Bitmain, the world’s largest cryptocurrency mining equipment producer, may be losing its competitive edge, a new research by investment management firm Sanford C. Bernstein & Co. suggests.
“The competitiveness of Bitmain’s chips is in question,” the analysts wrote in a report published on Wednesday, citing the recent crypto market downtrend, the company’s Bitcoin Cash (BCH) investments and the technological development of rivals.
Bitmain, which currently controls an estimated 85% of the market for cryptocurrency mining chips, reportedly made $1.1 billion in profit in the first quarter of 2018. However, the recent bear crypto market has hampered demand for mining hardware, thus affecting the company’s margins, Bernstein noted.
The analysts added that Bitmain’s Bitcoin Cash hoard represents a “major risk” to the firm’s profitability. Leaked documents from Bitmain’s pre-IPO investor deck showed earlier this month that, as of March 31, the firm was holding more than 1 million BCH on its balance sheet. With a steep decline in the coin’s prices, those funds have depreciated significantly in the past few months. At present exchange rates, the holding is worth almost $600 million, down from around $900 million when the data was published.
Bitmain, which plans to hold a $18 billion initial public offering (IPO), is also facing growing competition from the likes of Canaan and Ebang International Holdings, which are not only increasing the sophistication of their own mining chips, but are similarly planning to be listed on the Hong Kong Stock Exchange.
The Bernstein report also states that Taiwan Semiconductor Manufacturing Co. (TSMC), the world’s largest independent semiconductor foundry and Bitmain’s primary supplier, should consider requesting full advanced payments and be wary of increasing production solely for demand generated by cryptocurrency mining.
The analysis comes in just weeks before Bitmain files with the Hong Kong Stock Exchange, with a listing on the bourse expected at the end of the year, or at the beginning of 2019. The IPO is expected to raise as much as $18 billion, making it the largest crypto-related stock float, and one of the biggest IPOs in general.
Reports surfaced earlier this month that Softbank Group and Tencent have participated in Bitmain’s pre-IPO financing round. However, both companies have now denied any involvement with the offering.