Crypto Unicorns Clash While Bitcoin Droops

(Bloomberg Opinion) -- The Hong Kong market is low-hanging fruit for shy but hungry unicorns.

Bitmain Technologies Ltd., the world's dominant producer of cryptocurrency-mining equipment, is mulling a public listing, founder Jihan Wu told Blake Schmidt of Bloomberg News.

Giving early backers such as Sequoia Capital and IDG Capital an exit is a fine gesture, sure, but the four-year-old Chinese company is rushing to list chiefly because it doesn't want its smaller Hangzhou-based rival Canaan Inc. to collect any more ammunition. Canaan filed for an IPO a month ago, shortly after a Hong Kong Exchanges & Clearing Ltd. rule change opened the gates to unprofitable tech startups.

In China, any hot area can quickly overheat, and the blockchain ecosystem is no exception. In the first quarter alone, there were 68 startup funding deals, compared with 96 for all of 2017, according to Macquarie Research. By the end of March, more than 450 firms were developing blockchain technology.

Bitmain and Canaan compete directly in selling bitcoin mining machines to the world. By Canaan's own account, Bitmain has a 66.6 percent share of global shipments, more than double Canaan's 20.9 percent. 

Canaan isn't happy playing second fiddle, judging by the explosive growth in its prepayments – predominantly checks written to Taiwan Semiconductor Manufacturing Corp. and Global Unichip Corp. to secure future foundry capacity. Those payments are non-refundable, and Canaan is devoting most of its resources to a frontal attack on its rival, according to Bernstein Research analyst Mark Li.

So Bitmain has a powerful incentive to take center stage. It doesn't need the finance: The company had about $2.5 billion in sales last year and, because of its size, could potentially be much more profitable than Canaan – which itself has a 30 percent operating margin.

Bitmain may already be sowing doubts about how much Canaan can raise, suggests Douglas Kim, a contributor to the Smartkarma site. Sequoia Capital China was reported to have led a recent $400 million pre-IPO round for Bitmain, valuing the firm at $12 billion, 4.8 times trailing sales. Using that peg, Canaan would be worth only about $1 billion; it had expected to raise $1 billion in IPO proceeds alone.

All this while Bitcoin – the most important driver of value for Bitmain and Canaan – is in a bear market, down 56 percent this year. Do the world's top two mining-machine makers want to compete head-on for investors in such a weak environment?

But this is China, where companies often sacrifice profitability for a land grab. Bitmain slashed the price of its Antminer S9 device by more than 80 percent this year, forcing Canaan to lower the price of its A841 (with similar functionality) by almost 30 percent in the two months following its launch. It's likely the pair won't be as profitable as in 2017. 

Whether it's hacking or  manipulation, investing in cryptocurrencies is a risky business. Even if you aim to play safe and back the companies riding the crypto boom, you'd better worry about dueling Chinese unicorns.

To contact the editor responsible for this story: Paul Sillitoe at psillitoe@bloomberg.net

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