According to a recent analysis by Coindesk, Bitmain posted a $500 million loss in Q3 2018. Their conclusion was the result of insights they attained via an update to Bitmain’s IPO prospectus filing with the Hong Kong Stock Exchange (HKEX).
Bitmain is the largest cryptocurrency mining firm, offering ASIC and GPU mining hardware and operating the two largest Bitcoin mining pools — BTC.com and AntPool. However, Bitmain’s recent stumbles led to gross overestimations of mining hardware demand in 2018, and a massive gamble on Bitcoin Cash that turned sour.
The Downward Spiral of Bitmain
Bitmain was the cryptocurrency unicorn company, hitting its peak at the height of the ICO craze when the firm reportedly brought in $3 – 4 billion in profits in 2017. Since then, poor executive management and a prolonged bear market have pushed Bitmain into huge losses and an uncertain future.
Citing their own IPO prospectus filing with HKEX of their gross miscalculations leading into 2018:
“In early 2018, we anticipated strong market growth for cryptocurrency mining hardware in 2018 due to the upward trend of cryptocurrencies price in the fourth quarter of 2017, and we placed a large amount of orders with our production partners in response to the anticipated significant sales growth. However, there had been significant market volatility in the market price of cryptocurrencies in the first half of 2018. As a result of such volatility, the expected economic return from cryptocurrency mining had been adversely affected and the sales of our mining hardware slowed down, which in turn caused an increase in our inventories level and a decrease in advances received from our customers in the first half of 2018.”
Bitmain was sitting on approximately $1 billion in unsold mining equipment whose market value rapidly diminishes in an industry of chip manufacturing known for swift innovation.
At the time of their IPO filing, Bitmain was sitting on roughly $889 million in assets of Bitcoin, Bitcoin Cash, Ether, and a few others. However, according to Coindesk, that dropped to less than $700 million by the end of Q3 2018. Additionally, Coindesk cites how they used previous disclosures of Bitmain’s finances to identify their $500 million Q3 losses:
“The update showed Bitmain earned around $500 million in the first nine months of last year, on slightly over $3 billion of revenues, according to a source familiar with the situation. The filing, which is not public, does not break down the results by quarter. However, Bitmain previously disclosed it had grossed profits of $1 billion in the first half of 2018. Subtracting that from a $500 million profit for the first nine months leaves it with a net loss of roughly $500 million for the third quarter.”
An unnamed source from Bitmain refuted Coindesk’s account of their finances in a Chinese media publication, but Coindesk’s insights combined with the bear market and recent financials provided by Bitmain seem to be accurate.
The massive posted loss is another blemish on the mining giant, whose board recently pushed CEO Jihan Wu to step down from his executive role — although he remains on the board.
The meteoric rise and extended fall of the cryptocurrency markets is the cardinal driver of Bitmain’s recent tribulations. Many independent and smaller mining operations have been operating at a loss since the latter months of 2018, and have been forced to shut down.
Larger operations — like Bitmain — that can operate at scale continue to mine but are subject to losses or negligible profits. The volatile swings in prices also likely contributed to Bitmain’s vast overestimation of hardware demand, and Jihan Wu’s gamble on Bitcoin Cash over Bitcoin only compounded the problem.
Bitmain has had to halt plans for setting up new mining centers and offices around the globe and have laid off many employees.
Bitcoin’s mining market closely mirrors its price and is reflected in the mining difficulty and hash rate. In November 2018, between 600k to 800k Bitcoin miners were reported to have shut down their operations as mining became unsustainable.
Bitmain’s updated IPO financials are sealed until the potential approval by HKEX before the March filing deadline. Coindesk’s report highlights a brutal Q3 for the company, so many observers are anxiously awaiting the release of more financial insights into the Bitcoin mining giant, and by extension, the entire mining market.
Potential Turnaround on The Horizon
Despite the more than year-long bear market for cryptocurrencies and downturn in Bitcoin mining towards the end of 2018, there are some glimpses of hope for the market to turn around.
Notably, Bitcoin’s hash rate and mining difficulty have bounced from December 2018 lows, indicating more miners are contributing to the network. Further, mining pools have become more distributed, with major pools like AntPool and BTC.com comprising lower portions of the network’s overall hash power than previous years. This also has important implications for Bitcoin’s security model and sustainable decentralization.
Extended increases in Bitcoin’s hash rate closely correspond to positive price movements, and the sustained improvement of mining profitability attracts more miners, pushing the price higher, and driving the shift to bull markets.
Similarly, estimates for the amount of money needed to input into the Bitcoin ecosystem to drive bull trends is also highly disparate. For instance, JP Morgan claims that fiat amplifiers for the broader crypto asset market are 117.5, meaning that only $2 billion of net fiat inflow is required to push the overall market cap from $15 billion to $250 billion.
Other estimates have placed the amplifier between 2 and 25.
Bitcoin’s mining market could rapidly flip-flop its extended downward trend if prices start making a push north, and altcoins typically follow suit. However, Bitcoin has consolidated its grasp on the overall market share of the crypto space as many altcoins and ICOs have faltered or collapsed entirely.
Bitmain’s struggles are the pre-eminent example of the travails that a downward spiral in prices has produced for Bitcoin’s mining market. Coindesk revealed enormous Q3 2018 losses, but new leadership and a potential market turnaround could spur Bitmain into a highly successful IPO.