Nick Chong · 1 week ago · 2 min read · Insights via Grayscale Investments
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According to BitMEX Research, a group of analysts at major Bitcoin exchange BitMEX, Bitmain has been intentionally lowering the profit margin of its core business prior to its initial public offering (IPO).
As the biggest and most profitable conglomerate in the history of the cryptocurrency sector, Bitmain has attracted some of the largest investors in the technology space including Softbank, raising pre-IPO mega-rounds.
Its IPO that is scheduled to be conducted in Hong Kong is said to be in the region of $20 billion, raising several billions of dollars in the process.
But, its recent controversy around its latest funding round that allegedly did not involve Tencent contrary to many reports, led investors to question the Bitmain IPO and its lucrative mining business.
Bitmain is Intentionally Losing Money
In the first quarter of 2018, Bitmain generated $1.1 billion in pure profit, more than twice of the entire profit of Nvidia, the world’s biggest video game chip manufacturer. Nvidia generated a mere $550 million despite its influence over its respective market.
Although Binance, the cryptocurrency market’s most widely utilized exchange, generated $200 million in profit in the first quarter of 2018, it surpassed the profit margin of Deutsche Bank, Germany’s biggest regulated financial institution.
The extreme profitability of Bitmain and its positive first quarter sales led investors to acknowledge Bitmain as one of the most profitable companies in the global economy, outside the realm of cryptocurrency.
Naturally, for investors, Bitmain became the go-to investment as a bet for the long-term survivability of cryptocurrencies as an asset class, which ultimately led Bitmain to release its plans to conduct an IPO by the end of this year.
Most companies in the position of Bitmain eyeing one of the largest IPOs in the global market would allocate the majority of their resources to boost profitability and to appeal to as many investors as possible in the public market.
Instead, Bitmain took a different approach by reducing its profitability. Researchers at BitMEX, who published an in-depth report on the intricacies of the company’s balance sheet, said that Bitmain has purposefully decreased its profit margin to offer its products and services at low levels to drive its competitors out of business.
“This analysis implies Bitmain are currently loss-making, with a negative profit margin of 11.6% for the main S9 product and a margin of over negative 100% on the L3 product,” the BitMEX Research team said, adding, “these low prices are likely to be a deliberate strategy by Bitmain, to squeeze out their competition by causing them to experience lower sales and therefore financial difficulties. In our view, herein lies the key to one of the main driving forces behind the decision to IPO. A successful IPO may increase the firepower available to continue this strategy and eliminate an advantage rivals could have by doing their IPOs first.”
Importance of Driving Competition Down
There exists a handful of companies that have dominance over their respective industries; Coinbase over the crypto-to-fiat exchange market, Binance over the crypto-only exchange market, and Bitmain over the cryptocurrency mining market.
The primary attraction point of Bitmain as an investment for large-scale institutions and retail traders in the stock market, at least as of now, is not its profitability but rather its dominance over a market that is still at its infancy.
Hence, for Bitmain, even it means losing out hundreds of millions of dollars on a quarterly basis, its focus is to continue gaining more dominance over the cryptocurrency mining sector.
As the cryptocurrency sector grows at an exponential rate with government regulation and recognition from institutional investors, companies that have dominance over their respective markets in the broader frame of crypto will inevitably see large gains in profitability.