity of Bitcoin in the second half of 2017, Bitmain became TSMC's second largest customer in China that year, and it is expected that Bitmain will rank among TSMC's top five customers in the world in 2018.

2. The integrated circuit industry has great potential, and the blockchain field has emerged as a new force

2.1 Integrated Circuit Industry: Rapid Growth in Market Size and Strong Policy Support

Integrated circuits (ICs) are responsible for computing and storage functions and are the most important part of electronic devices. In the historical context of a new round of industrial revolution in the making, chips have become the core of all technologies and their strategic position is becoming increasingly higher. According to Frost & Sullivan, the market size of the global integrated circuit industry has grown from US$251.8 billion in 2013 to US$341.4 billion in 2017, with a compound annual growth rate of 7.9%, and it is expected that the global integrated circuit industry will further grow at a compound annual growth rate of 9.0%, reaching US$465.1 billion by 2020. Benefiting from China's policy support and domestic industrial transformation and upgrading, China's integrated circuit market has grown rapidly in recent years. According to Frost & Sullivan data, China reached US$79.2 billion by 2017, with a compound annual growth rate of 21.1%, and it is expected that the market size will further grow to US$125.2 billion in 2020.

Fabless chip design companies are semiconductor companies that only engage in the design, research and development, application and sales of wafers and chips, and outsource wafer manufacturing to professional wafer foundries. According to Frost & Sullivan, the market size of the global fabless chip design industry measured by sales revenue increased from US$62.9 billion in 2013 to US$77 billion in 2017, with a compound annual growth rate of 5.2%. Driven by the Internet of Things and AI technologies, the fabless chip design industry is expected to grow further at a compound annual growth rate of 9.6% in the future, reaching US$101.1 billion by 2020. In recent years, Chinese fabless chip design companies have increasingly attached importance to independent research and development and design. The chip design industry has developed rapidly at a compound annual growth rate of 26.3%. By 2017, the market size reached US$30.3 billion, and it is expected to reach US$49.2 billion by 2020.

Integrated circuits can be divided into general-purpose integrated circuits and ASIC chips. Unlike general-purpose ICs, ASICs are customized for specific purposes. Compared with general-purpose integrated circuits, ASICs have the advantages of smaller size, lower power consumption, improved reliability, improved performance, enhanced confidentiality, and lower costs when mass-produced. According to Frost & Sullivan, the global market size of ASIC chips reached US$25.7 billion in 2017, a year-on-year growth rate of 17.88%. Due to the high performance and low power consumption of ASICs, the demand for ASIC chips for cutting-edge technologies such as machine learning is expected to rise, reaching US$59.7 billion by 2022, with a compound annual growth rate of 18.4%.

In recent years, my country's integrated circuit industry has developed rapidly, and its overall strength has been significantly improved. The gap between integrated circuit design and manufacturing capabilities and the international advanced level has been continuously narrowed, and packaging and testing technology has gradually approached the international advanced level. Some key equipment and materials have been adopted by domestic and foreign production lines. A number of backbone enterprises with certain international competitiveness have emerged, and the industrial agglomeration effect has become increasingly obvious. However, the integrated circuit industry still has outstanding problems such as weak continuous innovation capabilities, disconnection between industrial development and market demand, lack of coordination in various links of the industrial chain, and imperfect policy environment adapted to the characteristics of the industry. There is still a large gap between the level of industrial development and that of advanced countries (regions). Integrated circuit products rely heavily on imports, making it difficult to form a strong support for building the core competitiveness of the national industry and ensuring information security. Therefore, the state and local governments have continuously issued relevant policies to support the development of integrated circuits and accelerate the pace of catching up with advanced countries (regions).

2.2 Blockchain field: Blockchain technology is in the ascendant, and the mining machine market is surging

With the increasing acceptance and popularity of the cryptocurrency market, the cryptocurrency market has achieved significant growth in the past five years. According to coinmarketcap data, the total market value of the cryptocurrency market has reached a peak of US$566.3 billion. As of October 10, 2018, there are 2,054 types of digital currencies in the world. The popularity of cryptocurrency has attracted more and more people to open accounts in various exchanges to trade cryptocurrencies. For example, the number of users of Coinbase, one of the world's leading cryptocurrency exchanges, has surged. The total number of Coinbase accounts has rapidly increased from approximately 500,000 in 2013 to approximately 13.3 million in 2017, with a compound annual growth rate of approximately 124.9%. As of June 30, 2018, Coinbase had 20 million managed user accounts.

Cryptocurrency "mining" is similar to mining gold, which adds transactions to the blockchain and releases new cryptocurrencies into circulation. In the case of Bitcoin, for example, based on the Bitcoin algorithm, a new block is created at a rate of approximately every 10 minutes. The actual time it takes to create a block can vary depending on a number of factors, including the number of transactions to be verified in the network and the total hash rate, but the mining difficulty level is set to adjust periodically based on the number of existing block creations in order to achieve this goal of every 10 minutes. Currently, 12.5 bitcoins are awarded for each solved block, with a total of 698,913 bitcoins created in 2017. However, the total supply of cryptocurrencies is fixed. In the case of Bitcoin, the total supply of bitcoins is set at 21,000,000, and as of June 15, 2018, more than 17,000,000 bitcoins have been awarded, accounting for more than 80% of the total supply. The number of bitcoins rewarded for solving a block during the verification process will be halved every 210,000 blocks, or approximately every four years, until the total supply is exhausted around 2140.

In recent years, as blockchain technology has been increasingly widely used and cryptocurrencies have become more attractive, especially as the price of cryptocurrencies has increased, the sales of cryptocurrency mining machines have also risen. Mining machines for Bitcoin mining are the main part of Bitcoin computing hardware. According to Frost & Sullivan, in the next five years, the market size (in terms of revenue) of the global ASIC-based cryptocurrency mining machine market is expected to increase to US$17.1 billion in 2022, with a compound annual growth rate of 41.3%, mainly driven by the increasing demand of miners for mining machines with low energy consumption and high operating efficiency due to the increasing difficulty of mining.

3. Fighting for supremacy: Competitiveness analysis of blockchain mining machine companies

3.1 Industry status: Three major players, the strong ones become stronger

Compared with the embarrassing situation of my country's semiconductor industry reflected by the "ZTE incident", in the upstream mining machine market of encrypted digital currency, Chinese enterprises have an absolute advantage in the research and development and design of blockchain mining machine chips. Blockchain mining machine companies represented by Bitmain, Canaan Creative and Ebang International have a monopoly in the global mining machine market. According to a report by iResearch Consulting, three mining machine companies monopolize nearly 88% of the Bitcoin mining machine market, among which Antminer, owned by Bitmain, has become the absolute leader in the Bitcoin mining machine market with a share of about 64.5% of the total network computing power and 60.7% of sales revenue.

3.2 Business performance: Bitmain is far ahead, while Canaan Creative is growing steadily

In 2017, the cryptocurrency industry exploded, and large-scale mining farms sprang up like mushrooms after rain, driving the business development of mining machine companies. The sales volume and unit price of mining machines were affected by the expected economic returns of Bitcoin mining. Among them, Bitmain had the highest operating income, which was about 12 times that of Canaan Creative and 16 times that of Ebang International in 2017, reaching 16.452 billion yuan, a year-on-year increase of 806.79%. Canaan Creative and Ebang International have smaller revenue scales. In 2017, Canaan Creative's revenue scale reached 1.308 billion yuan, but the growth rate fell from 562.22% in 2016 to 314.12% in 2017; Ebang International's revenue in 2017 increased by 710.35% to 978 million yuan.

In terms of net profit, Canaan Creative and Bitmain have maintained a net profit growth rate of more than 1 times every year for three consecutive years. In 2017, with the popularity of encrypted digital currencies, mining machine sales climbed, blockchain business grew rapidly, and the net profits of the three mining machine companies increased significantly. Among them, Bitmain's net profit increased by 534.28% to 4.583 billion yuan, which is 13 times the 361 million yuan of Canaan Creative in the same period, and about 12.5 times the 385 million yuan of Ebang International.

In terms of profitability, the gross profit margins of the three mining machine companies are relatively high, reaching more than 40% . Canaan Creative's gross profit margin has increased year by year, while Bitmain and Ebang International's gross profit margins are relatively stable. In terms of net profit margin, Bitmain's net profit margin in 2017 showed a significant decline, while the decline in gross profit margin in the same period was not obvious, indicating that Bitmain's other cost control in 2017 was not very good, resulting in a decline in profitability; while Canaan Creative's net profit margin has maintained a steady increase in the past three years, gradually increasing from 3.16% in 2015 to 27.59% in 2017.

Judging from the return on equity ( ROE ) and return on total assets ( ROA ), the profitability of the three major mining machine companies is generally higher than the industry average. Among them, Bitmain's profitability is much higher than Canaan Creative and Ebang International, but its ROE and ROA have declined. According to Bitmain's prospectus, the sharp decline in Bitmain's ROA in 2017 was mainly due to its debt financing and increased financial leverage in 2017. Canaan Creative's ROE and ROA have increased year by year, and its profitability is constantly increasing. Therefore, its future profit expectations are the best among the three companies. Ebang International's ROE and ROA dropped significantly in 2016, mainly because its profits in 2016 fell, and its net assets and total assets increased. In 2017, Ebang International's profitability recovered.

From the perspective of revenue structure, the revenue of the three major mining machine companies mainly comes from the sales of mining machines. Among them, Bitmain's mining machine sales revenue increased from 700 million in 2015 to 14.8 billion in 2017. In 2017, the proportion of mining machine sales revenue increased to 89.89%. Part of the revenue contribution came from self-operated mining, but due to factors such as the increase in mining difficulty, the proportion of self-operated mining revenue has been declining year by year. In 2015, 25% of Canaan's revenue came mainly from ASIC chip sales, and its system product (AvalonMiner) sales accounted for about 75%. By 2016 and 2017, Canaan's revenue almost all came from mining machine sales. Ebang International shifted its business focus to blockchain business in 2017, and most of its revenue mainly came from BPU mining machine sales. The proportion of telecommunications business revenue has been declining year by year, from 68.30% in 2015 to 5.44% in 2017.

3.3 R&D capabilities: competing for the lead, each with its own advantages and disadvantages

As fabless chip design companies, mining machine companies need to enhance their R&D capabilities and continuously increase R&D expenditures to ensure the market competitiveness of mining machine chips. In 2015, the R&D expenditures of Bitmain and Ebang International reached tens of millions, and in 2017, Bitmain's R&D expenses reached an astonishing 470 million yuan, far higher than the R&D expenses of Canaan Creative and Ebang International. Canaan Creative's R&D expenses in 2015 were only 5 million yuan. Since 2016, Canaan Creative has increased its R&D expenses by 100% every year, and in 2017, its R&D expenses reached 100 million yuan, surpassing Ebang International.

However, from the perspective of the proportion of R&D expenditure to revenue, due to Bitmain's high revenue, its R&D expenditure to revenue ratio is relatively low, which has been maintained at below 5% for many years, while Canaan Creative and Ebang International's R&D expenditure to revenue ratio has always remained at a high level. In 2017, due to the extremely hot digital currency, the operating income of the three mining machine companies all experienced explosive growth that year. Therefore, although the R&D expenses of the three companies in 2017 declined in the financial reports, in fact, the R&D expenditures of the three companies in 2017 still maintained a high growth.

In the past few years, Bitmain has become the absolute leader in the mining machine market with the advanced technology and craftsmanship of the Antminer series. However, Bitmain has continued to maintain a low ratio of R&D expenditure to revenue, and on the other hand, it has been forced to devote a large amount of resources to the research and development of the AI ​​field due to the need for transformation. The continued low investment in mining machine chips has brought a certain degree of impact on Bitmain's business.

The most notable example is that Bitmain's main mining machine product is still the Antminer S9 miner developed in 2016. The chip used is still the 16 nm process. It has not developed a new generation of mining machine products for two whole years. This is very rare in the field of digital currency mining machines with an iteration cycle of half a year to a year. According to a survey by Caijing magazine, the unit power consumption of the new generation of BTC mining machines should be below 70. There are currently two mining machines on the market that meet this indicator - Shenma Miner M10 is 66W/T, and Xindong Miner T2turbo+ is 69W/T, while the power consumption of Bitmain Miner S9 is the lowest at 104W/T, which is 37% higher than Shenma Miner M10 and 33% higher than Xindong Miner T2. In addition, in 2018, Canaan Creative took the lead in announcing the successful development and mass production of 7nm chips, which means that Canaan Creative's Avalon mining machine does not need to be optimized like Bitmain to achieve twice the computing power of Bitmain's Antminer S9 mining machine, which seriously shook Bitmain's leading position in the mining machine market.

4. Be prepared for danger in times of peace and worry about chaos in times of governance: the main risks faced by mining machine companies

4.1. Regulatory risks: Supervision is gradually improving and the attitude is becoming more cautious

Looking at the world, countries tend to improve regulation of digital currencies, and the only difference is whether to first tighten and then loosen or first loosen and then tighten. At present, some countries have standardized the management of digital asset exchanges and clarified the regulatory plan. Autonomous Next divides the regulation of digital currencies in various countries and regions around the world into four categories based on the strictness of the regulatory attitude towards cryptocurrencies and the level of application of blockchain technology: (1) countries with a prudent regulatory attitude and digital currency-related activities are ordered to be banned, such as China, India and other countries; (2) countries with a neutral or no regulatory attitude, such as Indonesia, the United Kingdom and other countries; (3) countries with a complex regulatory attitude, with both positive and negative sides, such as the United States and Russia; (4) countries with a positive regulatory attitude and encouraging the development of encrypted digital currencies, such as Australia, Canada and other countries.

At present, the Chinese government has not yet officially issued laws and regulations on virtual currency. Regulatory policies are mostly issued in the form of notices or announcements. The two most important documents are the "Notice on Preventing Bitcoin Risks" jointly issued by the People's Bank of China and five other ministries on December 5, 2013, and the "Announcement on Preventing Token Issuance and Financing Risks" jointly issued by the People's Bank of China and seven other ministries on September 4, 2017.

Among them, the "Notice on Preventing Bitcoin Risks" clarifies the nature of Bitcoin, stating that Bitcoin is not issued by monetary authorities, does not have monetary attributes such as legal compensation and compulsion, and is not a real currency. In terms of nature, Bitcoin is a specific virtual commodity that does not have the same legal status as currency and cannot and should not be circulated and used as currency in the market.

For mining companies, government authorities may continue to issue new laws, rules and regulations regarding the cryptocurrency industry in which they operate, and strengthen the enforcement of existing laws, rules and regulations. Under the uncertainty of new policies, companies may not be able to guarantee that existing or future systems regarding the mining, holding, use or transfer of cryptocurrencies will not have an adverse impact on their business operations and operating results. Therefore, it is crucial for companies to have the ability to respond or reflect on relevant policies or regulatory measures in a timely, proactive and effective manner.

4.2. Market risk: Cryptocurrency prices fluctuate greatly, and sales management is difficult

4.2.1. The price fluctuation of encrypted digital currency is too high, which has a great impact on corporate revenue

The business and financial status of blockchain mining machine companies are closely related to the market price of encrypted digital currencies: when the price of encrypted digital currencies rises, the market demand for related mining machines increases, and the operating income of mining machine companies will also rise; conversely, when the price of encrypted digital currencies falls, the market demand for mining machines will also fall, causing mining machine companies to fall into operating difficulties. The most obvious example is that when the price of Bitcoin continued to be sluggish in 2015, a large number of mining machine companies went bankrupt. Therefore, the impact of changes in digital currency prices on the company's sustainable operating ability is very huge.

Unlike other commodities, cryptocurrencies are inherently highly speculative and volatile. In early January 2017, the price of Bitcoin was only around $1,000, but by early January 2018, it had reached an astonishing high of $17,400. In the following months, the price of Bitcoin quickly halved to $6,000, showing the huge volatility of Bitcoin prices. This huge price volatility directly affects the price of mining machines and market demand, so blockchain mining machine companies are facing huge risks of digital currency price fluctuations.

4.2.2. Inventory and repayment risks: Inventory management is crucial, and accounts receivable are higher than the industry average

For mining machine companies, in order to successfully operate their business and meet customer requirements and expectations, enterprises must maintain a certain level of finished product inventory to ensure timely delivery when needed. However, if the inventory level cannot be maintained in line with the market demand for the product, it will lead to the mining machine company's sales loss and the risk of excessive inventory and high holding costs, which will have a significant adverse impact on the company's business, financial condition and operating results.

For the three mining machine companies, Bitmain's inventory turnover rate is slightly higher than Canaan and Ebang, but still lower than the industry (electronic equipment industry) average; in 2017, Canaan and Ebang's inventory turnover rates rebounded, but Bitmain's inventory turnover rate fell instead. However, Bitmain and Canaan's accounts receivable turnover rates are high, far higher than the industry average. In the case of a sluggish cryptocurrency market, this part of the accounts receivable is at risk of becoming bad debts. Relatively speaking, Ebang's accounts receivable turnover rate is low, which increased in 2017 and is at the industry average.

4.3. Accounting risks: risks under the new accounting rules for cryptocurrencies

In the financial report disclosed by Bitmain this time, audit disclosure of encrypted digital currency was made historically, but since there are no relevant regulations in the national accounting standards, there may be related cross-start risks involved.

According to Bitmain's prospectus, cryptocurrencies are identified as intangible assets with an uncertain useful life, and are valued using the weighted average cost method rather than at fair value on each accounting reference date to avoid the impact of excessive volatility in the price of cryptocurrencies. In terms of disclosure, cryptocurrencies are divided into two categories: cryptocurrencies (including BTC , BCH , etc.) and crypto tokens (mainly tokens created by ERC20 contracts). Cryptocurrencies are classified as " current assets - cryptocurrencies " , while crypto tokens are classified as " current assets - other financial assets " .

According to Bitmain's financial report, the cryptocurrency assets held by Bitmain have grown rapidly from US$12 million in 2015 to about US$880 million in June 2018. In 2016 , the scale of Bitmain's cryptocurrency assets exceeded the scale of cash and equivalents, and its proportion of total assets also increased from 9.92% in 2015 to 28.03% in June 2018. Therefore, cryptocurrency assets occupy an important position in Bitmain's corporate operations. However, the high risk of cryptocurrency prices also brings high risks to the company.

When conducting impairment tests and impairment provisions for cryptocurrencies at the accounting date, the recoverable amount is the higher of the fair value minus the cost of selling and the value in use, while the value in use is the expected cash flow generated by the asset discounted to its present value, which requires significant judgments on the relevant income level and the amount of operating costs. According to Bitmain's financial statements, in the past four years from 2015 to 2018, only $102 million of impairment provisions were made on June 30, 2018. However, according to the market risks mentioned above, the price of Bitcoin has fallen from a high of $17,000 in January to around $6,000 this year, a drop of more than 50%. It is obvious here that under the principle of which is higher between fair value and value in use, the present value of the expected cash flow when determining the value in use is higher than the current fair value, so only about 10% of the impairment provision was made. If the cryptocurrency is revalued at fair value, the company's cryptocurrency assets will shrink significantly. From this perspective, the high profitability reflected in Bitmain's financial report is inaccurate.

Since Bitmain's business is concentrated on the sales of mining machines, mining farms, and mining pools, a large amount of its revenue is mainly in the form of encrypted digital currencies. In accounting treatment, operating income related to cryptocurrencies is recognized according to different categories, as shown in the following table:

Since the main form of Bitmain's business income is cryptocurrency, and cryptocurrency is separately placed in the " Current Assets - Cryptocurrency " account when it is disclosed, this leads to a serious problem, that is, the company's operating cash flow may continue to be negative in the financial statements. As shown in the figure below, Bitmain's operating cash flow has continued to be negative in recent years, reaching a staggering $621 million in June 2018, while the profit in the same period reached $700 million. According to Bitmain's prospectus , in 2015, 2016, 2017 and the first half of 2018, the company recognized revenue in the form of cryptocurrency of $54 million, $118 million, $855 million and $750 million, respectively, accounting for 39.42%, 42.45%, 33.96% and 26.35% of the company's total revenue, respectively. However, such an important source of income cannot be included in the cash flow statement, resulting in the inability to correctly reflect the company's operating conditions and short-term viability .

4.4. Technical risks: The difficulty of blockchain network is gradually increasing, and the curse of Moore's Law

4.4.1. The difficulty value of the blockchain network is gradually increased

The difficulty value of the Bitcoin network is not static, but will be adjusted according to the computing power of the entire network to ensure a certain block time. As Bitcoin and blockchain technology are gradually accepted by the public, more and more miners are joining the Bitcoin mining industry, and the computing power of the entire network is also constantly increasing. The increase in the computing power of the entire network means an increase in the difficulty of mining, that is, the number of Bitcoins mined per unit time by a mining machine with unupgraded computing power will decrease, which will eventually lead to an increase in the cost of obtaining a Bitcoin. The Bitcoin blockchain adjusts the difficulty approximately every two weeks. We use the difficulty value change rate of 5%, 8%, and 11% to calculate the dynamic benefits and costs of Bitcoin mining in the next year. The results are shown in Figure 15. It can be seen from the figure that for a mining machine with unchanged computing power, due to the increase in the computing power of the entire network, its cost of obtaining a unit of Bitcoin in the next year will also increase.

In reality, the adjustment of the difficulty value is linked to the total network computing power, and the level of the total network computing power is directly related to the price of Bitcoin: the higher the price of Bitcoin, the more miners will rush into mining, which will in turn increase the total network computing power and increase the difficulty of mining; conversely, the difficulty of mining will decrease. The situation of reduced total network computing power briefly occurred when the Bitcoin price collapsed in 2015, but with the gradual popularization of digital currencies, more and more people began to pay attention to Bitcoin. Even in the digital currency bear market in 2018, a large number of miners still poured into the field of Bitcoin mining. Therefore, the total network computing power will continue to rise in the future. Unless the computing power of the mining machine is upgraded, the mining cost will become higher and higher. However, mining machine chips also follow Moore's Law. The performance of ASIC mining machine chips will double approximately every two years. Therefore, the risk of blockchain network difficulty adjustment mainly comes from the competition between the speed of increase in total network computing power and Moore's Law.

4.4.2. Risks of Chip R&D: Fierce Competition under Moore's Law

If any mining machine company wants to gain an advantage in the market competition, the most important thing is that its ASIC chip technology and performance must be in a leading position in the market. At present, the ASIC chips used for digital currency mining have an iteration cycle of half a year to one year, and the tape-out process is a key link in the business of enterprises. Successful tape-out means that the company has completed all stages of the ASIC chip design and verification process. The tape-out process is very expensive, and repeated failures will increase the cost of mining machine companies, and more importantly, extend the product development cycle, causing companies to lose their competitive advantage in the market. According to a report by Caijing magazine, Bitmain has had several tape-out failures, with an estimated loss of about 6 billion yuan.

5. Getting rid of the old and embracing the new, looking to the future: the AI ​​transformation path of mining machine companies

At present, mining machine companies are facing the problems of single company revenue, unstable main business revenue, and profits greatly affected by the price of coins. Undoubtedly, AI is the next outlet of the Internet. Like blockchain, the foundation of AI is also computing power. High-speed computing power and data processing are the basic elements of AI. As the integrated circuit chips developed for blockchain become more specialized and targeted, ASIC chips can be customized for specific target scenarios and can support AI in terms of image recognition, voice recognition or data analysis. Therefore, experienced ASIC chip design companies also have relevant expertise in the field of AI. Looking at the world, the AI ​​industry is growing strongly. According to Frost & Sullivan, the AI ​​market size has grown from US$13.2 billion in 2013 to US$104.4 billion in 2017, with an annual compound growth rate of 67.7%. It is expected that the global industry will continue to grow to US$261.3 billion in 2020.

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Canaan Creative began to develop ASIC chips for artificial intelligence applications in 2016, and plans to mass-produce edge computing chips (KPUs) in the fourth quarter of 2018. Its KUPs involve artificial neural networks and high-performance processors, mainly providing diversified, real-time and offline artificial intelligence applications, with the goal of smart home, voice and natural language recognition. The strategy is to continue to design and launch KPUs and other artificial intelligence applications ASIC chips. According to Canaan Creative's strategic plan, the company will first focus on edge computing and continue to explore applications in the field of IoT, such as smart cities, intelligent monitoring, smart toys and high-performance applications (such as driverless cars). At the same time, it will continue to maintain and supervise new strategic cooperation and alliances with industry partners to enhance industry influence and overall competitiveness, and build a platform for the future transformation to artificial intelligence technology.