
Crypto mining giant Bitmain reveals heady growth as it files for IPO - smaili
https://techcrunch.com/2018/09/26/bitmain-hong-kong-ipo/
======
dwighttk
Bitmain reports financials in halves instead of quarters, disguising downturn
with incredible growth from the beginning of this year

might be a better title, though it is a little long.

~~~
nullnilvoid
As a matter of fact, semi-annual reporting is standard in Hong Kong Stock
Exchange. It requires only semi-annual reporting, for long-term investing.

[1] [https://www.arx.cfa/up/post/569/Asia-s-Financial-
Reporting-F...](https://www.arx.cfa/up/post/569/Asia-s-Financial-Reporting-
Frequency.pdf)

------
ldayley
Classic gold rush pattern: the people who outfit the miners do better overall
than the vast majority of people who do the mining.

(Generalizing here, but seems similar to California in 1849, Yukon in 1898,
and several others)

~~~
carbocation
Interestingly, Bitmain sold most of its Bitcoin and accumulated tons of
Bitcoin Cash, leading to hundreds of millions of dollars in losses, so they
also seem to have burned themselves on the gold rush as well.

~~~
snikeris
Did they then sell the Bitcoin Cash after its price declined? I wouldn't say
they lost anything until they sell their asset at a loss.

~~~
Drakim
Not even if it drops down to 0? I'd say it counts as a loss as it goes down,
even if you haven't sold it yet. You can't say that you have 3 billion in
assets because "in the future it's hopefully rise in value!"

~~~
snikeris
[https://www.reviso.com/accountingsoftware/accounting-
words/l...](https://www.reviso.com/accountingsoftware/accounting-words/loss)

> Losses can result from a number of activities such as; sale of an asset for
> less than its carrying amount, the write-down of assets, or a loss from
> lawsuits.

Seems like some action needs to be taken for it to be considered a loss.

~~~
village-idiot
There’s a split between the technical definition of a loss, which requires a
sale or transfer, and the layman’s definition of a loss, which does not.

Technically if you hold an asset that’s traded down to 0, you haven’t
_realized_ the loss yet. But the average civilian would say that you’ve “lost
everything”.

~~~
Retric
Companies are valued based on cash flows + assets. That value can change even
when they don't sell assets.

EX: If a hotel chain was destroyed by a hurricane it's stock price would drop
for both cash flows and the value of properties, not when they tried to
liquidate the properties.

~~~
village-idiot
Not a good comparison.

First, there's a difference between an assets trading value dropping, and it
being physically destroyed. With the former you can continue to hold and hope
that price recovers, with the latter there is no hope that the hotel will
reconstruct itself without serious cash expenditure.

Second, a hotel chain is both property and the ability to generate cash flow.
If that is destroyed, the company's ability to generate more revenue is
eliminated. Financial assets used for speculation typically do not generate a
large amount of cash flow while sitting idle. Instead there's the expectation
that they can be sold later for a profit (ideally).

Finally, there is an important disconnect between a company's assets and its
stock price, since the stock price represents an expectation of future
profits. If traders think that BCash will rise in the near future, they might
vote up Bitmain stock before the underlying assets move in the slightest.

~~~
Retric
I said cash flow was part of the equation.

But, assuming a company had an insurance payout for their property: Then they
go from cash flow A + property's worth X, to cash flow 0 + property's worth Y
+ insurance money in a bank account. Under your method because Y is undefined
you assume it's X and then add the insurance money to the total valuation.
That's really not what happens.

I don't disagree that cash flows could increase the value of the company.
However, the value of assets really are part of the equation and get updated
when the value of those assets change.

------
briatx
This reads to me like Bitmain wants to cash out while it can. Not a great
indicator for the blockchain space.

~~~
joshschreuder
Maybe it's that more cryptocurrencies are moving to ASIC resistant hashes to
curb Bitmain and the like also

------
rajacombinator
IPOs of smart money companies (aka dumping your stock on dumb money public
markets) generally signal the top of the market.

~~~
wc-
The crypto market is down 75% to 95% or more depending on the asset. This is a
last ditch effort to stay solvent after betting the farm on the bull market
continuing around Jan 2018.

------
kgwgk
Matt Levine column today
([https://www.bloomberg.com/view/articles/2018-09-27/sharehold...](https://www.bloomberg.com/view/articles/2018-09-27/shareholder-
value-could-be-worse))

Bitmain.

Maybe the most interesting thing about the initial public offering of Bitmain
Technologies is its accounting. (Here is the preliminary offering document,
here are articles about it from Bloomberg News and the Wall Street Journal,
and here is an analysis from my Bloomberg Opinion colleague Tim Culpan.)
Bitmain is a company that mostly sells cryptocurrency mining hardware; it also
does some crypto mining itself. It seems to be quite profitable: In the first
half of 2018, it had net income of $743 million, and profit from operations of
$1.07 billion, on about $2.8 billion of revenue. (It seems to have had a loss
in the second quarter though.) Its business seems fairly straightforward: Most
of its revenue comes from selling mining hardware, most of its costs come from
building the mining hardware, and the revenue greatly exceeds the costs.

But while Bitmain has over a billion dollars of operating profit, its cash
flow from operations is very negative: It used $622 million of net cash in
operating activities in the first half. That is unusual! But the explanation
is simple:

"Our cash outflows from operations are principally payments for purchases of
products and raw materials, selling and marketing expenses, administrative
expenses, research and development expenses and other operating expenses.
During the Track Record Period, we have accepted payment in the form of
cryptocurrencies for sales of our cryptocurrencies mining hardware, and we
also received cryptocurrencies from our proprietary mining and operation of
mining pools, however, we do not recognize receipt of cryptocurrencies as
operating cash inflows."

Oversimplifying slightly, Bitmain pays for parts and labor in fiat currency,
uses those parts and labor to make stuff, and then sells the stuff for
cryptocurrencies. The making-stuff part of this business is lucrative—it sells
the stuff for much more than it costs to make it—but the currency mismatch is
sort of muddling. Cash goes out to fund operations, but it does not come in as
a result of operations.

Cash does come in, though: Sometimes Bitmain sells the cryptocurrencies. It
sold $516.5 million worth in the first half of 2018. It just treats that as a
cash flow from investing activities, not from operations. The normal operating
cycle of paying cash to make stuff, making the stuff, selling the stuff for
cash, and then using the cash to make more stuff, is completed here; there is
just an extra step—and an extra timing decision, and an accounting move from
operations to investing—in the middle, as Bitmain sells the stuff for crypto
and then, later, optionally, converts the crypto into cash.

One could imagine a world in which Bitmain paid its workers and suppliers in
crypto and the entire cycle stayed out of the fiat system, but—obviously—that
is not the actual world. And one could imagine a world in which selling stuff
and getting paid in crypto counted directly as operating cash flow, but that
is also not the actual world (of accounting).

Anyway, between the time that Bitmain sells its stuff for crypto, and the time
it converts that crypto into cash, something else a little weird happens to
it:

"We account for cryptocurrencies at cost, instead of revaluing
cryptocurrencies at their fair value on each accounting reference date, to
avoid substantial volatility in the value of cryptocurrencies from time to
time, which may distort our results of operation and financial condition.
Gains or losses from the disposal of cryptocurrencies are determined as the
difference between the net disposal proceeds and the carrying amount of the
cryptocurrencies and are recognized in profit or loss on the date of
disposal."

Is that right? I mean, it’s probably right as a matter of technical
accounting; I am not an expert in the international financial reporting
standards for cryptocurrency but I assume that Bitmain’s auditors are. But is
it the right way to think about this business? It seems like the right way to
think about a computer-hardware company; it isolates Bitmain’s ability to
build hardware and selling it for more than it costs to build. And that is,
operationally, a pretty good description of what Bitmain does.

On the other hand you could also think about Bitmain as an investment fund
that invests in crypto assets, and whose value as a company rises and falls
with the price of its crypto assets. This would not be fair to its operating
business, and you can see why it says that it would “distort our results of
operations.” But I am not sure it would distort Bitmain’s “financial
condition.” It seems to me that shareholders might care about the value of
Bitmain’s assets, and if that value swings wildly then possibly the financial
statements should too.

I realize that this is an annoying and trivializing position; it reduces any
real operating business that takes payment in crypto (and holds onto it) to a
crypto hedge fund with an operating business attached. But that’s what using a
wildly volatile currency will do for you!

One other accounting item I enjoyed is on page 197 of the offering document,
under “Other Net Loss,” where there is a line item for “loss of
cryptocurrencies incurred as a result of cyber-security incidents.” There are
entries there for 2015 and 2017. They’re not huge—the 2017 one was “a loss of
cryptocurrencies worth approximately US$27 million, which we suspect was
caused by a hacker attack”—but I like the idea of “getting your Bitcoins
stolen by hackers” as a recurring expense, and I expect to see a lot more of
it as more crypto-related companies go public.

------
knicholes
Is this evidence that they use their hardware to mine their own
cryptocurrencies before they sell/ship it to you? I remember reading terrible
reviews for bitmain and their customer service about how orders were delayed
for months because cryptocurrencies were skyrocketing.

~~~
wmf
That idea never made much sense, but IIRC their disclosures show that they
ship a lot more units than they have mining internally.

