Samson Mow Reviews Bitmain IPO: Bitcoin Mining Status and Exposing Technical Challenges
Technical Challenges Facing a Bitmain IPO
Bitmain dominates the bitcoin hardware space, accounting for approximately 80% of all bitcoin miners sold worldwide. As Bitmain reportedly earns record profits, the China-based giant is allegedly preparing for an IPO. That IPO, according to a new report posted online, could face enormous technical challenges.
Samson Mow recently posted an article at SamsonMow.com explaining some of the potential technical challenges of a Bitmain IPO. That article was originally written by Allen Guo from 2048 Capital, an offshore cryptocurrency investment fund, and translated with his permission.
Three Bitmain teams abandoned the company in recent weeks: one group from operations and manufacturing, & two groups from their chip design division. One of those groups is actively trying to raise capital to compete with Bitmain. They approached a friend of mine. #BitmainIPO 😂 pic.twitter.com/6ivOjpzDaf
— Samson Mow (@Excellion) August 26, 2018
Bitmain Has Tried to Remove the Article
First, Bitmain has apparently tried to remove the article multiple times. In fact, this is the third time the article has been posted online.
The article was originally posted on WeChat, for example. Bitmain asked WeChat to remove it:
“Rejected by WeChat, Bitmain continued to exert pressure upon our business partner and deleted this article twice. Finally, after some effort, we took back the account, re-published this article, and began to share our findings and thoughts with the industry.”
With that controversial past in mind, let’s take a look at why a Bitmain IPO could run into trouble.
Technical Challenges of a Bitmain IPO
What kind of problems is Bitmain facing? Why is the Bitmain IPO seen as controversial?
Here’s how Guo introduces his article:
“During the market’s best two years, Bitmain did not roll out any new chips or new mining hardware to update its core Bitcoin mining product line, which can be fatal for a chip company in this fast-growing industry.”
The Bitmain product line “fell behind” the competition, for example. Today, the Chinese mining giant is trying to be reborn “in the face of other uprising competitors.” Bitmain is branching into AI, for example. They’re also reportedly planning to launch an IPO.
A Brief History of Bitmain
Guo takes us on a brief history of Bitmain, from its beginnings as a startup to its complete dominance of the crypto mining market.
Bitmain’s First Generation Miners
In October 2013, Bitmain released its first bitcoin mining chip, the BM1380, using TSMC’s 55nm process. Tests of that chip in October 2013 were decent. Miners flocked to the chip, and the chip earned several hundred million RMB in sales. Bitmain’s war chest began to grow.
Bitmain Achieves Another Big Win
After its first success, Bitmain released their second mining chip, the BM1382, which used the TSMC 28nm process. The second chip began production in April 2014, with final production occurring in June 2014.
Bitmain’s second generation chip allowed it to continue to lead the mining chip industry. The second chip generated hundreds of millions in sales revenue for Bitmain.
Bitmain’s Rivals Mysteriously Disappear
The next phase in Bitmain’s rise is, according to Guo, the:
“mysterious disappearance of rivals in the face of gloomy business prospects.”
After the power consumption of the BM1382 failed to meet expectations, Bitmain continued to optimize the chip using the 28nm process. In October 2014, Bitmain began production of its third generation chip, the BM1384. The power consumption was optimized compared to that of the BM1382, although it lagged behind its competition – like the Fried Cat 28nm BE300.
Despite the disappointing production, Bitmain ordered a large number of BM1384 chips and invested in the production of a large number of S5 miners. Producing the S5 miners reportedly took all of Bitmain’s accumulated profits.
As the price of bitcoin dropped through 2014 and 2015, Bitmain “also experienced a rough time.”
This bear market caused Bitmain’s biggest competitor, Fried Cat, to mysteriously disappear. Their company, ASICMiner, was disbanded.
Bitmain Continues Without Major Competition
After the disappearance of Fried Cat during the bitcoin bear market, Bitmain had virtually no competition in the space. In June 2015, Bitmain continued to use the 28nm process to begin production on the BM1385 chip.
The BM1385 chip had big advantages over Bitmain’s other major competitor at the time, Avalon and the Avalon A6 miner. Bitmain reportedly sold 200,000 models of the BM1385 chip, generating 2 billion RMB in sales with a profit margin of about 80%. Bitmain’s market share rose to 80%. The S7 miner would outshine the entire mining industry.
Analysts See “Hidden Dangers Among Expansion”
The two years between 2015 and 2017 were a great time for Bitmain. At the start of 2017, one BTC was worth 5,000 RMB. By the end of the year, bitcoin peaked above 120,000 RMB.
Bitmain similarly experienced a record year. From the beginning of 2017 to the first quarter of 2018, Bitmain sold more than three million miners, including more than two million S9 miners, generating approximately 30 million RMB in sales with a gross profit ratio of about 60%.
As sales rose, however, analysts like Guo “noticed two worrying realities.”
Bitmain Has Two Worrying Problems
The “two worrying realities” mentioned by Guo are both related to Bitmain’s falling market dominance. Guo feels that Bitmain’s products have fallen behind the competition. The power consumption of Bitmain’s products have more than doubled compared to their competitors, for example. The two problems mentioned by Guo include:
Problem 1) Bitmain’s BTC Mining Chip Consumes 40% More Power than the Competition
Bitmain’s BTC mining chip is still the foundation of Bitmain’s business. However, Guo claims that Bitmain’s new chip designs since 2016 “have met nothing but sheer failure.”
Guo cites the disappointment of the optimized BTC 16nm version of BM1X89 in February 2017 that failed, for example, as well as the BTC 12nm version of BM1X90 that failed in December 2017. Most recently, Bitmain’s BTC 10nm version mining chip BM1X93 failed in March 2018.
Because of these failures, Bitmain continues to rely on the BM1387 miner (the S9) released in early 2016. This miner continues to support the company despite the fact that rivals “have outpaced its technological performance.”
Guo mentions that the ShenMa M10 could have a power consumption ratio 40% better than Bitmain’s upon release, for example. Guo cites five other chips as evidence that Bitmain’s competition has surpassed the company.
Problem 2: Bitmain Has Been “Gambling Away Money”
Aside from technological disappointment, Bitmain has also run into trouble by “gambling away money”, according to Guo. Guo cites rumors that Bitmain “has recklessly gambled away 6 billion RMB” in failed production.
One gamble was the one billion RMB purchase of the untested BM1X90 12nm chips. Bitmain was hoping to capture the prosperous bitcoin market at the end of 2017. This gamble was, in the end, “a one billion RMB failure.”
Bitmain also gambled and lost on the BM1X93 10nm chips in early 2018, spending three billion RMB on chip production for about one million miners. According to Guo, this was “a three billion RMB failure.”
Guo Claims Bitmain Co-Founder Zhan Micree is Lying About His University Degree
There’s one other interesting bit of information in the Bitmain writeup from Guo. Zhan Micree, who co-founded Bitmain with Jihan Wu, is frequently said to have graduated from Tsinghua University.
Guo claims this “is not true”. He claims it “could be a typo, or a mistake made by carless reporters.” However, Zhan Micree has not yet issued a public statement clarifying the matter.
Conclusion: Is a Bitmain IPO Problematic?
Guo’s analysis suggests that a Bitmain IPO is problematic. Bitmain has run into some problems in the last two years, and these problems have been masked by Bitmain’s strong sales. Bitmain’s chips, however, have regressed against the competition. Since chip design is the core of Bitmain’s business model, this could be a problem.
Ultimately, Guo’s writeup is a controversial look at why Bitmain could run into trouble as it proceeds to an IPO. You can read the full writeup here.