Bitcoins are worth less than half of what they were in December. Mining them is 60 percent less profitable than it was in 2017. Even retailers of hobbyist mining rigs say they are seeing fewer customers. Why, then, is Canaan Inc, a leading cryptocurrency mining rig supplier, looking to raise up to $2 billion, according to two sources with knowledge of the deal, in the world's biggest bitcoin-focused initial public offering to date?
Canaan is expected to present itself to investors not so much as a bitcoin company, but as a chip designer focused on developing other markets in artificial intelligence and blockchain, the electronic ledger that underpins bitcoin. “Their customers happen to be bitcoin miners. But they are a chip company, not a bitcoin company," said one of the sources. Both declined to be named because information about the IPO has not yet been made public.
The offering for Canaan, which claims to be the world's second-largest bitcoin mining hardware supplier, is scheduled for July, the sources said. Canaan declined to comment. The Beijing-based company's profits rose seven-fold last year to 361 million yuan ($56.67 million), according to its prospectus, as bitcoin's soaring price drove a surge in demand for its products, sold under the AvalonMiner brand.
But the effects of bitcoin's volatility and rising mining costs can be seen in the shops of Sham Shui Po, just a few kilometres from Hong Kong's central business district, where the IPO has been filed. Businesses selling mining rigs there said demand - especially for high-end machines - was limping along.
Alvin Wong said the only rig in his Hong Kong electronics store this week was plugged in underneath the cash register, busily crunching numbers in search of profit.
"Since we weren't selling the miner, we thought we might as well use it," said Wong, a sales representative at Centralfield, in the Sham Shui Po computer district.
The change has come suddenly. Just a few months ago, demand for bitcoin mining gear in Sham Shui Po was booming. Bitcoin prices have fallen 40 percent this year, hurting margins for miners. The cryptocurrency rose from $1,000 in January last year to more than $19,000 in December. Currently, one bitcoin is worth about $8,400.
Promised Land
To some, the IPO presents a rare opportunity to buy into in a cryptocurrency supply company. They point to the old investing adage that the surest way to make money in a gold rush is to sell mining equipment.
"Investors are always looking for crypto 'picks and shovels', and that's what this is," said Jehan Chu, managing partner at Kenetic Capital, a Hong Kong based blockchain and crypto currency investment firm.
Canaan produces mining machines containing application specific integrated circuits, or ASICs, which are chips designed for a single purpose. Its customers are mostly large-scale miners with facilities holding thousands of machines working around the clock. However, the rules governing bitcoin limit the amount that can be mined at one time. This means that the more computers there are mining, the more work and electricity are needed to earn the tokens.
Fast-rising capacity in the industry has hit profits hard: combined with the fall in bitcoin prices, analysts at Bernstein estimate that mining revenues are just 37 percent of their 2017 peak at roughly $17 million per day. Last month, Taiwan Semiconductor Manufacturing Corporation (TSMC), the world's largest chip manufacturer, cited uncertainty in the crypto market as a reason it was cutting its full-year sales target. TSMC is a major producer for Canaan Creative and its larger rival, Bitmain.
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Cryptocurrency mining is under pressure in China. But last month, China Securities Regulatory Commission vice-chairman Jiang Yang gave Canaan the regulator's apparent approval.
Visiting its factory, he said: “no matter what the chip is used for, fundamentally you’re still a chip company, and I hope you list in China," according to mainland media reports.
Market Test
Bitcoin-related companies have to date largely avoided diving directly into the public market - a fact illustrated by the pricing range suggested for Canaan's deal. Although the two sources were confident the IPO could raise $2 billion, others with knowledge of the deal said it was more likely to raise between $500 million and $1 billion.
A lack of comparable companies makes it harder to price. In Australia, DigitalBTC went public via a backdoor listing in 2014. Eighteen months later, however, the company changed its name to DigitalX and switched its focus to fintech software. Last year in Canada, listed miner Leeta Gold became HIVE Blockchain.
"Its not your everyday investment world," said HIVE chairman Frank Holmes, who is relatively new to the crypto world, but is a well-known investor in gold.
HIVE, with a market capitalisation of $318 million, mines bitcoin and other cryptocurrencies in Iceland and Sweden, favoured for the energy-intensive process because of their cool temperatures and cheap power.
"We became the first public company that allowed institutions to play in this kind of space," Holmes added, pointing out that HIVE's second-largest shareholder is Fidelity, the giant U.S. fund manager.
Other companies are also getting in on the act, with Canaan's smaller rival Ebang also considering a Hong Kong IPO, according to IFR, a Thomson Reuters publication.
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"The excitement about bitcoin and cryptocurrencies is not nearly finished, it is only just beginning," said Kenetic's Chu, who added that if successful, Canaan's IPO would encourage other cryptocurrency-related firms to list.
People involved in Canaan's IPO say the prospects for the offering depend in part on the price of bitcoin over the next two months. While soggy prices, combined with rising mining capacity, will hit the hobby miners served by the Sham Shui Po shops far harder than Canaan's industrial-sized customers, they would still cast a shadow over the deal. In Sham Shui Po, meanwhile, Alvin Wong says he will soon unplug his rig to put it and others back on the shelves - just as soon as customer demand returns.
(Reporting by Alun John and Jennifer Hughe of Reuters)
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