Participating in an initial coin offering is pretty risky, but buying into the initial public offering of a leading player in the crypto world could be stomach-churning too.
The world’s largest cryptocurrency-mining equipment-maker Bitmain on Wednesday filed for an IPO to list in Hong Kong. So far there are no details of how much the China-based company—which made a $1.4 billion net profit in the 12 months ended June—plans to raise or at what valuation. Almost all of Bitmain’s $5.1 billion revenue during the 12-month period came from selling mining rigs for cryptocurrencies, mostly bitcoin.
Bitmain will likely find it hard to repeat its stellar year following the boom and bust in cryptocurrencies. Bitcoin, the leading cryptocurrency, has lost two-thirds of its value after hitting a record high near $20,000 in December.
Selling mining rigs—specially-designed machines that can solve the mathematical equations needed to generate new crypto coins—might look like a more stable business than crypto trading. In reality, Bitmain’s business could be just as volatile. To start with, the company owned almost $900 million of cryptocurrencies as of June—more than half of its net assets—which could lead to substantial losses if the crypto market declines further.
When crypto prices were sky high, Bitmain could sell its rigs at high prices to miners hoping to make a quick buck. But rig prices slumped too when cryptocurrency markets went into free fall this year. The average selling price of Bitmain’s mining rigs was $1,353 in the second half of 2017, but fell by over a quarter to $992 in the first half of this year. Current prices are even lower: Antminer S9-Hydro, Bitmain’s latest machine launched last month, is currently selling for $719.
The price slide means Bitmain is likely to prove much less profitable in the current six-month period, as its margins narrow. The average cost of manufacturing and materials for each mining rig Bitmain sold in the first half was $576. Costs could fall in future, but they are unlikely to drop as quickly as selling prices.
The price slide could also lead to further write downs of Bitmain’s $900 million inventory of unsold mining rig equipment: It already impaired almost a third of its stock in the first half of this year. As the arms race in crypto mining rigs heats up, newer machines from rivals are making older models obsolete pretty quickly.
When the gold rushes come to an end, even those selling shovels aren’t immune.
Write to Jacky Wong at JACKY.WONG@wsj.com