The Bitmain IPO: A risky bet on mining and Bitcoin Cash?

Bitcoin mining giant Bitmain has been circulated a pre-IPO investor deck that suggests that as part of the company’s plans to go public it will attempt to raise $18 billion during its IPO.

The Bitmain IPO

If Beijing-based Bitmain Technologies Ltd. is successful in its shot at $18 billion, it would put the company’s valuation at $40 to $50 billion. Bitmain plans to list on the Hong Kong Stock Exchange either in Q4/2018 or Q1/2019 and its securities offering will be underwritten by China International Capital Corporation.

With an $18 billion IPO, Bitmain would rank among the top five largest initial public offerings in history behind Alibaba and ahead of Facebook.

Bitmain is well-known in the cryptocurrency community as it is one of the largest bitcoin miners and the leading producer of mining hardware. Due to its leadership position in the bitcoin mining market, Bitmain has become one of the most profitable companies in the blockchain industry.

According to Forbes, Bitmain earned $2.5 billion in revenue in 2017 and booked a net profit of $1.1 billion in Q1/2018. Around 96 percent of its revenue comes from the sale of its cryptocurrency mining hardware while only three percent comes from its mining operations and other services. According to company estimates, Bitmain’s Antminer series of mining rigs holds an 85 percent market share of the global bitcoin mining hardware market.

Bitmain has reportedly already closed a one billion dollar pre-IPO funding round where it received financial backing from investors such as tech companies Tencent and Softbank as well as U.S. hedge fund Coatue Management. This follows a successful series B funding round in June, where the company managed to raise $400 million from several leading venture capital funds, which valued the bitcoin mining giant at $12 billion at the time.

Despite Bitmain’s dominant market position and high profitability in the mining hardware market, its planned IPO is not without dissenters.

Bitmain and its risky Bitcoin Cash trade

Citing the pre-IPO investor deck, Blockstream CEO, Samson Mow, pointed out in a tweet that Bitmain holds substantial amounts of Bitcoin Cash (BCH), which he says results in a hidden risk in purchasing shares in the cryptocurrency mining company, which investors may not be aware of.

“The Bitmain IPO is incredibly risky for any investor to buy into. The potential for massive losses is just around the corner as they have no idea how to maintain BCH, but are all-in. Play stupid games, win stupid prizes,” Mow said.

Bitmain converted a substantial amount of its bitcoin holdings into the bitcoin fork, bitcoin cash. Specifically, Bitmain holds over one million BCH and 22,000 BTC, according to its pre-IPO documents. What needs to be noted, however, is that Bitmain bought its BCH holdings at an average price of $900, which means it has been forced to book substantial losses on its Bitcoin Cash holdings, considering the coin is currently trading at $550.

Moreover, Bitmain has gotten itself into a peculiar situation as it is holding a large chunk of a rather illiquid asset, which means should they want to exit their BCH position, the company would completely crash its price.

Once Bitmain has gone public, it will need to be very transparent about its digital asset holdings and it will have to answer to its shareholders about why it is holding certain assets over others. Not all its future shareholders will likely be happy with the company’s large exposure to Bitcoin Cash, especially given that the market has (so far) decided that Bitcoin Cash is not “the real bitcoin,” as many of its proponents – including Bitmain CEO Jihan Wu – have been claiming.

Hence, once publicly traded, Bitmain may find itself in a position of being forced to sell its holdings at a loss due to shareholder pressure. Adding that to a potential continuance of the 2018 bear market in the crypto asset market, it may be hard for Bitmain’s current valuation to hold or for its share price to perform well post-IPO.

Bitmain’s move towards diversification

While Bitmain has made its billions selling cryptocurrency hardware, the company has started to diversify its business to become a broad digital asset company, penetrate the global chip market and move into A.I.

In recent months, Bitmain has gone on an acquisition spree and invested in several cryptocurrency companies that fit into its new diversification strategy. The company has invested in popular cryptocurrency-supporting web browser Opera, contributed to a funding round in crypto payments company Circle, backed EOS creators Block.one, and has incubated a new decentralized exchange called DEX.top.

Bitmain’s diversification strategy is partly driven by the desire to develop the Bitcoin Cash ecosystem, which explains the company’s recent investment in tribeOS, a Bitcoin Cash advertising platform scheduled to launch in 2019.

Bitmain also aims to leverage its expertise in chip design to increase its market share in the chip industry. Bitmain is coming close to overtaking China’s leading chip producer Huawei HiSilicon in the local market with its 8 percent market share and is already eyeing the U.S. chip design market as its next target.

In terms of the artificial intelligence market, in an interview with Bloomberg, Bitmain CEO Wu said he estimates that 40 percent of Bitmain’s revenue will come from producing A.I. chips within five years. Given that A.I. technology requires substantial computing power, Wu feels that his company is well positioned to provide the hardware required for this new technology to run.

Buying Bitmain means betting on BCH and crypto mining

Despite Bitmain’s diversification strategy and its impressive revenue figures, it is important for investors to know that buying shares in Bitmain’s planned IPO will also be an indirect play on Bitcoin Cash due to the company’s heavy involvement in the Bitcoin Cash ecosystem and its holding of over one million BCH.

Moreover, it is also a bet on a profitable future of the cryptocurrency mining market, which is far from certain due to the increase in mining difficulties of major POW coins and the potential for asset prices to refrain from reaching all-time highs for a long period of time.

While a leading bitcoin startup going public should be considered a success for the bitcoin community, the Bitmain IPO is not without controversy.