The significant stock market entry of Bitcoin comes at an inopportune moment.
Three leading providers of cryptocurrency technology are eyeing share sales, offering investors a novel opportunity to invest in digital currencies, with ambitions to raise billions.
Unlike traditional currencies such as the dollar or euro that are controlled by central banks, cryptocurrencies operate based on computer code. Bitcoin, for instance, is generated and exchanged via a “mining” process where algorithms tackle increasingly sophisticated mathematical problems.
Bitmain, Canaan, and Ebang, all headquartered in China, profit by supplying the high-tech components and systems essential for this mining. Collectively, they are the dominant players in this sector.
However, these firms function within a nascent and volatile industry, moving toward their IPOs in Hong Kong amidst challenging market conditions. Bitcoin’s value, which peaked at nearly $20,000 in December, has since dropped by approximately two-thirds, with other cryptocurrencies like ethereum also experiencing significant declines.
“If cryptocurrency market prices were to decline sharply … the demand for our mining equipment and cryptocurrency mining services would also diminish quickly,” Bitmain cautioned potential investors this week.
Moreover, Hong Kong’s stock market, where these companies plan to list, has entered a bear market this month, having fallen more than 20% from its prior peak, fueled by worries regarding China’s economic slowdown and the trade conflict with the United States.
The mining technology companies have not specified their public offering timeline or the amount they hope to raise. Bitmain and Canaan declined interview requests, while Ebang did not respond.
“These firms might be looking to secure profits before the market experiences a sharper decline,” noted Benjamin Quinlan, founder of Hong Kong-based consulting firm Quinlan & Associates.
He emphasized that cryptocurrencies are gradually gaining traction among mainstream investors despite recent difficulties, and the revenues for the three mining firms continue to grow. However, the sector encounters significant hurdles.
A primary concern is how governments will approach the regulation of digital currencies. Last year, China prohibited most activities related to bitcoin. While the country is still believed to host numerous cryptocurrency mining operations, authorities have attempted to displace them.
Cryptocurrency miners require vast quantities of electricity to operate their rooms filled with computing equipment constantly. Some public utilities in the U.S. have already begun imposing higher rates specifically for miners.
“Rising costs of bitcoin mining will reduce demand for mining equipment, impacting the performance of these companies,” Quinlan stated.
Mining cryptocurrencies has become less profitable over time.
Bitcoin mining activity surged over the last year, increasing demand for the technology. However, this also means that the profits from mining are divided more thinly among a larger user base, potentially affecting future demand for mining equipment.
Will the mining surge continue?
Bitmain, Canaan, and Ebang all reported profitability in their latest financial year, according to documents outlining their plans to go public.
Nevertheless, sustaining profitability will prove to be a “significant challenge,” remarked Leilei Wang, a Shanghai-based consultant at research firm Kapronasia.
The companies recognize the risks ahead and are adapting their strategies. They plan to invest more in advanced chip technologies applicable in sectors like artificial intelligence, cybersecurity, and connected devices.
Despite the Chinese government’s strict regulations on cryptocurrencies, it is keen to strengthen the nation’s capabilities in technology, particularly in computer chips. Most Chinese firms still depend heavily on foreign chip technology, primarily from the United States.
“Whether [the cryptocurrency companies] can successfully pivot remains uncertain,” Wang observed.
For the moment, their future is closely linked to the overall industry performance.
“Cryptocurrencies are likely to lose appeal” without broader adoption in the near term, Quinlan predicted. The makers of mining equipment “will face immense challenges to survive if the cryptocurrency market overall declines significantly,” he added.
However, bitcoin enthusiasts remain optimistic that the cryptocurrency can rebound as financial markets and major companies begin to regard it more seriously.
“As public acceptance grows, it seems poised for recovery,” said Mike Novogratz, CEO of cryptocurrency investment firm Galaxy Digital, in an interview with CNN this week.
CNNMoney (Hong Kong) First published September 27, 2018: 6:56 AM ET
