Chipping In: Bitmain’s Journey to a Multi-Billion Dollar Valuation

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Bitmain’s aim to raise $18 billion at a market capitalization of up to $50 billion could potentially result in one of the largest IPO in history.

Bitcoin Exchange CEX.IO

After the closure of an IPO funding round in August, the Bitcoin mining giant Bitmain is now worth $15 billion. Bitmain’s aim to raise $18 billion at a market capitalization of up to $50 billion could potentially result in one of the largest IPO in history. Founded only five years ago by Jihan Wu and Micree Zhan, Bitmain has presided over the transformation of Bitcoin mining from a quirky hobby into a multi billion-dollar industry. In a cut-throat environment where new technological advances are the lifeline of companies trying to stay ahead of the game, Bitmain has proven itself a fearsome competitor.

From bit parts to Bitmain

In spite of the stability of its position at the top of the industry, Bitmain was born of chance. Jihan Wu — then working in private equity, having graduated with an economics degree from the prestigious Peking University — came across Micree Zhan, an ambitious software developer with big ideas. Zhan tried to get Wu to help him source funding for his 2010 startup, DivaIP, but the project never came to fruition and the two men parted ways after a few months.

The beginning of their fateful partnership began a few years later in 2013, after Wu read a blog post about how Bitcoin had the potential to be “the most dangerous open-source project ever.” Wu had spent his entire life savings on the nascent cryptocurrency. Fortunately, things were beginning to pick up for both Bitcoin and the young investor. The price of Bitcoin had leapt from $20 to $900 and, at this point, Wu realized he could make 25 coins every 10 minutes. However, having gone all in with his savings, this return was not good enough. Wu realized he would need a more efficient way to mine. And then he remembered Zhan. After being given a crash course on Bitcoin, Zhan was tasked with creating a piece of equipment with the sole purpose of mining efficiently and quickly. On November 2013, the Antminer S1 was unveiled and the company has been skyrocketing every since.

Five years on and tens of billions of dollars later, Bitmain has secured investment from major companies across the globe. The deal included an investment from Japanese tech giant, Softbank, which currently holds a 15 percent stake in the successful ride-hailing app, Uber. Tencent, the developer of China’s most popular social media network, WeChat, which has over 1 billion monthly users and recently outstripped Facebook’s market cap by $72 billion in March 2018, also invested. Reports suggest that Bitmain is planning to launch its IPO on the Hong Kong Stock Exchange (HKEX) in September 2018, at an estimated valuation of $30 billion. In the first quarter of 2018 alone, Bitmain earned around $1 billion in net profit, closing a Series B funding round that saw its valuation rise to $12 billion at the time.

Bitmain also secured between $300 and $400 million from a Sequoia Capital subsidiary (Sequoia China), U.S hedge fund Coatue and EDBI — a governmental investment fund based in Singapore — in a Series B funding round in June.

Block party: How Bitmain maintains its vice grip

Bitmain’s transformation of the market with the Antminer S1 not only meant that the graphics cards and CPUs used by home computers could no longer keep up, but also that people who mined as a hobby were presented with a steep financial barrier if they wanted to shake it with the pros. Bitmain’s latest rig, the Antminer S9, is currently the most powerful miner available on the market. The rig has a hash rate of 13.5TH/s ±5 percent and can produce north of $300 in revenue per month. Bitcoin mining consumes vast quantities of energy, with one estimate stating that it is due to use a half percent of the world’s energy by the end of 2018. Small time players often find that the exorbitant energy consumption, combined with the cost of purchasing the number of needed units, makes it impossible to turn a meaningful profit. Bitmain’s ASICs are nonrefundable, bringing a consistent and irrefutable source of income, although the Antminer S9 does come with a (limited) warranty.

A prime example of vertical integration, Bitmain has designed every piece of equipment that goes into its rigs, builds them itself and then sells them to a client base that spans the globe. As well as renting out the machines on contract, Bitmain has also developed several sites with enormous concentrations of processing equipment, meaning they are able to improve their chances of mining new blocks. Miners are rewarded with a certain number of Bitcoin per block added to the blockchain. Blocks are found roughly every 10 minutes, meaning that the biggest players are able to make up to $7 million a day. Currently, Bitmain Technologies controls 45 percent of all existing computing power in the network.

Decentralization

Described as the ‘business brains’ behind Bitmain, Wu’s company has brought him both wealth and controversy. Bitmain’s processing power and domination of the market means that they have a lot of clout within the network. Most notably, Wu has consistently advocated for the increase of Bitcoin’s transaction capacity by eliminating the current 1 MB limit. Wu’s vocal support for this move led to the suspicion that he was behind the recent Bitcoin-Bitcoin Cash hard fork, aided by the fact that the split was supported by ViaBTC, a company that Bitmain happens to have invested in.

In spite of Wu’s claims of innocence, others still believe he has ulterior motives. In the words of Jack Liao, operator of the Shenzhen-based mining company, Lightning ASIC:

“He wants to control the code, he wants to control the environment[…]Then he can design the entire Bitcoin ecosystem.”

If true, the allegations suggest that Bitcoin is vulnerable to manipulation by both traders, who have large quantities of Bitcoin, and miners like Bitmain.

The CSO of the cyrptocurrency consulting firm Blockstream, Samson Mow, wrote in Fortune:

‘Jihan does have a lot of control for now, and much of that is simply due to mining centralization. As Bitmain is so vertically integrated, from selling ASICs, to operating mining farms, to running mining pools, he can prevent network upgrades and attempt to hijack the Bitcoin brand with things like [Bitcoin Cash].’

Despite this, Mow still believes the democratic and decentralized values that underpin Bitcoin remain uncompromised. Mow maintains that the real power lies with the users and that any power held by Wu will be short-lived.

Dark clouds on the horizon: Bitmain and a changing industry

Though Bitmain’s prominence over Bitcoin mining is undeniable, other players are starting to encroach upon its turf.

The mining giant’s fiercest competitor is Canaan, which recently announced its intention to launch an IPO. If successful, Canaan could beat Bitmain in becoming the first blockchain-based company to ever be listed on the HKEX. An unnamed source recently told the South China Morning Post that the company hopes to raise $1 billion. Prior to the HKEX, the company had been considering listing in the United States. Canaan’s previous attempts in China fell through after regulators disagreed with the proposed valuation of the deal.

Though Canaan operates 15 percent of the mining market, it is dwarfed by Bitmain’s 75 percent. And Bitmain doesn’t intend to give up any ground without a fight. Bitmain has a 66.6 percent share of global shipments compared to Canaan’s 20.9 percent. Canaan has been hard at work to remedy this, greatly increasing its prepayments to both Taiwan Semiconductor Manufacturing Corp. and Global Unichip Corp in an effort to get the upper hand over future production. However, Bitmain is in a stronger position to defend its sought-after position at the pinnacle of the industry.

Since the introduction of the Antminer S5 several years ago, their power consumption has been slashed by about a third. This had the dual effect of allowing Bitmain to harvest Bitcoin at a great rate than ever before, while also attracting other miners who sought to buy the rigs for their own use. This left Bitmain with a 50 percent profit margin on the product. Now onto its ninth incarnation, Bitmain’s Antminer devices continue to hold on to their prestigious position at the top of the market. In a bid to ensure this is the state of affairs for the foreseeable future, the company slashed the prices of their product by more than 80 percent, in turn, forcing Canaan to lower the price of its A841 by 30 percent. It’s likely the products’ profitability will suffer, but Bitmain has its position of power and profit margin on its side.

Intelligent Design: Bitmain looks to AI to keep ahead of the curve

For the last two years, the brains behind Bitmain’s software innovation, Micree Zhan, has been working on a deep learning chip. Inspired by Liu Cixin’s wildly popular science-fiction novel, The Three-Body Problem, Zhan’s eureka moment came to him during his decades-long habit of meditation. Zhan was inspired by something called Sophon, a fictional proton-sized computer sent by an alien civilization to bring scientific discovery on Earth to a grinding halt. The long and short of this fictional example is that the aliens use the technology to take over the planet. It doesn’t take a wild stretch of the imagination to see how this translates to Bitmain’s dominance of the industry, along with its desire to keep things that way.

These souped-up ASICs could be a shot in the arm for the mining industry. Michael Bedford Taylor, a professor at the University of Washington, spoke about the kind of technology Zhan is trying to develop, albeit from a more communitarian perspective:

“This will invigorate the hardware field[…] We are about to see the emergence of all kinds of ASICs clouds, and the Bitcoin hardware community has demonstrated that under the right conditions, this can happen rapidly as a grassroots effort.”

Zhan’s idea is to incorporate some of the most common deep learning algorithms into Bitmain’s devices. With this generation of ASICs, users will be able to apply their own datasets and build their own models. The AI incorporated into the new devices will learn from the results and improve at a vastly accelerated pace. Google’s Deep Mind unit uses the same technology to train its AlphaGo artificial intelligence by using Tensor Processing Unit chips.

Their first publicly available version of this intelligent design vision is called the Sophon BM1680, which was released in October 2017. The chip can greatly speed up machine learning. Wu estimates that AI chips could bring in up to 40 percent of Bitmain’s revenue in the next five years.

President for life: Bitmain moves abroad to avoid clampdown

Thanks in part to low electricity rates, China was reported to have filed the most patents for blockchain in the world. However, moves to both regulate the crypto sphere and restrict the power consumption of miners threatens to drastically change the business environment in China.

In an effort to resist the clampdown, Bitmain has already begun to shift its operations abroad. In December 2017, Bitmain Switzerland was registered in the small Swiss canton of Zug. The company was registered under the name of Bitmain co-founder Jihan Wu, as well as that of Chinese national Ti Liu and Swiss national Christian Johannes Meisser. A spokesman told the Swiss paper Handelszeitung about the move:

“Bitmain Switzerland will play a central role during our global expansion.”

In a press release on Aug. 6, Bitmain revealed that it will also build a $500 million blockchain data center and mining facility in Texas. Situated in Rockdale, Texas, the project is due to finish in late 2018 and to begin operations by early 2019.

As philosophical debates rage about the future of blockchain and how it should be developed, Bitmain is sure to remain a powerful player at the international table. Whether its innovations contribute to the decentralization and democratic values that are so important to the community at large, however, remains to be seen.

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