Reviewing the Bitmain IPO with Samson Mow and Katherine Wu

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I think that they don’t want to IPO right now, but they have no choice because they raised with the expectation that they would IPO, so they had to file and it had to look good, or as good as they could make it look.
— Samson Mow

Interview location: Skype
Interview date: Thursday 18th October
Company: Blockstream (Samson Mow), Messari (Katherine Wu)
Role: Chief Strategy Office (Samson Mow), Director of Business Development (Katherine Wu)

The Bitmain IPO was to be the largest in history. Riding the 2017 bull run, Bitmain delivered staggering growth numbers with $billions in revenue and profit, but the bear market crash of 2018 has exposed fragilities in the business and raised many concerns with operations and strategy.

Coindesk reported this week that investors received false information around the most recent funding round, this alongside the significant questions surrounding the balance sheet, faltering innovation and the decision to support and prop up the price of Bitcoin Cash is casting a shadow over the IPO.

In this interview, I discuss the IPO and the state of Bitmain with Blockstream’s Samson Mow and Messari’s Katherine Wu.

 

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TRANSCRIPTION

Peter McCormack: Right. Good evening, Samson, good evening Katherine. Well, it’s evening here in London. I’m not sure what time it is there, I know you’re in New York, Katherine, so you’re five hours behind. Where are you, Samson?

Samson Mow: I’m on West Coast Canada.

Peter McCormack: You’re West Coast Canada, so that’s about eight hours behind. Well, thank you for agreeing to come on and do this. I’ve been pouring over the documents for the Bitmain IPO. I think it’s a very interesting subject. I’ve started to get some of my opinions together but I think it would be interesting just to start with because I’ve been following both of you from the announcement, you’ve both been adding commentary and analysis, if you could both just tell me what your overwriting thoughts are now. Probably start with you first, Katherine.

Katherine Wu: So my analysis, I would say is more of a summary so what I did was pretty much summarize the application proof that Bitmain had filed to the Hong Kong stock exchange. Of course, this is just sort of like a preliminary filing. There’s still a lot of figures and details that haven’t been disclosed or figured out yet but, you know, basically, the big thing was just, you know, this was something that’s been, years in the works now and I think to some extent, satisfied some people’s curiosities and, and then mostly, you know, they had for example like financial statements.

Katherine Wu: Obviously, we’ve always known that Bitmain’s a huge company, it’s impressive but looking at the numbers, when you look at actually capital figures in front of you, it’s impressive, right? Like, you look at how much, you know, their revenue was, right? So, first half of 2018, revenue was 2.8 billion USD which, you know, is again, it’s just very, it’s just staggering.

Katherine Wu: And then you look at their size or go look at their plans, right? They’ve got just farms not just in China but also, around the world, like, three in the US where plans expand, to Canada. You look at the size of their team, right? Bitmain’s like over two-thousand-person company and just within that, 840 of them are engineers.

Katherine Wu: So, you know, I don’t want to, spend too much time going to every single detail but I think from a macro level it was, it was a really interesting read because there’s been a lot of intrigue around the company itself and just seeing the numbers in front of me was definitely just a very, again a riveting read.

Samson Mow: Yeah. So I’ve been following Bitmain pretty much since early 2015 because back then, I was at BTCC, BTC China and they were a competitor for us, at least on the mining pool side, if not on the ASIC side, so having run a mining pool, we do deal with a lot of, manufacturers and we are familiar with a lot of people on the mining space, both, running farms and, doing the Innosilicon. And I guess following the Bitmain IPO is just a natural extension of just following along with what Bitmain has been doing, for the past few years.

Samson Mow: And I think my initial reaction was, a bit of shock because I knew that they weren’t in a really good place and it’s kind of surprising that they would want to IPO at this time and all the information that was coming to light was reconfirming all of the intel that I’ve had on what was going on inside.

Samson Mow: So I think it was an eyeopener for me and for everyone else in the space to watch this unfold in real time and all the things kind of bubble to the surface and now I see is that you can make when you actually have data because when you’re going to IPO, it’s all transparent. You’re opening up the, the kimono and it’s all out there.

Peter McCormack: And do we have any idea when the Q3 data will be out?

Samson Mow: (laughs) Well, we know that they filed at the end of September to kind of cut off the Q3 date and I actually have a different thesis on their whole IPO strategy. I think that they don’t actually want to IPO now but they have no choice but to IPO because they raised with the expectation that they would IPO.

Samson Mow: So, they had to file and it, it had to look good or as good as they could possibly make it but I don’t actually think they really wanted to IPO in this market and not with their current, their current offerings and position and just overall health of the company. So when Q3? I don’t know. They should probably submit again before the end of the year to the Hong Kong stock exchange but I think Q3 is going to be worse than Q2, at least that’s my guess.

Peter McCormack: Yeah. I think you might be right. So from my position after kind of going through everything over the last couple of days in quite a bit of detail, it feels almost like the IPO is some kind of bail out in that I was looking through the balance sheet and obviously they have quite significant crypto holdings though possibly, well, not possibly, certainly overvalued but they have very little cash for a company of two and a half thousand people.

Peter McCormack: I think it was about 105 million in cash, yet they also have quite a bit of an inventory that they’re probably struggling to sell. It’s almost like a perfect storm. They’ve got this huge cash of BCH for an illiquid market with no over the counter demand, a huge inventory of ASIC which will lose in value whilst there are better products, competitor products on the market and difficulties increasing. They’re burning through capital trying to release new chips where they’re not really having much success and they’ve had a pretty unsuccessful attempt at moving into AI so far.

Peter McCormack: It feels like a perfect storm and what I’m trying to also then understand myself and I’d love your opinion on this, both of you, is that it feels that Bitmain can’t be successful without a successful growth in the price of Bitcoin but Bitcoin can be successful without Bitmain so if you were thinking of investing in the Bitmain IPO would it be more astute to invest in Bitcoin itself?

Katherine Wu: Yeah. I mean, I think you raised some really good points and there are kind of like three points that I, or two major concerns that I had was, which was, okay, number one that they have really high crypto holdings right? I think, like, 28% and secondly, and I think they disclosed this but it’s, like, “Okay, we over-ordered, right? Inventory-wise,” in the year of 2018.

Katherine Wu: And now they’re stuck with a ton of just mining rigs or equipment that they probably aren’t going to be able to sell and on top of that, we can probably go into this later because I know you tweeted about this too but the reset of US-China trade war, with the tariffs can, I mean, in no uncertain terms will really kind of screw them over especially because Bitmain’s, over 50% of Bitmain’s sales are international sales.

Peter McCormack: Sorry. I was just going to say, I’ve got it here so is it the Trump tariffs are 27.6%?

Katherine Wu: Yeah, so basically what happened is, you know, given the whole trade war, there’s been a reclassification of, like, hardware exporting to the US and so Antminer S9s specifically, has been recategorized, and so now they’ll be facing a 27.6% tariff up from basically zero previously and, and that’s important to know because, the Antminer S9, at least in 2017, kind of were like over half of their revenue and, and of course, this is, this isn’t just Bitmain specific, right?

Katherine Wu: This is going to hit, like, basically any crypto mining, producer that comes out of, China exporting to, to the US, and I noted this earlier, but, you know, over half of Bitmain’s sales do, happen from international sales. I don’t remember what the specific trigger for the US is but, you know, they do have at least three farms in the US.

Peter McCormack: Won’t that affect other miners in China as well?

Katherine Wu: Yeah, that, that’s what I mean, yeah.

Samson Mow: Definitely, but Bitmain has kind of plunked down a lot of, commitment to build in the US unlike the other guys, right?

Katherine Wu: I would want to also bring up one interesting point, and this was at least from my perspective, is that it seemed that jus through the application proof like Bitmain was really trying to kind of come out and be like, “Oh, like, look, like, we’re also an AI company so we’re not totally screwed by buying crypto,” so just on a very high level, those are, like, the three observations/concerns that I had.

Samson Mow: So, they have 887k BCH based on the leak decks, but the fun thing was in their prospectus, they hid that. They just buried that number. They just said they have 989 million in crypto. They wrote down $102 million of it, but they still have 886 million in crypto holdings and you just have no idea what that’s in or how it’s valued because they are also valuing, valuing their crypto, at the time they acquired it so basically, it’s not going down. So that’s very scary, I think, from the perspective of any prospective investor just, or any educated prospective investor just not knowing how much they actually have and what they’re valuing it that at.

Peter McCormack: So, it’s interesting you say that because I was reading through the prospectus and I wrote down the quote for that from it. It was hidden, like, page 350 and it says, “The group accounts for cryptocurrencies at cost instead of revaluing cryptocurrencies at their fair value on each accounting reference date because the latter morally subject to inherent in substantial volatility in the value of cryptocurrencies from time to time. In addition, the group believes the cost model better reflects the group’s business mode as a group does not trade in cryptocurrencies but earns cryptocurrencies from the sale of mining hardware, proprietary mining operational of mining pooling servers.” So, I found that is also disingenuous, Samson, because I know they’ve changed the model now, but if you were forcing people to buy the equipment in BCH, you are essentially trading BCH.

Samson Mow: Yeah, and even the illiquidity is not fully explained well enough. I mean, you could value it at the time you acquired it but it’s not a very liquid market and we still don’t really have a, a standardized way to value liquidity of any crypto asset, not at least industry-wide. We can do estimates based on market depth and the like but it’s unlikely that you’d be able to offload almost a million BCH on the market right now without tanking it to zero (laughs).

Samson Mow: The other part of your question is would people be better off just buying Bitcoin and would Bitcoin be fine without Bitmain? I definitely think Bitcoin would be fine without Bitmain. It’d probably be better off because then you, you have less power in the hands of one entity that has acted maliciously in the past and acted against the best interest of Bitcoin.

Samson Mow: You’d probably be better off buying Bitcoin at this point than investing in the IPO or even just investing in one of their competitors that has new equipment coming to market or on the market already at a much lower, much, much lower valuation than … What are they raising? They’re valuing, their pre-IPO was valued at $14 billion, right?

Peter McCormack: $14 billion, yeah.

Samson Mow: Yeah. I think the potential IPO was 20, 18 or 20, something up in that range so first of all, are they going to keep growing? I really don’t know and are there better buys? Definitely.

Katherine Wu: Although I think there are two competitors at least in China, Ebang, and Canaan Partners. I don’t think either of their IPOs have been approved yet, right?

Samson Mow: Not yet, but their sizes are much smaller. I think Ebang, they’re raising one billion and Canaan is 400 million or so but, I mean, you could invest in MicroBT. They’re also raising money too, right? That’s the company founded by Yang Zuoxing, and they, they have the, the M10 (laughs) at 16 nanometer, the performance is probably going to be similar to, whatever Bitmain releases at seven nanometers and I think they’re looking for the A round now I believe so you could put money in that and you could have a nice multiple on that investment.

Peter McCormack: In reference to the Bitcoin Cash holding, I put the same question to Ari Paul and he said that’s the one thing that doesn’t concern him because he said, “If they’ve got half a billion of Bitcoin Cash and that goes to zero, then maybe they should be raising 13.5 billion rather than 14.” He said, “That’s only half a billion of the total evaluation.”

Peter McCormack: But when I was going through all the documentation, I actually listed the Bitcoin Cash situation within a section I call “Leadership.” The bets on Bitcoin Cash, the amount of money they spent on Bitcoin Cash and the way they promoted it and had to prop it up, I think was a poor reflection on the leadership and decision making of the company because essentially, they liquidated, they’ve pretty much spent, what was it? 70% of their operating profit from 2017 on acquiring Bitcoin Cash.

Samson Mow: Mm-hmm (affirmative).

Peter McCormack: Am I correct?

Samson Mow: Yes.

Peter McCormack: So, for me, less of a concern about the evaluation but more of a concern of the reflection on leadership.

Samson Mow: So, I agree with you. It’s a big warning flag on the leadership where they’re, they’re not motivated by business logic, by, just the common-sense decisions. You, you wouldn’t sell a liquid asset to buy an illiquid asset and I think the example I like was Charlie Lee saying, you know, you, like, spending money on buying cars and treating that like an asset. That’s the, not something a normal business person would do. This is very, I don’t know. It’s religious, I don’t know. They, they believe in it so much that they’re willing to make these bad business decisions to put all their chips in one basket.

Peter McCormack: It feels to me that if you are investing in Bitcoin Cash now, you’re essentially making a bet on Bitmain because without Bitmain, Bitcoin Cash essentially has no future?

Samson Mow: Well, they’re, they’re holding the bag (laughs). That, they’re definitely holding the biggest B cash bag probably on the planet and they’re accepting it for payment too. I believe they’re probably the only major, I don’t know, merchant of any type that’s taking it for payment, like, there are hotdog stands but you can’t really compare, right?

Samson Mow: These guys are accepting BCash as payment for miners and they can’t really offload it, so the whole value prop of BCash is really just Bitmain will accept it and they’re holding it on everyone’s behalf. So, I think Jihan has said in, in some conference or something that BCash is a tokenization of Bitmain and yeah, it is (laughs). If you believe in, in Bitmain, then you should buy BCash.

Peter McCormack: And also, they will then be one of the largest holders in Satoshi’s vision when that forks.

Samson Mow: That’s true. So, I think the underlying thing that everyone has to reconcile is are our fork coins really that valuable? Right? If it, they are then yeah, Bitmain’s really great because they’ve managed to accumulate a lot of something that they duplicated but for me personally, I don’t believe fork coins are that valuable.

Samson Mow: Anybody can copy it and once there’s a marketplace for it, you can assign a value to it whether or not you can actually get that value or extract that value from the market is a different question and I really don’t think that being able to copy something that’s supposed to be digitally scarce is valuable.

Peter McCormack: So, it almost feels like if they, they should have done the IPO about a, about a year ago. It would have been about the right time, a booming market and no fears, accelerated growth, no Q2, Q3 numbers to be fearful of and also it feels like there’s a risk now associated with investing in this IPO and I know people will but what I don’t understand is how smart people, smart investors will be investing tens and hundreds of millions into this with the amount of information that’s now publicly available.

Samson Mow: Mm-hmm (affirmative).

Peter McCormack: Am I missing something?

Samson Mow: No. I don’t think so. There’s a lot of FOMO, right? When the announcement first went out that Bitmain was going to IPO, the headlines were, “This will be the biggest IPO ever, bigger than Facebook, bigger than everybody,” and that drives a lot of people to throw in money and not really do their homework or, or wait, right? You could just wait until they file the prospectus but I think a lot of people were trying to rush in and get in on a deal before it, it went off.

Katherine Wu: I would also add, so I think a lot of the figures and a lot of the data that we have, part of it is from leaked decks, right? If you actually just look at what they filed, we don’t actually even get that full of a picture so Samson, you were breaking down their crypto holdings and all this but that’s because you had access to these leaked confidential decks and a normal investor, they just look at the prospectus or, or, sorry, the application proof, like, they don’t break that down in there, right? And they also don’t break down their quarter earnings, so, you know, I think, you know, Peter, to your question, which is like IPO, well, it’s because I think if a normal investor was just going to be looking at these documents, there’s a lot of details that are missing.

Peter McCormack: Right, because the H1 figures look great.

Katherine Wu: Yeah.

Samson Mow: Mm-hmm (affirmative).

Katherine Wu: And it’s not like a, it’s not like they did anything legally wrong, right? Like, yeah, they disclosed how they calculated these and, like, yes, it’s half a sentence in a four hundred page document and, you know, they lumped up their semi-quarter, they, they made it like a semi-annual reporting’s instead of quarterly and they didn’t, like, disclose a breakdown of, of their holdings but, like, you know, It wasn’t like, illegal. It’s right and they did it the right way. It’s just, you know, you don’t get the full picture. That’s all.

Peter McCormack: But they are facing potential lawsuits, right? In Hong Kong over the pref B and B+ rounds. I read about four misrepresentations which I don’t know if you’ve read this but the CICC investor deck had net income at $1.25 billion versus the KPMG prospector’s deck as $701 million. So that’s a $550 million difference.

Peter McCormack: They put a net profit target for 2018 of $1.8 billion even considering their Q2 and Q3 loses which isn’t really possible. I guess it’s, as they said, it was a skilful way, they bundled the Q1 and Q2 figures together for H1 but that is misleading in that the bull run continued in to Q1 because people were still buying equipment on back order.

Peter McCormack: You were still having a minimum order of 50 … No, I think it went down to 20 units for the S9s and also they’ve not been breaking down the invention of cryptocurrency recordings to the true market value. I’ve been reading that there’s a potential of lawsuits in, Hong Kong based on the sale in June. Have either of you looked into that?

Samson Mow: I’ve seen some things posted but I haven’t looked into it personally, so I don’t really want to comment on whether it’s accurate or the state of the lawsuits, but I’ve heard some things.

Katherine Wu: I will point out thought, I don’t actually have any background in these lawsuits but companies trying to go public are generally aware of consequences of lying or severely misleading or I hope they are, in public disclosure documents like this, so that’s all I’m going to say.

Peter McCormack: So, trying to imagine what the opportunity is for investors therefore outside of, the crypto board market is possibly for Bitmain to become a wider chip company outside of being just crypto mining chips because if they’re just crypto mining chips, I see there’s two problems. Firstly, it’s …

Peter McCormack: Well, three problems. There’s a competitive market. They don’t have a great product plus I can’t see this being a market that continues to grow for years and years and years just building mining chips and you know, the Facebook IPO was based on the fact that they could take a continually increasing share of the advertiser market and move into other products.

Peter McCormack: I guess the only way for Bitmain to become a more stable business is starting to develop chips outside of crypto chips and we know the only area they’re working at the moment is AI. You’ve looked into that, right, Samson?

Samson Mow: Yeah. I’ve, I’ve done a little bit of digging. I really don’t know if that’s a … It’s a, it’s a nice part of their pitch and their potential value proposition but I don’t think the AI market works like that, the, the market for computational power, for, you know, training AIs or deep learning.

Samson Mow: They, the researchers typically will rent or lease cloud services, intensively and at high amounts when they want to do something specific and then they shut it off whereas the model that Bitmain is predicting is that people will have these always on, I don’t know, so fun miners that will always be crunching away just like in a Bitcoin mining farm and I don’t think the demand model is the same at all.

Katherine Wu: Well, I mean, I brought up this point earlier which was that, like, through reading the application proof, I really got a sense that they were, like trying to push their, like, AI direction and so, so simple example, right? So the part where they talk about AI chips was, like, put into like a very prominent position.

Katherine Wu: In fact, they actually mention that even before they mention, mining resales and then, you know, there’s all these sayings about, okay, you know, Bitmain’s biggest, advantage is being a very strong competitor in the AI chip mining industry that, you know, they’re goanna continue. I mean, there’s just, like, a lot of section, a lot of meat just dedicated to AI, um.

Katherine Wu: Even though they, even though most, I don’t think they make that much money from it (laughs) if at all, but, you know, that was the sense that I got. I was just like, “Wow, there is a ton of like space dedicated to this, like, AI practice.” I mean, I think they have engineers working on it. It’s just sort of like that was the direction that I thought they were, like, really trying to emphasize.

Peter McCormack: Well, AI is a buzz word right now.

Samson Mow: It is. I think the bulk of the R&D is actually working on that rather than Bitcoin ASICs, so it goes to show they, they really have a big focus on it, but I don’t think it is even commercial right now. I don’t think they’re, they’re, they’re selling anything in terms of that market.

Katherine Wu: No, but they did say and, and maybe this wasn’t in the proof, but I think, or I read somewhere, I think Jihan said this but he’s, he’s predicting that in the next five years that 40% of their income will come through AI. Take that where you will.

Peter McCormack: And predicting in the next three years the valuation of the business will be $30 to $40 billion is what I also read, and I guess that’s the kind of expansion they’ll need but I can’t see AI chips having the same rapid growth as ASICs have had because it doesn’t feel like a similar kind of market that has the same accelerated growth.

Peter McCormack: I feel like the crypto accelerated growth was like a once in a generation, perhaps once in a lifetime situation. I don’t imagine we will have a year like last year. We might have bullish years and also I think so many people have been burned from it, I think there’ll be a bit more cautious next time like I bought a bunch of mining rigs, they got delivered in January and I’ve had two months where I’ve made money. I’ve had five or six where I’ve lost in a couple or break even. I think there’s a bigger threat now that people aren’t going to be diving into it so much now.

Samson Mow: Well, it’s a much different market now with the saturation. I think they kind of did it to themselves. If they didn’t overproduce their assigned inventory, it may have been a bit different now but because they went all out and they created so much inventory and flooded the market, it’s just shifted the whole dynamic right now. There’s the difficult so high, right? It’s getting less profitable to mine even if your electricity costs are very low. Who’s to know what would happen if they didn’t do that but I, I think it’s definitely, it did not help themselves and it did not help the ASIC industry in that it’s become, so cheap to buy an S9.

Peter McCormack: Samson, tell me about the next generation stuff that Bitmain are doing.

Samson Mow: Okay, so they had the, worldwide … What was it? WDS or WMS, worldwide mining summit or whatever it was called out in, Georgia and they announced that they will have seven nanometer chips and this is at a time when Ebang had … Sorry. It was like a day before Ebang announced their E11s and I think it was, like, right between the two announcements so the, at MicroBT miner was announced the day before and then I think Bitmain announced theirs and then Ebang announced theirs.

Samson Mow: So, there was like a sequence. I think it’s possible they didn’t plan to announce it and they were forced, their hand was forced because MicroBT announced their, new M10, the Whatsminer M10, and they had to say something but the Bitmain announcement was very weak because, like, if you looked at the, MicroBT announcement, they were demoing the actual miner showing the power draw at the wall (laughs) versus Bitmain, we have, they have a, a line on a PowerPoint deck saying we have seven nanometer chips.

Peter McCormack: So, do you think, how much has this had to do with them losing the former director of design, doctor Yang … Is it Zuoxing?

Samson Mow: Yeah.

Peter McCormack: How do you pronounce it?

Samson Mow: Yang Zuoxing. Yeah, so they definitely suffered a huge loss. They’re selling the, they’ve been selling the S9 for two years and then their most recent S9 iteration’s like a water cooled version of S9 (laughs). So it’s not exactly great. They definitely have been falling behind on the tech side and RND side and I don’t know for what reason is.

Samson Mow: It could be because they diverted a lot of resources to AI or they’re just not able to find someone as capable as Yang Zuoxing but the fact is, like, at 16 nanometer chips, they, MicroBT can basically compete with Bitmain’s, seven nanometer. A lot of people that are not familiar with mining might think, “Oh, like, seven nanometer …” And they, I think they, they, what was it? They said, it was 42 joules per terahash but there, there’s like a little nuance here. You can measure the power draw, the chip itself and that’s 42 joules per terahash but you have to look at the entire miner drawing at the wall and if you’re comparing that to the Whatsminer, it’s 62 joules per terahash and that’s a 16 nanometer chip which is probably half the price.

Samson Mow: I think, you can buy a 16 nanometer wafer for seven thousand dollars and a se-, seven nanometer wafer would be 12 thousand dollars and each wafer would produce about three thousand, four thousand chips. So the price is basically double to produce a seven nanometer chip and their gain is not double that of MicroBT. It’s not two times 60, not half of 64, right? It would be in the 30 range. I think that’s what should be expected for a seven nanometer, seven nanometer miner drawing 30 some odd joules per terahash at the wall and there-, that’s nowhere close.

Peter McCormack: I guess with the slow sales of the inventory that they’re already holding, they are potentially risking having quite a bit of dead inventory next year if what you’re saying is right about these other bits of equipment, Samson. Like, what is the reason to buy an S9 right now when the competitor product is so much better? Is it pricing?

Samson Mow: You wouldn’t. You wouldn’t …

Peter McCormack: Right.

Samson Mow: … because the efficiency is not there. Like, even if they gave it away for free (laughs), you’d be better off maybe still buying a miner unless you had free power because economics doesn’t work out. You, you’d still be mining at a loss probably. I mean, they are so cheap now, the S9s. I think they’re, like, 30, 20, somewhat dollars per terahash at this point. They’re cheap.

Peter McCormack: It almost feels like Bitmain were as bullish everybody else. All the traders you’ve got caught, everyone else in the market has got caught at this top thinking it would go on forever and not realizing the impact of the dip. Similar with their expansion into supporting Bitcoin Cash which is obviously now pretty much a failed experiment. It’s surprising sometimes to think that people would make these mistakes but then at the same time, I guess they’re only human, right?

Samson Mow: Well, there’s nothing really special about Bitmain. If you’re around back, back in, in, in 2015, then you know, like, they’re just another ASIC manufacturer, you know. There was, KNC and Butterfly Labs, there’s a whole bunch and a lot of them folded just because they couldn’t withstand the bear market.

Samson Mow: There’s nothing inherently special about Bitmain. They just had lower costs and a more efficient miner and they were able to just hang on but if, if that bear market lasted a bit longer, they could have went under it that time too. They just got lucky and they managed to, you know, slide through and survive and they just built on top of their S7 and S9 business units and managed to become the biggest but this, this stuff is cyclical.

Samson Mow: People go up and they go down. It’s not like Bitmain wants to gain a dominant position. They’ll be dominant forever because as we’ve discussed, they do make bad decisions and they have made a lot of early big gambles that did not pay off.

Katherine Wu: I mean, there is something to be said about the perseverance. I think in this application, they said that, among ASIC chip sales, they owned 75% of global market share which, you know, that’s …

Samson Mow: Yeah.

Katherine Wu: That’s impressive.

Samson Mow: That’s really off of the S9 and S7. They, they, those were the best ones for the, like, the past two years, I would say, right? Maybe a little bit less than two years but that is, that was the most efficient miner for a long, long time.

Peter McCormack: And now, they have the wrong kind of momentum going into this IPO then because the other machines that you’ve noticed … Is it the Whatsminer M10 …

Samson Mow: Mm-hmm (affirmative).

Peter McCormack: Is it outperforming at, the Ebang machines are outperforming and it looks like they haven’t had the live running demo of the seven NM happening?

Samson Mow: No. They just said it’s launched, and the crazy thing was they had the audacity to write in their prospectus that it was launched when they just kind of announced it. That’s not launched by any definition in my book.

Peter McCormack: So, do you think, Samson, that in some ways, Bitmain have a lot of risk at the moment and the traditional question, are they too big to fail or could they actually fail as a business?

Samson Mow: Well, they’ve raised a lot of money (laughs) for the IPO, the pre-IPO round and I think that will keep them going but unless they actually launch a new product and is more competitive than Ebang’s, I don’t think they’re too big to fail. I think they’re definitely, they just go poof just as easily as any of the other ASIC manufacturers back in 2014, 2015.

Peter McCormack: So, I wasn’t around back then. Was it a similar market conditions or like a bear market and there just wasn’t enough customers and similar situation happened?

Samson Mow: Yeah. It’s a bear market and it was not profitable to mine, based on the prices at certain times and then there’s not much demand for miners, like, it’s really linked, like, the, the price of Bitcoin and the demand for ASICs is linked.

Samson Mow: It’s just inexplicably linked together and the, the price of Bitcoin, if it was higher, I think would have made a bit of a different story for Bitmain right now and it’s even more ironic because they were the ones attacking Bitcoin for a long time and they even wrote it in their prospectus that, you know, if, Bitcoin is not presented well or the market looks poorly upon Bitcoin, it’ll affect them negatively but they’ve been doing this attack on Bitcoin for the last two years.

Peter McCormack: What do you think the impact on the industry would be if there was a collapse of Bitmain? I know you’re thinking it could be positive, but would there be any immediate impact in terms of, like, any immediate impact from the market, any negative impact or was it just a positive?

Samson Mow: I think immediate impact? Not much from a production standpoint because I think if anyone’s buying S9s now, they’re probably making, a bad decision (laughs) because those will be underwater soon, like, they, they cannot pay for themselves at the current difficulty unless Bitmain keeps selling at a bigger loss.

Samson Mow: They’re already selling them at a loss. They’re, they’d have to sell it at a bigger loss and even then it’s still not … You’d be better off buying a E11 or an M10 but in terms of production, I don’t think that it would be an issue. The other manufacturers can keep up and satisfy demand.

Samson Mow: The, there may be an issue with some of their mining farms closing down but I think people would just buy up those assets, on, on the, on an auction or something. They’re used machines. People would just stack those up and if they have cheap power, they would keep running them but overall, I don’t think it would be a big impact.

Peter McCormack: I also noticed they’ve invested in Opera, the browser. Did you think there’s anything in this? What else do you think they’re trying to achieve here? Do you think there’s just further diversification?

Katherine Wu: I mean, so okay, correct me if I’m wrong but do they, Bitmain owns APTC, right?

Samson Mow: No. They are a big investor in Bitcan. Jihan founded APTC, I think or one of, was one of the founders but he’s, like, departed from it and it’s totally separate from him and his operation now.

Katherine Wu: I see. Okay, because I was just trying to think of, like, you know, given that most of their money comes from crypto, they’re trying to make AI play, like, how else that they’re diversifying their income stream but, I saw the browser thing. I didn’t really make much of it. What do, what about you?

Peter McCormack: I mean, my assumption was that it was to bring crypto into the browser.

Samson Mow: Like Brave?

Peter McCormack: Yeah.

Samson Mow: I really don’t know. It seems like kind of a random investment. I mean, if you look at the timing of the investments, I think they are flushed with cash at some point, and they’re riding high and they’re just putting money on different projects and they’re not really investing with any, any cohesive strategy.

Samson Mow: I mean, they set up a Israeli entity to do a mining pool there but there’s like no mining in that region so (laughs) I think they’re sweeping it under the rug now but there was a mining pool that they launch, Connect BTC or for, something like Connect something but that’s, it was, it had barely any hash rate. I think it’s just gone now but Opera, it seems like another kind of random hopeful investment. There may be prop up BCash but like I, I don’t really see the connection. Maybe it’s to use it to pay for, I don’t know, or moving ads or something it, but it’s a stretch, I think.

Peter McCormack: Do you think with the IPO, if it’s successful that they will be using the money to further prop up Bitcoin Cash and try and double down on their bet?

Samson Mow: Definitely. I mean, BCash is their tokenization of their company, so they can increase their value by propping it up. So, I think they will keep on putting money in these random projects that are struggling for adoption. I mean, they’re investing in Yours which nobody is using so (laughs), they’re just trying everything right now at this point.

Peter McCormack: Yours is the, project by Ryan Charles? So, they’re putting money into anything which is accepting Bitcoin Cash, right?

Samson Mow: Well, it’s great for anyone (laughs) trying to launch a startup is building on, on Bitcoin Cash, right? You’ll get money from Bitmain.

Peter McCormack: This is almost a Bitcoin Cash or as you said, BCash karma playing out for them in that they’ve openly attacked Bitcoin with the creation of Bitcoin Cash.

Samson Mow: Yeah.

Peter McCormack: And that bet is not really now paid off. They are stock holding a large bag. I can’t make a decision whether this is a misleading IPO or a chaotic IPO and I think is probably somewhere in the middle.

Samson Mow: Yeah. It’s somewhere in the middle. I mean, Katherine, you can chime in on this too but reading their prospectus, it’s like layers upon layers of, I don’t know, o-, occlusion. They’re trying to hide so many different things in this thing but write so much about it. It’s hard to, like, carve out the facts of what they actually did, what they have, how they’re valuing things. It just … You read it and then, at the end, you’re still, like, scratching your head thinking what exactly did they do, right? How much do they, how much do they have of different things? How much inventory do they have? It’s not really clear at all.

Katherine Wu: Yeah. I mean, for me, it’s sort of like I thought this document was a really fantastic overview of even, like, if you think about the crypto markets, right? Like, they spend time talking about, like, you know, Coinbase accounts and how much they’ve grown and, you know, for me, it’s kind of like reading the history of crypto mining almost from, like, 2013 onwards.

Katherine Wu: Specifically, about Bitmain, I agree with you, like, there are a lot of questions that I was left with. Like, for example, like I said earlier, a lot of details were just sort of unclear. The AI thing took up, like, half of it, which people were just, like, didn’t even know, right? Because I remember summarizing it and I was like, “Oh, yeah, like they also do AI,” and someone was like, “What?” Like, “When did this come in?”

Katherine Wu: But, it was a, interesting first look at such a big company, but, you know, also, going through and preparing a document like this, I mean, do you think about the legal cost I mean, it just, all of that cost put together, an effort that would have been required to, like, clean other, I don’t know, financial statements and stuff, um. It wouldn’t, it wasn’t like a haphazard, like, last minute decision, right? This has obviously been planned for a while, but if you’re asking me the intent, like, I don’t, I don’t know. It’s hard to, for me to guess that.

Peter McCormack: Well, I guess with anything it’s, they’re trying to sell it, right? So, they’re always goanna try and paint the best picture. It’s a prospectus, right? It’s a piece of marketing. So, everything has to be sold.

Katherine Wu: I don’t know if this is a prospectus. I think this is just the … I mean, this is only, like, one of many steps that actually get listed. So this is just the application proof so which means that it’s currently under review by the Hong Kong stock exchange, because, like, once you submit it, there’s still, like, a review process and you actually have to go and, like, meet with the stock exchange and then there’s a whole marketing period where you actually go and, like, try and talk to, like, banks and try get it sold you know. There, there’s a lot of steps that come before. This is just sort of the first of many.

Samson Mow: In the US, this is the, it would be a prospectus, right? In Hong Kong, it’s like a, a filing or something like that.

Katherine Wu: Yeah. That’s why I kept saying application proof because that’s, like, what the …

Samson Mow: Yeah.

Katherine Wu: In Hong Kong and so, you know, there are going to be questions at this Hong Kong stock exchange will or at least hope, that I hope will have, right? Hopefully, they’ll drill down on like, “All right, your crypto holdings exactly, like, how does that break down?” it’s a big document but a lot of details are still very fuzzy and, who knows if they’re going to ultimately get listed.

Peter McCormack: So, what, they might not get listed?

Samson Mow: They might not.

Katherine Wu: They might not. Yeah, I mean, look at Ebang, right? Ebang filed their, their prospectus or their application back in, May or March or earlier this year and-

Samson Mow: Same with Avalon.

Katherine Wu: Yeah, exactly, like, it’s been months and we haven’t heard anything yet, so, you know, they … Bitmain, Bitmain is not the first crypto mining company to file in Hong Kong and, like, so far nothing’s been approved, so …

Samson Mow: Yeah.

Katherine Wu: … There’s a lot of uncertainties.

Samson Mow: I know for Ebang, like, Canaan, sorry. I misspoke earlier. It’s Canaan, not Avalon, but, they, they filed a, a few times and they’ve had to do a lot of revisions, so the Hong Kong stock exchange is not slacking on reviewing this stuff. They’re very stringent in their requirements and you do have to, you do get rejected and they say, “File again.”

Samson Mow: I think, recently, like a month ago, Avalon, or sorry, Canaan had to refile because of some issues in their application. I actually think Ebang will be the first to successfully IPO, if they do get approvals. There’s another layer of complexity on the, Bitmain IPO which some people may not be aware of which is it’s actually more difficult for them to IPO because of their mining operations, their actual mining farm operations and pools.

Samson Mow: It complicates their whole offering a lot more than say, Canaan or Ebang because those guys are IPO-ing as purely semi-conductor IC design companies and manufacturing companies, right? They have no farms, they have no pools or anything like that. It’s a very straight forward offering. Bitmain’s offering, having read the prospectus, it’s really convoluted, confusing and they, their, their business lines are just so complicated and then add in the AI which is really out there and then the random acquisitions.

Samson Mow: If you look at the Ebang filing, it’s just like, you know, we make these, mining machines. That’s it. (laughs) It’s much more streamlined and straightforward so the likelihood of Bitmain getting approved is actually less than the other two, I believe.

Peter McCormack: So, to get listed, who can invest? Is it only people based in Hong Kong? Is it international? How does it work? Are there any kind of restrictions or rules around it? Is it the public can invest or major institutions? How does that actually work? Where would they be expecting to get the majority of the money from?

Samson Mow: I think, anybody with a Hong Kong brokerage account would be able to invest. I, I don’t believe it’s restricted to just Hong Kong residents but I’m not 100% sure on that one.

Peter McCormack: Can you both summarize and wrap up your thoughts are on the IPO? How do you think this is going to play out?

Katherine Wu: Well, so like I said earlier, like, this is sort of just one of many steps, and I kind of, I do agree with Samson. I’m not sure that Bitmain would be the first crypto mining company to IPO in Hong Kong. But even given that, you know, given that there’s still a lot of details to be figured out and to sort of, really hash out, I think this document, really illustrates…

Katherine Wu: …It’s been a really impressive, like, growth and journey, right? I think Bitmain is, still a very impressive company, and I think a lot of the details really only goes to show just how far the crypto, industry, even from a consumer base, right? Like, they were saying how their users jump from, like six thousand to, like, 80 thousand.

Katherine Wu: I mean, that’s just impressive, so you know, regardless of I think what happens, I personally just, like, found this document to be really interesting story almost to read, and I think it will be really interesting to see where Bitmain goes, whether they really do kind of pivoted into a AI company, or, you know, maybe these seemingly random acquisitions do have a point/ It’s hard for me to say but, for me, it was a really interesting read.

Samson Mow: I think, the Bitmain IPO, if they get through approvals, will probably be less spectacular than a lot of people are hoping it will be. I think they will need to refile, they’ll need to provide their Q3 numbers and we’re going to see that they’re nowhere near their projected profits of $1.78 billion in 2018.

Samson Mow: They’ve probably eaten through most of that, their Q1 profits by now. Q1 was definitely profitable and I think they had hoped to IPO based on Q1 but that’s just not going to happen. We saw Q2, we’re going to see Q3 and it’s likely we’ll see Q4 before they’re approved so let’s just keep on watching seeing how it unfolds.

Peter McCormack: So full year figures could be negative?

Samson Mow: It’s very possible.

Peter McCormack: And would you invest in it?

Samson Mow: I definitely would not.

Peter McCormack: What about you, Katherine?

Katherine Wu: I try not to invest in anything that I don't totally understand.

Peter McCormack: I just want to ask you, Samson, how's the launch of Liquid gone?

Samson Mow: pretty good, we, we're seeing even more interest after we've launched so we've got people reaching out to us to, to join the network and we just have to get people to integrate now and expose it to their end users.

Peter McCormack: Fantastic.

Samson Mow: A lot of work.

Peter McCormack: Great, and how can everyone stay in touch with you, Samson?

Samson Mow: I'm on Twitter. My handle is @excellion, and I'm on Facebook too and LinkedIn.

Peter McCormack: And Katherine, how do people stay in touch with you?

Katherine Wu: So just find me on Twitter. My handle is @Katherineykyu. Please don't find me on Facebook. I will not accept your friend request (laughs).

Katherine Wu: But I am on LinkedIn (laughs) under Katherine Wu and if you search Katherine Wu, it's a pretty common name. Just search, Messari.

Peter McCormack: Fantastic.