Crypto Meets Wall Street as Bitcoin Mining Giant Bitmain Files for IPO

By Steven Russolillo

Bitmain Technologies Ltd., the world’s largest cryptocurrency mining company, is planning to pursue an initial public offering in Hong Kong, one of the first major instances where the traditional capital markets and the newer cryptocurrency world will collide.

The company’s financial statements, which were released in a 438-page filing with the Hong Kong stock exchange, confirmed Bitmain’s intention to go public in a deal that analysts and investors have said could raise billions of dollars. But the potential offering comes at a difficult time for both the cryptocurrency and public-equity markets.

Bitcoin and other digital currencies have lost roughly two-thirds of their value this year after 2017’s manic surge.

Meanwhile, Hong Kong has been one of the world’s worst performing stock markets, down 16% since January’s high. And while Hong Kong has hosted a number of large IPOs this year, many-including Chinese smartphone maker Xiaomi Corp. and internet startup Meituan Dianping -have struggled to maintain initial gains.

Bitmain, founded in China five years ago by now-billionaires Jihan Wu and Micree Zhan, said in its first public filing that it generated $2.8 billion in revenue in the first half of 2018, up nearly 10-fold from a year ago. Profit rose similarly, to $742.7 million from $83 million.

The company held $886.9 million in cryptocurrency assets through the end of June, up from $56.3 million at the end of 2016 and $12.3 million the year before that. By comparison, its crypto assets more than doubled its $343.3 million in cash and cash equivalents, according to the filing.

Bitmain didn’t disclose a valuation target or how much money it hopes to raise in the offering. That is expected to come in a subsequent filing with the Hong Kong exchange.

The firm is a dominant player in selling cryptocurrency-mining equipment and offering computer chips and related gear to other miners. Analysts at Sanford C. Bernstein & Co. estimate Bitmain controls 85% of the market for cryptocurrency-mining chips, but that figure could suffer as rivals such as Canaan Inc. and Ebang International Holdings Inc.-both of which are also planning to go public in Hong Kong-expand their offerings.

The Bitmain IPO will prove a test for other cryptocurrency and blockchain companies that might consider exploring their own IPOs. Blockchain technology serves as the underpinning for bitcoin and other cryptocurrencies.

Many such startups have typically preferred a more controversial type of fundraising method called an initial coin offering, a hybrid of an IPO and a crowdfunding campaign. Those companies create digital tokens similar to bitcoin and sell them to the public, often before they have even developed or released a product.

“I kind of view this world blending over time,” says Eric Ervin, chief executive at Blockforce Capital, a San Diego-based asset-management firm that focuses on digital assets and blockchain technology. “For a company of this size like Bitmain, it’s probably going to get a better valuation on a huge deal like this in the traditional markets than in an ICO, especially in today’s market.”

One of Bitmain’s biggest holdings is Bitcoin Cash, an offshoot of bitcoin that launched in August 2017. The Bitmain co-founder Mr. Wu has been a big supporter of the technology, believing Bitcoin Cash would fix problems, including transactions speeds, that have prevented bitcoin from becoming a mainstream payment tool.

Bitcoin Cash recently rose more than 20% following Bitmain’s filing, according to research site CoinMarketCap. Even so, it is down by about 80% for the year as investors have questioned its use case. Analysts have said Bitmain’s holdings of Bitcoin Cash could prove to be a liability in the future.
Bitmain might need to write down the value of its inventory, Bernstein analysts wrote in a research note last month, noting that the company’s computer chips that power digital-currency transactions are facing heightened competition in a tough market as the value of cryptocurrencies has fallen sharply.

“Last year was nothing but a wild success,” Bernstein said. “However, Bitmain’s cash flow appears to be questionable and the company may be gradually losing technological edge.”’

A Bitmain spokesman said that “due to compliance requirements,” the company was unable to comment on Bernstein’s note.