Bitmain of China is the world’s largest bitcoin miner, producing roughly half of the world’s supply. (Photo provided)
We all know the sage advice that in a gold rush the best thing to do is sell shovels.
My caveat would be to ensure you’re paid in cash. And just to be clear for the modern world, this does not mean getting paid in Bitcoin Cash.
Yes, I am looking at you, Bitmain Technologies Ltd.
The Chinese company is reported to be the world’s largest maker of cryptocurrency mining rigs. It also makes specialised crypto-mining chips, and controls close to half of the world’s Bitcoin mining power. In gold rush terms, it designs and makes the shovels, sells those shovels, and runs half the mines that use the shovels.
Bitmain is steaming toward an IPO amid a plunge in the price of cryptocurrencies. Various leaks of its financials have made it into the wild, shining a spotlight on its business model.
The first appears to come from Samson Mow, chief strategy officer of Blockstream Corp., who tweeted a screenshot in mid-August. If anyone else has an earlier claim, then let me know. BitMEX Research, part of bitcoin trading platform BitMEX, is among other outfits that seem to have got their hands on Bitmain documents.
What pops out at everyone who reads that initial slide is that while Bitmain is making and selling a lot of crypto shovels, it’s getting paid in digital gold, ie Bitcoin and its offshoot Bitcoin Cash. Or if it’s not getting paid in crypto, then it has been using cash to buy said digital gold.
Numerous people pointed out the strategic error of selling Bitcoin and buying Bitcoin Cash, whose price has plummeted even more. They’re correct, but miss the point. It’s like saying they were stupid swapping gold for silver in the middle of a precious metals rout. Look at BitMEX’s analysis of the situation and the error is even more stark.
Barely US$105 million of Bitmain’s assets at the end of March were in cash, or fiat, compared with $1.17 billion held in various types of cryptocurrency.
What’s more worrying to me amid the prolonged crypto downturn are the two largest non-coin assets on its balance sheet: inventory, and prepayments to its chip manufacturer, Taiwan Semiconductor Manufacturing Co. Those two items accounted for 54% of total assets.
Public comments from TSMC indicate that demand for crypto-mining chips has cooled significantly this year, which makes it possible that Bitmain won’t go through with at least some of its orders for application-specific integrated circuits, or ASICs. Its stockpiles — likely mining chips and rigs — are casting an even bigger shadow.
Yet we really need to look at crypto assets and inventory together because the plight of one exacerbates the other.
Bitcoin mining is an arms race, with demand for the weapons fuelled by the price of the coins they’re mining. In February I wrote about the likelihood of miners getting fried in a game of chicken. I’m pretty sure this scenario has played out for at least some, and many held on because mining low-priced coin is better than none at all.
It’s not difficult to see that if prices of Bitcoin and Bitcoin Cash decline, then so does the value of those chips and mining rigs. It’s akin to buying a home in the middle of a housing bubble, then putting your savings into highly leveraged mortgage-backed securities. The resulting snowball effect amplifies any decline in Bitmain’s assets.
That leaves Bitmain needing to take more payments in cash as well as seeking more funds from capital markets. Even that won’t solve the problem, because there are further landmines waiting. – BLOOMBERG OPINION