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Bitmain has filed for an initial public offering (IPO) on the Hong Kong Stock Exchange (HKEX). The company was valued at $14 billion in its most recent pre-IPO financing round, with Sequoia China being the major investor. With billions more expected to be raised during the IPO, will Bitmain be the largest IPO in history?

Let’s take a closer look at Bitmain’s operations to help shed some light on how this IPO might play out. Expectations are high, but there are also those who are scrutinizing Bitmain’s accounting practices and comparing it to failed public companies that manipulated the public, such as Theranos.

Bitmain’s Revenue Sources

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Bitmain has long been considered the dominating force in cryptocurrency mining. But with the market declines of 2018, cryptocurrency mining profits have also fallen. The graph below shows the declining market share of Bitmain in mining operations. But cryptocurrency mining is not Bitmain’s only source of revenue. Bitmain also operates the two largest cryptocurrency mining pools, AntPool and BTC.com, which charge fees on the cryptocurrency mined by the pool.

Bitmain’s market share from mining operations – Source: https://blog.bitmex.com/unboxing-bitmain/

But Bitmain’s largest business is in hardware. Bitmain designs, assembles and distributes application-specific integrated circuits that are highly specific and have powerful chips that only mine Bitcoin. A current Antminer S9j model, which has a hash rate of 14.5 TH per second, is priced at $355. These devices perform progressively less well as time goes on and the Bitcoin network difficulty increases. Current estimates from a mining farm indicate that the hardware devices will last for three years upon release date, with a declining profitability of 2% per month. When the devices are no longer profitable, they have no resale value.

Mark-to-Market Misery

One of the key concerns that have been raised about Bitmain is its accounting treatment. Bitmain has a large altcoin portfolio, which includes large holdings of over 1 million in Bitcoin Cash. Other holdings in the portfolio include Bitcoin, Dash, Litecoin and Ether.

The issue is not in holding these altcoins but in how Bitmain has valued them. Bitmain has valued them using what is known as a cost basis. A cost basis means that the assets in the portfolio are valued at the price they were purchased at.

A more prudent valuation would be “mark to market,” where the assets in the portfolio are priced at recent market prices. Mark-to-market valuations on Bitmain’s altcoin portfolio would actually make Bitmain a loss-making company. Bitmain invested large amounts of operating cash flow from 2017 into Bitcoin Cash.

Bitcoin Cash Investment – Source: https://blog.bitmex.com/unboxing-bitmain/

Bitmain made a risky investment, and it backfired. It is now using accounting procedures that present them in the most positive light possible. Although mark to market would have made Bitmain a loss-making company this year, Bitmain has no debt and generates large amounts of cash from its hardware sales, mining pools and mining operations. It is certainly not Theranos, but it may not get away with making such risky investments once it is a public company.

The Bitmain IPO looks likely to be a huge success. Despite dropping market share from mining operations, it remains the dominant force in mining. Bitmain also tends to underprice the market for ASICs. Funds raised from an IPO will enable it to do this for a longer time and gain a key competitive advantage over other major ASIC sellers.

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