Why is Bitmain worth 50 billion US dollars?

August 1st this year marks the one-year anniversary of the Bitcoin Cash hard fork.

As the founder of Bitmain, the computing power giant, Wu Jihan did not bring good news to the miners at the BCH anniversary summit held on this day, but instead poured a bucket of "chilling" ice water on the cool digital currency market.

“With the rise of ERC20 contracts, ICO has become a very popular term, but the reasons for touting ICO are all improper in my opinion. For example, ICO is not subject to supervision by the Securities and Exchange Commission, which is wrong. According to the relevant definition of US securities law, almost all ICO contracts are securities. No matter what arrangements are made, the nature of securities is indelible. At the same time, many ICOs are full of false statements and cannot withstand scrutiny.”

ERC20 is a universal token protocol on Ethereum, which greatly reduces the difficulty of token issuance by defining a series of technical standards and interfaces. The most direct relationship between Bitmain and Ethereum is the Ethereum E3 Antminer launched in April this year.

Mining has been an indelible brand mark of Bitmain since its founding. In less than five years, Bitmain has controlled more than 50% of the world's Bitcoin computing power, and its mining machine market share has reached more than 70%.

In November last year, Bitmain suddenly announced a strategic adjustment: it would turn to artificial intelligence and downplay the image of a mining machine company. The digital currency market was immersed in an unprecedented carnival. The price of Bitcoin soared to the $20,000 mark, and various platform coins and altcoins based on Ethereum were also attracting money from major exchanges.

Bitmain seems to no longer agree with the role positioning of mining chip and mining machine company. According to a Pre-IPO round of financing materials recently obtained by BlockBeats, Bitmain was named "China's largest AI chip company".

Canaan Creative wants to become Bitmain, and Bitmain wants to "become Nvidia"

At the AI ​​WORLD 2017 conference held in Boston in November 2017, Bitmain co-founder Zhan Ketuan personally launched the artificial intelligence brand SOPHON. The first self-developed tensor processor BM1680, deep learning acceleration card SC1/SC1+, and intelligent video analysis server SS1 were also unveiled at the same time.

This is the first time that Bitmain, the world's largest mining machine and chip manufacturer, has made a public appearance in the field of AI.

In early January this year, Bitmain held a media communication meeting in Beijing, where product strategy director Tang Weiwei claimed that Bitmain had entered the field of artificial intelligence as early as 2015.

In fact, at that time, Bitmain had just recovered from the brink of bankruptcy in 2014. In the eyes of the outside world, Bitmain had nothing to do with artificial intelligence. Looking through Bitmain’s official Weibo, there was no content talking about artificial intelligence throughout 2015 and 2016. The most frequently appearing keywords were mining, mining machines, etc.

BlockBeats found through querying industrial and commercial information that Suanfeng Technology (Beijing) Co., Ltd., which is responsible for the transformation to AI, was established in September 2016 with a registered capital of only RMB 1 million. The actual controller is Bitmain Technologies Limited registered in Hong Kong.

According to the information revealed in this media communication meeting, Bitmain continues to use the ASIC (Application Specific Integrated Circuit) technology route to design AI chips. Based on TSMC's 28nm process, the BM1680 has a floating point peak computing performance of 2TFlops and an average power consumption of 30W under single-precision FP32 conditions.

Specifically in terms of product applications and scenario-based implementation, Bitmain focuses on three sub-sectors: public security, the Internet, and urban big data, and plans to work with partners to provide an integrated solution of cloud chips + algorithms.

In March, Bitmain released the second-generation AI chip BM1682, which claims to have a performance improvement of more than 5 times and can work independently without the X86 CPU. The Suanfeng intelligent video analysis server equipped with the BM1680 chip also won the annual excellent AI application selected by China Security Network.

Generally speaking, deep learning, which is the hottest field in AI, can be divided into two parts: training and inferencing. As the name implies, the training part is to input a certain amount of sample data into the existing algorithm model and adjust various parameters to make the model reach the optimal state. Then these algorithms can be used to handle more similar tasks.

Taking the face recognition algorithm as an example, the more face data of different ages, genders, and races included in the training process, the better the recognition efficiency and accuracy of the algorithm, and the wider the scope of application. As the frequency of use accumulates over time, the algorithm model itself will continue to improve its accuracy and other indicators.

In the wave of artificial intelligence concepts, one of the hot topics among practitioners is what kind of chip architecture to use to run these algorithm models.

At present, institutions and companies researching autonomous driving generally give priority to Nvidia GPUs to accelerate data processing and model training. In the security field that Bitmain is going to enter, the most common chip architecture is FPGA (field programmable gate array).

The advantage of FPGA lies in its strong flexibility and programmability. When a neural network model is trained, it can only be written into the ASIC chip once and cannot be upgraded later. FPGA allows multiple writing and updating through programming methods, which is very friendly to AI applications that require frequent algorithm iterations.

In other words, the algorithm model in the ASIC artificial intelligence chip must be good enough to handle new tasks of the same type without updating or upgrading once it leaves the factory, in order to make this business feasible. At this stage, the algorithm iteration speed of deep learning applications in various fields is very fast, and the algorithm will change drastically in less than a year on average. This may prevent ASIC chips from gaining an advantage over GPUs and FPGAs in the short term.

An insider of Face++, a company that specializes in facial recognition, told BlockBeats that it is rare to see manufacturers like Bitmain that use ASIC chips to provide computing power at bidding meetings for security and smart city projects. The most common ones are FPGAs. Face++'s facial recognition and comparison algorithms also mainly run on the FPGA architecture, and are still being optimized.

According to the product roadmap released by Bitmain, two more generations of products are under development after BM1682, both of which will adopt TSMC's 12nm process. On average, the product iteration cycle is about 9 months.

Bitmain's biggest competitor, Hangzhou Canaan Creative, which ranks second in the mining machine market share, recently officially released the 7nm mining machine Avalon A9 series, while Bitmain's new S9i mining machine this year uses a 16nm process.

In the eyes of many people, Canaan Creative seems to have achieved a technological breakthrough and has become one of the first companies in the mining industry to benefit from the 7nm technology dividend. Is Bitmain going to lag behind the industry in terms of technology?

A senior practitioner in the chip industry told BlockBeats,

"Canaan's progress is faster. Their backend is outsourced to a Taiwanese company called GUC (Creative Electronics), which is a subsidiary of TSMC and has better resources. Bitmain does its own backend and optimizes it more aggressively. It may take several attempts to succeed, but once it succeeds, the technical indicators are not as good as others. Even if they use the same process for another two years, they still cannot succeed. They can only compete with new processes, so Bitmain has a long product life cycle. This is to build a moat, which is very necessary, otherwise there will only be ordinary profits."

However, this toothpaste-squeezing approach of constantly squeezing out the performance of existing chips will eventually be defeated by Moore's Law. The 7nm manufacturing process advantage allows Avalon miners to achieve twice the computing power of Bitmain's S9 miners without the need for optimization like Bitmain. This may mean that Bitmain's leading advantage in ASIC mining chips does not seem to be unshakable.

In addition to the first release of the 7nm mining chip, Canaan Creative also announced the Avalon Mine Certification Program and the Canaan Ecosystem Global Node Program. Miners who join the Avalon Certification Program will receive a series of resources such as guidance on mine construction solutions, funding, and hosting customer docking. However, the details of the Canaan Ecosystem Global Node Program have not yet been announced.

From the perspective of the competition, Canaan Creative, as the second largest company in the industry, seems to want to expand its market share through more advanced mining chips and ecological mining operations, aiming to become Bitmain. Bitmain, which has set its sights on artificial intelligence, wants to become the Nvidia of AI.

The financing materials obtained by BlockBeats also cited a report from research firm Tractica, predicting that ASIC chips used for deep learning will enter a period of rapid growth starting in 2020.

In other words, after its Hong Kong IPO, Bitmain still needs to go through the cryptocurrency bear market and the gradual acceptance of ASIC artificial intelligence chips before it can truly enter the dividend period. Only then can institutions and retail investors who bought Bitmain's shares cash out openly.

But no one can predict how long this period will last.

Selling mining machines is very profitable, so why do we need to transform to AI?

In June this year, Wu Jihan revealed in an interview with Bloomberg that Bitmain's total revenue in 2017 was US$2.5 billion.

According to the Pre-IPO financing materials obtained by BlockBeats, more than 90% of the $2.5 billion came from the sales of mining machines. Bitmain's net profits in 2016, 2017, and Q1 2018 were $0.97 billion, $1.18 billion, and $1.06 billion, respectively.

In other words, last year Bitmain's net profit margin from selling Antminers was as high as 47%. Given such good profits and growth, why did it adjust its strategy to AI?

We believe there are two main reasons, the most important of which is that the digital currency market has not shown any signs of sustained recovery since it began to fall in early 2018. Bitmain started out by developing bitcoin mining chips and selling mining machines. Its revenue model is also highly tied to the price of bitcoin, and its computing power is mainly used for bitcoin mining.

As the price of Bitcoin continues to rise, miners' mining revenue will also rise accordingly, and the market demand for mining machines will be strong, which will drive rapid sales growth.

When the price of Bitcoin lacks growth momentum and its future is uncertain, miners may consider not continuing to operate the mines once their profits decrease or even incur losses. Purchasing mining pool computing power through online transactions will also gradually become uneconomical.

On the other hand, the Proof of Work algorithm used by Bitcoin naturally consumes a considerable amount of electricity for mining, and PoW has begun to become unpopular. According to incomplete statistics from BlockBeats, there are currently more than 700 digital currencies in the world that use PoW, and the vast majority of the more than 2,300 tokens traded on the market use PoS.

A report released by the Bank for International Settlements (BIS) in June this year showed that Bitcoin has consumed 70 trillion watt-hours of electricity worldwide, more than three times that of Ethereum.

On the other hand, ordinary people outside the currency and blockchain circles are more easily influenced by the opinions of authoritative figures, and thus continue to doubt the true value of digital currency.

In an interview earlier this year, Buffett, the world's most successful investor, said that Bitcoin is "rat poison to the power of two." His old partner Charlie Munger called Bitcoin "worthless artificial gold" and quoted Oscar Wilde's famous saying, "Unspeakable people hunt unedible things," comparing the pursuit of Bitcoin to hunting foxes.

This may reflect the overall perception of the mainstream public towards cryptocurrencies represented by Bitcoin: investing in cryptocurrencies is a waste of money.

In addition to cryptocurrency, artificial intelligence is a blue ocean with a compound annual growth rate of nearly 40%. The demand for computing power in fields such as security, autonomous driving, and smart manufacturing is rising exponentially.

Now Bitmain has chosen artificial intelligence. After the IPO, we will see whether the artificial intelligence market will choose Bitmain.

The market value has tripled in three months. Is it expensive to be almost the same as Xiaomi?

Since its establishment in 2013, Bitmain is less than five years old, but its pre-IPO valuation has reached 15 billion US dollars. Compared with the B round of financing completed in June, Bitmain only took more than a month to increase its valuation by 3 billion US dollars.

What is even more shocking is that according to the latest information revealed by the famous digital currency website Coindesk, Bitmain will eventually reach a sky-high price of 50 billion US dollars when it goes public! This is basically the same as the current market value of Xiaomi, which is also listed on the Hong Kong stock market, of 52.2 billion US dollars (410 billion Hong Kong dollars).

Investors will naturally wonder: Is Bitmain's valuation too exaggerated?

According to the price-earnings (PE) method, Bitmain's PE multiple (150/11.8) in the Pre-IPO round (US$15 billion) is about 13 times. In comparison, Bitmain's benchmark Nvidia's PE multiple is 43, Intel's is 25.2, and Qualcomm's is 34.8. From the exposure of the US$50 billion market value, it can be seen that Bitmain has been ahead of technology and the market, and is on par with the giants in terms of PE multiples.

But please don't forget that there are only 21 million bitcoins in total, and the amount of bitcoins produced by mining will be halved every four years. Currently, 80% of the world's bitcoins have been mined, leaving only about 4 million bitcoins to be mined. And judging from the current market situation, the possibility of bitcoin prices returning to the peak of $20,000 in the next year is pitifully small.

According to such fundamental estimates, the bitcoin mined in the next natural year is worth about $3.6 billion. Due to fierce competition, the best case scenario for Bitmain in the next year is to occupy 1/3 of the mining machine market share and achieve a 10% net profit margin, which is $120 million in net profit. If we conservatively calculate that the market is still willing to give a 20 times PE in one year, Bitmain's market value is about $2.4 billion.

For institutional investors, in theory, they can still convert stocks into bonds, as Bitmain's income is very stable and they will not be unable to repay. However, retail investors who take over after the IPO will face extremely high risks.

BlockBeats learned that Bitmain's $15 billion Pre-IPO shares did not sell well, not because potential shareholders recognized the above point of view, but because they felt that digital currency still had policy risks that could not be ignored.

Another point worth pointing out is that although Bitmain claims that 90% of the company's revenue comes from the sales of mining machines, there are actually two hidden sources of income whose details have not been disclosed.

The first is how to dispose of digital assets such as Bitcoin (BTC) and Bitcoin Cash (BCH) mined from Bitmain’s own mining farms.

The second is the Bitcoin hard fork led by Bitmain last year. Although the official statement has always refused to admit that it is the manipulator behind BCH, the Bitcoin Cash (BCH) generated after the hard fork currently has a circulation market value of about US$10 billion, and it has reached a peak of US$68.6 billion. The price of BCH is also largely affected by Bitmain.

In April this year, BCH's price nearly doubled in six days. This short-term rise is very consistent with the mining tyrants' price manipulation.

If Bitmain really has market-making operations for BCH, how will this hidden income be reflected in the financial statements, and how will it be explained to shareholders and investors?

Bitmain's financial report released last weekend showed that the company recorded the digital currencies they mined at cost in the column of other current assets. It is worth noting that the price fluctuations of digital currency assets in this asset are not included in the report.

The financial report shows that Bitmain held 841,800 BCH, 36,800 BTC, 925,000 LTC, and 312,000 DASH at the end of December 2017. By the end of March 2018, BCH had become 1.021 million, BTC had become 22,000, LTC had become 930,900, and DASH had become 312,000.

In three months, Bitmain sold 14,800 bitcoins. At the same time, because it controlled most of the computing power, BCH added 179,200 bitcoins. Historical financial reports also show that Bitmain is using its own bitcoin inventory to support Bitcoin Cash, the "crown prince."

However, apart from those investors and believers who support Bitcoin Cash, ordinary investors have not shown much enthusiasm for holding Bitcoin Cash, not to mention that in a bear market, everyone has begun to "escape" and has no time to take care of this forked coin.

There is a certain possibility that Bitmain's IPO is to continue to support BCH by sucking blood from the listing. However, the supervision after the listing will be stricter, and the pull and smash can no longer be as casual as before.

Back to the discussion of assets, if digital currency is regarded as the company's asset, the company will have to bear the rise and fall of this part of the digital assets. If the price falls, it will need to make an impairment provision, which will seriously affect the company's profits. Ultimately, this part of the profit will be distributed to each shareholder.

Bitmain is shut down

Last Thursday, mining pool statistics showed that the computing power of Bitmain's Ant Pool and Bitcoin Block Explorer - BTC.com mining pool dropped by 9%. The two originally accounted for 41% of the computing power in the entire computing pool, but now it has dropped to 33%. Bitmain has begun to shut down mining machines.

Market analysts believe that this is a signal that Bitmain is not optimistic about the future revenue from Bitcoin mining, and it is also a signal that it will continue to support Bitcoin Cash.

The competitor's 7nm mining machine was launched on the market first, the Bitcoin market and Bitcoin Cash market responded coldly, the price of Bitcoin was close to the cost price many times, the difficulty of Bitcoin computing power continued to rise, the policy level did not improve, the false propaganda of mining machines and other signs are telling us: Although mining is a business, it is no longer as good as before.

This reminds me of the ATM and POS machines of the Dead Sea industry. Virgin Creative is a financial equipment company specializing in ATM and POS machines. It submitted an IPO application two years ago. However, under the pressure of mobile payment, the demand for ATM machines for cash withdrawal and POS machines for card swiping plummeted, causing the company's profits to plummet by 90%. In the end, Virgin Creative chose to give up the IPO in such a market environment.

For the Dead Sea industry, an IPO is meaningless and impossible. However, for investors, the uncertain digital cryptocurrency industry may make them pessimistic about Bitmain's IPO.

In this case, we can only rely on artificial intelligence. At least in the next few years, artificial intelligence chips are still a blue ocean.

According to the original plan, Bitmain will submit an IPO application to the Hong Kong Stock Exchange in late August or September. The IPO size will reach US$18 billion, with a valuation between US$40 billion and US$50 billion. It is expected to be listed within the year.

It took Bitmain about a year to complete the $15 billion self-denial from a mining machine company/miner to an artificial intelligence company.

But in the history of human companies, it is the market that ultimately makes the affirmative or negative decision.