Ep. 12: Bitmain – the Most Valuable Crypto Company in the World?

As a TechBuzz China listener, you must be at least a little bit crypto-curious. This week on TechBuzz China, we talk in-depth about Bitmain, the most valuable company in the cryptocurrency space that happens to be from China.

TechBuzz China by Pandaily is a weekly technology podcast focused on giving you a peek into what’s buzzing within the tech community in China. It is co-hosted by Ying-Ying Lu and Rui Ma, who are both seasoned China watchers with years of experience working in the technology space in China. They uncover and contextualize unique insights, perspectives, and takeaways on headline tech news that don’t always make it into English language coverage.

This week, TechBuzz China’s very own Ying-Ying Lu and Rui Ma, along with guest co-host Joyce Yang, talk all about cryptocurrency – more specifically, the biggest crypto company in the world, Bitmain. With profits of 3 to 4 billion dollars last year, how did Bitmain manage to hold 70-80% of the market share of bitcoin mining hardware? What are their future challenges and how will the Chinese government play a role?

Our special guest co-host this week is Joyce Yang, the creator of Global Coin Research, a content platform that bridges the East and the West in this new global crypto world. In this episode, we also hear from Tim Swanson, the founder of Post Oak Labs who has heard over 500 blockchain-related pitches, and Jimmy Song, long time Bitcoin developer turned Venture Partner at Blockchain Capital.

As always, you can find these stories and more at pandaily.com. Let us know what you think of the show, and don’t forget to follow us on Twitter at @techbuzzchina and to like our Facebook page!

Full Transcript

We are TechBuzz China by Pandaily, powered by the Sinica Podcast Network!
We are a new weekly podcast focused on giving you a peek into what’s buzzing within the tech community in China. We uncover and contextualize unique insights, perspectives and takeaways on headline tech news that don’t always make it into English language coverage. TechBuzz China is a part of http://pandaily.com/, a new English language site that tells you “everything about China’s innovation.”

(Y: Ying-ying R: Rui J: Joyce TS: Tim Swanson JS: Jimmy Song)

[0:14] Y: Our special guest today is Joyce Yang, who runs Global Coin Research and has an excellent daily newsletter you should probably subscribe to if you are into this space.
R: Big THANK YOU to— Tiemin Zhao, Michael Mao, Chang Xu, and Garry Tan
Y: Again, if you enjoy listening to us, please take the time to leave us a rating or review on iTunes and elsewhere!

[1:41] R: Before we start, Joyce, could you please introduce yourself to our listeners.
J: My name is Joyce Yang and I’m the creator of Global Coin Research. I was formerly a Software equity research analyst at Merrill Lynch, covering companies such as Box. speaking of which, I went against the rest of the streets’ view on that one. Later I covered Chinese technology companies at CICC, or the “Goldman Sachs” of China. In the last year, I became crypto-curious and got involved when I saw so many smart and amazing people entering the space.

[2:14] Y: Can you quickly explain what Global Coin Research is?
J: Global Coin Research is a content platform that focuses on bridging the East and the West in this new Global Crypto world. Now, we know that Cryptocurrency is a real global phenomenon, and one of its values the world saw is its ability to break down this barrier digitally between nations. One of GCR’s core missions is to better cover the Asia cryptocurrency space in the English-language media. We have a newsletter, and we are launching a podcast to help the Crypto community to better understand Asia. So check us out at http://globalcoinresearch.com/

[2:48] R: So you do a similar sorta thing to what we do here at Techbuzz, but focused on crypto instead, and not just China, that is super helpful. I’m curious, Yingying, how many bitcoin do you have?
Y: Low single digits? Really low single digits?
R: How about you Joyce?
J: I probably won’t disclose that on air. That’s like asking to get hacked. (Laugh) Just kidding. It’s definitely not enough to retire.
R: Fair. I’m pretty much in the same boat as Yingying here. I had looked into the space back in 2013 through 2015, but didn’t stick with it. But it feels like so many people I know have made so much money from crypto! Many zeros.

[3:35] Y: But none more than some of the people we are going to talk about today.
R: For sure. Bitmain is one of the most well-known companies in cryptoland and its Chinese founders and co-CEOs Jihan Wu 吴忌寒 and Micree Zhan 詹克团 are both billionaires. Or at least as according to Bloomberg and Fortune anyway. Simply put, Bitmain produces cryptocurrency mining chips. Just in case our listeners don’t know what that is, can you explain, Joyce?

[4:08] J: In layman’s terms, cryptocurrency mining is the process of checking and adding new transactions to bitcoin’s immutable ledger, also called the blockchain. The blockchain is formed by digital blocks and it’s where transactions are recorded. The act of mining is essentially using math to solve for a cryptographic hash, or an unique signature to identify new blocks.

[4:31] Y: Bitmain helps you mine bitcoin and other cryptocurrencies. I think most of us know that can be highly lucrative. But just how lucrative is it?
J: The mining process requires massive processing power and incurs hefty electricity costs. So it’s not something you go into without spending a pretty penny first. But in return for the individual, or the miner, for performing this work, he or she is rewarded with a number of bitcoins for each block they add onto the blockchain. Currently the reward for every block discovered is 12.5 bitcoins. At the current bitcoin price of about $7,000, that’s 87 thousand 500 dollars up for grabs every 10 minutes, or 12.6 million dollars a day.

[5:14] R: But Bitmain doesn’t make all $12MM right?
J: No. Bitmain makes money in a few ways. The first and primary one is selling mining machines outfitted with Bitmain’s chips that are usually a few hundred to a few thousand dollars. For example, currently the Antminer S9 model on their site is about $700. Secondly, you can rent Bitmain’s mining machines. Third, you can participate to mine bitcoin as part of Bitmain’s mining pool. A mining pool is a joint group of cryptocurrency miners who combine their computational resources over a network. Bitmain’s mining pools, for example, the AntPool and BTC.com, collectively control more than 40 percent of the world’s Bitcoin mining power.

[5:58] R: That’s some serious market share. How did Bitmain come about? How did the founders meet?
Y: Between the two founders, Micree was the chip-designer, Jihan the business guy. He studied economics and psychology at Peking University. Micree met Jihan when Jihan was in a prior job as a young, private equity fund manager. They didn’t talk to each other for a few years, but by the time they reconnected, Jihan was deep in the rabbit hole of cryptocurrency after reading Satoshi Nakamoto’s Bitcoin white paper.

[6:29] R: The story goes that when Jihan learned about bitcoin, he emptied his bank account to buy it. Back in 2011, think this, one bitcoin could be purchased for under a dollar. So assuming he kept those coins, he would be in the three comma club already regardless of whether or not Bitmain does well.
Y: In 2013, Jihan and Micree decided to build an ASIC chip, which stands for Application Specific Integrated Circuit, for bitcoin mining, and founded Bitmain. Jihan was just 28 at the time.

[7:04] R: Here we are in 2018 and Bitmain is estimated to have 70-80% of the market share for bitcoin mining hardware in 2017, and also $3-4Bn in profits last year, as estimated by analysts. This is on what they’ve publicly said is $2.5bn in revenue in the same year. That is mind-blowing! They’re basically printing money.

[7:30] Which is probably why they are rumored to be filing for IPO in Hong Kong shortly with a target market cap of between $30 and $40 billion dollars. Sounds crazy but not if you’re making $4 billion dollars in profit.
Y: Although I don’t really understand why Bitmain even needs to raise any money, last week they apparently let Sequoia China lead a $400MM pre-IPO round. Maybe it’s just to boost credibility. Either way, Bitmain actually didn’t raise outside money — at least none that they publicly disclosed — until September of last year, when they raised just $50MM, also from Sequoia China, along with IDG.

[8:05] J: But it wasn’t always smooth sailing for Bitmain. The company went through bitcoin droughts when Bitcoin prices hit low points, and their ASIC machines did not see much demand. At the end of 2014, for example, Mt. Gox, a famous Bitcoin exchange at the time, got hacked, spurring a crash in cryptocurrency prices, putting Bitmain at a tough place. Nobody wanted to pay for expensive electricity bills to mine a digital currency that was falling in value.

[8:33] Y: I remember those times. But those times are behind us. Bitcoin is back up!
R: It’s still a far cry from the almost twenty thousand dollars that it was worth in 2017. It’s down over 50% from this year’s highs. I stopped looking at my wallet balance because it got too depressing. But that probably explains why Bitmain has been doing two things aggressively – 1) expand into new coins and 2) expand into new sectors besides cryptocurrency. To understand that better, we grabbed a crypto expert to give some more color.

[9:14] TS: Hi my name is Tim Swanson, I’m the founder of Post Oak Labs, a tech advisory firm. Prior to creating this company, I was head of market research at a financial consortia called R3 where I heard roughly 500+ pitches over the course of a couple of years related to anything with a “blockchain.” So if somebody was saying they were building a blockchain relate to finance, I was shuffled over to them and had to hear them pitch to see how zany they were and if they would make a good partner for either R3 or member banks.
As a result, I had a chance to hear and see just about anything you can imagine.
Y: Sounds not so fun actually. What do you think is Bitmain’s main challenge?

[9:59] TS: As far as Bitmain goes, they may become a victim of their own success. No matter how you crunch the numbers, they basically have a majority share of the market of all SHA256-related coins as it were, so Bitcoin, Bitcoin Cash, so the equipment that is used to generate the hashes for those networks primarily come from Bitmain based equipment and now they’ve broadened and now support I believe 8 or 9 other cryptocurrencies or at least the different types of hashing of different types of cryptocurrencies. One of the fundamental challenges facing any cryptocurrency mining manufacturer such as Bitmain is that the valuation is largely based off of the coin value, so if there is a bull market then you can go to investors and say give me this kind of multiple but if there is a bear market, it’s just the opposite typically because margins are squished from both yourself if you are operating your own farm and from your customers now have to earn less money per unit of labor, effectively. This is one of the reasons why Bitmain is probably expanding into different types of coins but also the push into AI, so they’re not a one hit wonder.

[11:05] Y: Let’s stay with the AI topic for a bit here. I think what’s shaping up to be one of Bitmain’s key selling points at IPO will be that in the next 5 years, 40% of revenues could come from AI chips. Now, these chips haven’t been sold yet, but they have been announced. They are called Sophons.
R: For any sci-fi nerds in our audience, that’s one of the key alien technologies in the famous trilogy, the Three Body Problem, by Liu Cixin. Numerous Chinese entrepreneurs especially in the internet sector, say it changed their worldview and inform how they do business. I finally read it last year, and I can totally see why it topped Obama’s reading list as well. Micree is obviously also a fan and so named their new deep learning chip the Sophon.

[12:00] J: If things go as they plan, Bitmain Sophon units could be training neural networks in data centers around the world. Or at least in China. The current trade and regulatory environment looks favorable for Bitmain. After the ZTE fiasco, which you guys went over in episode 3, the Chinese government has been increasingly pushing for mainland companies to develop its own chips. As a Chinese company, Bitmain may be a favored home-base player.
R: True, but there’s a lot of competition in the AI chip space. For example, another Chinese company, Cambricon just announced a new round of funding in the hundreds of millions that places its post-money valuation at $2.5Bn. It’s also pre-product. There are at least a handful of others that have raised more than $100MM who are dedicated to AI chips. Bitmain has its work cut out for it, and as Tim said, it may be a victim of its own success because its crypto business is just so large and profitable and it’s hard to move away from it.
[13:01] Y: Jihan told Bloomberg last year that the Bitmain mine in Ordos, Inner Mongolia generates about $250,000 in revenue daily, and that he is planning to invest up to $200 million building new mines in the US. Seriously, with such a lucrative business, why doesn’t Bitmain have more competition?
J: Actually they do. For example, one of Bitmain’s competitors Canaan creative has already filed for an IPO in Hong Kong, from which the company is targeting to raise about $1 billion in initial funding. The company had $205mn in revenue last year.
Y: Not small but less than one-tenth of what Bitmain made. And I saw another competitor Bitfury said a year ago that it had $100MM in annual revenues as well. But both really a drop in the bucket compared to Bitmain.

[13:50] R: So what is it about the company or their technology that made them so ahead of the curve?
J: I invited an expert who can give us some more color on that.
JS: My name is Jimmy Song, I’ve been in Bitcoin since 2011. I started coding in 2013, so for the last 5 years I’ve been coding as a Bitcoin developer. Before that I was coding at startups. I contributed to a bunch of open source projects, I’m familiar with a lot of different companies in this space. I’ve been a VP of Engineering at Armory, I’ve worked as Principal Blockchain Architect at Paxos, and now I’m a Venture Partner at Blockchain Capital.

[14:29] J: You must have seen so much of how the mining industry has come along. I’m curious how you see Bitmain outbeat their other competitors. What is it about their technology that’s so differentiating?

[14:42] JS: I’m not sure it’s their technology per se, it’s more competence than anything else. You gotta remember when Bitmain came in in 2013, the players that were in the industry, the ASIC minersAvalon, Butterfly Labs, KnC Miner, CoinTerra, Spondoolies Tech, and all of those companies are out of business now. A large part of that was just that they didn’t know what they were doing, they didn’t have very good tech or very good manufacturing expertise. What they would do is they would raise money preselling a lot of these ASIC machines, they would collect that money and try to go and manufacture them. A lot of the money they raised would have a lot of assumptions on how soon they would get it done, of course there would be delays, something would go wrong, they ended up delivering way late most of the time.

[15:39] I keep on hearing from industry sources that Micree is an absolutely brilliant chip designer and Jihan knows all the different relationships in that area of the world. Obviously TSMC is bar none the best chip fab out there, and they have almost an exclusive relationship with them. But that’s how they won. How they’ve kept their lead is up for a little bit of debate, there are lots of rumors of dirty business practices and stuff like that to keep people out, who knows whether that’s true or not, but I keep hearing about things like that.

[16:15] R: What are the large-cap Chinese tech companies saying about blockchain though? Are they also getting involved?
Y: Pony Ma apparently announced at a press conference that while he thinks blockchain is interesting, Tencent is not considering a digital currency. Although of course as soon as he said that, on the same day, a subsidiary of Tencent announced a blockchain wallet project went into private beta. With an associated Music coin. Sounds like someone forgot to inform the boss of their cryptocurrency plans.

[16:45] R: It seems to be the party line. Jack Ma, has said the same thing, pretty much. And Baidu has its own cryptokitties. So the BAT(Baidu, Alibaba, Tencent) are all doing something.
J: CCTV, China’s state-owned TV, had a one-hour special on blockchain that aired recently. Lots of viewers shared on social media 3 ideas that they took away from the program: first, that blockchain is the second era of the internet. 2nd, the value of blockchain will be 100 times as that of the internet. And third, blockchain is a machine for generating trust.
Y: What people are failing to put into context though is that in all of these statements, CCTV is just quoting either a blockchain expert or Western media. It doesn’t necessarily reflect what CCTV itself or the government thinks of blockchain.

[17:33] R: Actually the government’s position is one of “compromise.” The government has repeatedly stressed that it supports blockchain, but not cryptocurrency. That much is super certain. They’ve already prohibited crypto, and so at least that part of blockchain technology is off limits. Unless you’re the government. China’s central bank is indeed developing its own centralized digital currency.
Y: The following statement really sums it up neatly – a really clever Guizhou government official, when quoted about blockchain, said that blockchain isn’t really all about decentralization. Instead, he said, it’s about dis-intermediation. Remove the brokers, not the central command center. In other words, noted the reporter — blockchain with Chinese characteristics.

[18:21] R: I love that! So accurate. Although it doesn’t mean that the government doesn’t want Bitmain to continue its crypto dominance. Some foreign press have even speculated that the Chinese government may want to control the international flow of money through controlling mining. Which Chinese companies, most notably Bitmain, already does. I think that’s giving the government and crypto both way too much credit.

[18:51] Y: It’s a complicated situation, and sounds like Bitmain should be treading carefully. Joyce, do you have any last comments for us?
J: I’d just highlight one last comment made by. Jihan, Bitmai’s CEO. Jihan has said that a Bitmain IPO would be a “landmark” for both the company and the cryptocurrency space. I agree. Bitmain’s IPO will appease global regulators as it provides more transparency and brings legitimacy to the cryptocurrency world, which in turn will benefit Bitmain. Once Bitmain’s competitor Canaan goes public in July, we will be able have a benchmark for Bitmain’s margins and valuation multiple. Canaan’s valuation will be a good starting point to understand how much the market believes in cryptocurrency long term.
Y: Said like a real equity research analyst!

[19:44] Y: We’d like to give a shoutout to our partners at SupChina. In addition to our podcast here with Pandaily, they publish the fabulous Sinica podcast, a weekly discussion of current affairs on China with journalists, writers, academics, policy makers, and business people.
R: So while we only focus on tech, they really give you the entire overview.

Tune in to our partners SupChina & the GGV 996 podcast, which interviews top tech leaders in China tech and investment.

Follow us on twitter, at @thepandaily, @techbuzzchina, @ruima and @ginyginy. You could also follow our guest host Joyce at @globalcoinrsrch. Thanks to our producers Carol Yin and Kaiser Kuo.