Mining machine business is difficult to do, Bitmain stops paying wages

Bitmain, which has been silent for a long time, has caused heated discussions in the industry because of an announcement of delayed salary payments. In this bear market, will Bitmain, which was once the most popular, also be unable to withstand the cash flow?

According to Wu Blockchain, several Bitmain internal employees confirmed that Bitmain issued a notice: the company's operating cash flow has not turned positive in September, especially the progress of the mine (referring to the entry of mining machines into the mine) is seriously below standard. EMT decided to postpone the payment of part of the salary of all employees in September, and pay it after the holiday on October 7th. Several employees revealed that all employees' performance wages in September were deducted in full, and their basic wages were also deducted by half. It is unknown when the deducted wages will be paid. As of October 8, employees have not received their unpaid wages, and the year-end bonus for 2022 has not been paid yet.

Bitmain once monopolized more than 70% of the global market share of Bitcoin mining machines, but was severely damaged by the "internal fighting" between the two founders, Wu Jihan and Zhan Ketuan, for control. In the first quarter of this year, Bitmain implemented a structural salary reform for employees, adding "age points" to performance appraisals. The older you are, the more points you will be deducted. Bitmain employees said that in the latest salary adjustment plan, the original fixed salary was adjusted to a basic salary + performance salary, and the performance salary was linked to the job level. The performance salary ratios for the three job levels of T3x, T4x, and T5x were 30%, 50%, and 70% respectively.

The announcement of delayed salary payments came very suddenly. Bitmain held a highly anticipated press conference in Hong Kong at the end of last month, where it launched its latest product, the S21 mining machine. At that time, most people were saying that Bitmain had "returned as the king", so the timing of this announcement is hard not to be worrying.

The ill-fated road to listing

Since the internal strife, Bitmain has lost its former glory, like a deflated ball. In addition to the rumored funding chain problem, the difficult road to listing has also hindered the company's further development.

The three giants in the industry, Bitmain, Canaan Creative and Ebang International, have all gone to Hong Kong for IPO but all failed. Canaan Creative and Ebang International successfully landed on Nasdaq after failing to go public in Hong Kong. The former went public in November 2019 and the latter went public on June 26, 2020. As a mining giant, Bitmain has also been seeking to go public in the United States, but internal power struggles have repeatedly delayed its listing plan.

Bitmain is the last company among the three mining machine giants to announce its IPO plan. Previously, Bitmain expected to submit an IPO application to the Hong Kong Stock Exchange in July 2018, planning to raise at least US$3 billion. According to the plan, it should have submitted the listing application at the end of August of that year. Before the news of the listing plan was exposed at that time, Bitmain conducted Pre-IPO financing, and the relevant PPT began to circulate online.

Data from the financing PPT of that year showed that the mining machines produced by Bitmain accounted for 70% of the market share, and the mining pool computing power controlled by the company exceeded 50% of the computing power of the entire Bitcoin network. The total profit in the past nine quarters was US$3.2 billion, of which the turnover in the first quarter of 2018 was US$2 billion. The market dubbed it the "mining tyrant". The rumors that Bitmain was valued at US$50 billion or US$30 billion spread like wildfire on the Internet.

Doubts also began to spread, mainly from two aspects, the mining machine business and the fork plan.

According to public data, mining machine revenue accounts for more than 90% of Bitmain's total revenue, but it has fallen into technological stagnation since 2016. In the past, Bitmain's S1, S2, and S9 have all brought surprises to the market. Among them, the S9 launched in 2015, using 16nm technology and power consumption of 110 W/Thash, has a 25% power consumption advantage over the competing products at the time. It was sold out immediately after its launch, but Bitmain has not launched any amazing new products since S9.

The Antminer V9 launched in June 2018 has high power consumption and low computing power and has been discontinued. Its upgraded version S9i mining machine still uses 16nm process, while its competitor Canaan Creative released the 7nm mining machine Avalon A9 series in June of the same year. According to Bitmain's Pre-IPO fundraising documents, the company's mining machine inventory including V9 and S9 is as high as 1.2 billion US dollars. At that time, the new mining machine had not yet been released, which cast a shadow on its future revenue capacity.

In addition, according to IDG Capital's internal investment report in 2018, Bitmain has used most of the company's profits to purchase BCH, totaling $2.5 billion. BCH originated from the Bitcoin hard fork plan initiated by Bitmain, and Bitmain has officially moved to the opposite side of the market. Data shows that the number of BCH users is 3%-10% of Bitcoin, and its value does not exceed 20% of BTC.

Because of this hard fork, before the IPO fundraising is finalized, mining machines are still the main source of funds for Bitmain to provide BCH with blood transfusion. If Bitmain's IPO application is to continue to move forward, then the most powerful response to the market will be a truly technologically upgraded product. But at present, the newly released S21 mining machine is obviously not up to the standard of a major upgrade.

Crypto mining industry in the doldrums

Not only Bitmain, other leading mining companies are also mired in the quagmire of declining revenue.

Earlier, Yibang International announced its performance for the first six months of fiscal year 2023. Data showed that in the first half of this year, Yibang International achieved revenue of US$4.09 million, down 83.69% from US$25.06 million in the same period of 2022; gross profit of US$990,000, while the gross profit in the same period of 2022 was US$14.24 million; net loss of US$8.38 million, while the net loss in the same period of 2022 was US$10.92 million.

Canaan Technology announced its financial report for the fourth quarter and full year of 2022 at the beginning of the year. The data showed that the company's total revenue for the whole year of 2022 was 4.3789 billion yuan, a year-on-year decrease of 12.2%; the gross profit was 1.7479 billion yuan. In order to increase sales, Canaan Technology lowered the price of its products. But this weakened its profitability, and in the cold winter of virtual currency, the effect of boosting sales was also very limited.

Since last year, with the decline in Bitcoin prices and the rise in energy costs, mining profits have continued to shrink, and the entire cryptocurrency mining industry has fallen into a difficult environment, causing the price of mining machines to fall by more than 80%.

With the outbreak of the Russian-Ukrainian conflict, Russia cut its natural gas supply to Europe, forcing countries to look for alternative energy sources. Data from the European Energy Exchange showed that the contract price for electricity delivered in the first quarter of 2022 in Europe was 184.62 euros per megawatt-hour. After the escalation of the Russian-Ukrainian conflict, the contract price for electricity delivered in the third quarter of 2022 in Europe soared to 375.75 euros per megawatt-hour, nearly three times higher than the same period in 2021 (97.14 euros per megawatt-hour). The global electricity cost has increased significantly, and mining companies, as large electricity consumers, are naturally overwhelmed.

The price drop of Bitcoin cannot be ignored. According to CoinMarkertCap data, as of the close of October 10, the price of Bitcoin was $27,600 per coin. This price has dropped by 57.36% compared with the peak of $64,800 per coin in November 2021. On August 18 this year, the price of Bitcoin once experienced a flash crash, falling from $28,600 per coin the previous day to a low of $25,200, a drop of more than 11%.

The rising electricity costs and the falling Bitcoin prices will certainly affect the enthusiasm of miners, thus reducing the market demand for mining machines. But at the same time, the chip production capacity needs to be booked 6 months or 1 year in advance, and upstream manufacturers will still produce 150,000 to 200,000 mining machines per month, so the entire mining machine market is definitely in oversupply, and it is irreversible in the short term. The stockpiled mining machine inventory is difficult to digest, and price reduction to clear inventory is naturally a last resort.

Overseas mining practitioners are also struggling. Mining giants Core Scientific and Compute North have both filed for bankruptcy protection, while Argo Blockchain sold its Helios mine in Texas to Galaxy Digital for $65 million, successfully preventing the company from going bankrupt.

In the cold winter, the performance of crypto mining companies has generally declined, and the chip companies upstream of mining companies can no longer hold on. Semiconductor giant Intel previously stated that its Blockscale ASIC chip series, a product line dedicated to cryptocurrency mining, will stop production. The company expects to stop accepting orders for this series by October 20 this year and stop shipping by April 20 next year.

Galaxy’s mid-year report on the bitcoin mining industry shows that despite trend reversals in several key areas of the mining sector, the astonishing growth in network hashrate in the first half of the year offset many favorable factors, leading to a record high in mining difficulty.

Crypto mining practitioners are facing unprecedented challenges.

Conclusion

Even a strong crypto company like Bitmain is struggling in a bad market environment and cannot remain immune.

Bitmain’s financial woes highlight the inherent risks of working in the cryptocurrency industry, where market volatility can have a profound impact on even the most sophisticated players. The crypto community is closely watching to see whether Bitmain can weather the current funding crunch or face further setbacks.

Bitcoin is expected to have its fourth halving in April 2024. The market is currently optimistic about this, and crypto mining companies are also waiting for this round of market explosion. However, before that , Bitmain must first consider how to solve the funding problem and smoothly transition to the halving day.