Banking & Finance

Chain reaction

Bitcoin crash clouds crypto currency firms’ IPOs


Done nearly as badly as the bolivar

Lei Hua did not expect the business of harvesting next-generation currency would lead to his downfall. A headmaster at a high school in Hunan, Lei secretly moved eight of his mining machines into his school’s electronics lab last July in a bid to tap some free electricity and a smoother internet connection. Although the scam helped the hobbyist miner save Rmb14,714 ($2,118) on electricity bills for about a year, it also cost him his job and membership in the Chinese Communist Party.

Lei’s ploy, however improper, is more understandable in the context of crypto mining’s main cost: a round-the-clock operation runs up huge electricity bills. Mining new ‘coins’ is essentially a race to solve a mathematical puzzle, thus requiring relentless computing power. And the more algorithm processors are plugged into the network, the more problem solving (and electricity) is needed to earn each token.

Fundstrat Global Advisors estimated that the breakeven point for mining a Bitcoin had risen to $7,300 as of mid-September amid a crypto gold rush since the beginning of last year. So, when prices for coins fell below $3,900 over the weekend, i.e. 80% from their peak last December, it wasn’t just crypto investors who were hurt. The mining farms, as well as their equipment suppliers, are bleeding too.

“The more you dig, the more you lose. It’s better switching all the machines off,” said one miner, who owned facilities operating 2,000 such machines in China. Since mid-November at least 600,000 other Bitcoin miners have unplugged their processing power, according to Mao Shixing, founder of F2pool, a Chinese firm that is said to have pulled together 11% of the world’s computing power dedicated to mining Bitcoin.

Mao’s verdict coincided with news that various crypto mining farms in Xinjiang and Inner Mongolia have already folded, leaving behind heaps of computing hardware to be sold as scrap metal. Bitmain’s top-of-the line mining machine the Antminer S9, for instance, saw its prices drop over 90% to Rmb1,200 in less than a year, according to a dealer at Shenzhen’s Huaqiangbei, an electronics bazaar that claims to export 80% of the world’s crypto mining rigs.

Huaqiangbei experienced a revival early this year when crypto harvesters from around the world aggressively scouted for high-performance gear. Yet the steep selloff in Bitcoin has prompted many hardware dealers at the marketplace to switch to other trades, selling products as random as stockings and shoes instead.

“It’s tough to do business now,” a distributor at Huaqiangbei told Securities Times. “I am now dumping mining machines that are worth thousands of yuan at just 10 bucks. They are brand new and yet I can only sell them as junk metal. Cashing them back at a loss is better than getting zero return, isn’t it?”

The crisis has a knock-on effect on the world’s leading crypto-focused chip designers, namely Bitmain Technologies, Canaan Creative and Ebang Communication, which are all based in China. Banking on the same meteoric growth in sales as last year, which was fuelled by Bitcoin’s 1500% rise in value, the three companies had all planned to go public in Hong Kong this year.

Bitmain’s potential $18 billion IPO, which is still going through the regulatory process, was particularly anticipated given its 75% share in the global crypto hardware market. The company was valued at $15 billion as of August, according to QQ News. Yet its offering is facing scepticism on three fronts. First, the company is widely believed to have sustained losses for the first time in the second quarter, as both inventory and impairment provisions spiked. Second, Bitmain’s practice of accepting payments in the form of cryptocurrencies to purchase its mining rigs also means that its finances are likely to be compromised by the fast-depreciating digital asset.

Bitmain also seems to be losing its competitive advantage as smaller rivals such as Canaan and Japan’s GMO move faster into developing more powerful machines adopting a 7-nanometer ASIC chip. Bitmain’s listing prospects also dimmed earlier this month when Canaan, which has a 6.2% global market share, shelved its own IPO plan in Hong Kong. According to the South China Morning Post, Ebang – the smallest of the Chinese trio – is also unlikely to IPO this year.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.