Unbeknown to most, Bitmain is the king of the cryptocurrency mining industry. The company was founded by two young men, Jihan Wu and Micree Zhan in Beijing in 2013. Wu’s early experience with Bitcoin and the IC design expertise of Zhan helped Bitmain improve its mining ASICs and miners and expanded its market share quickly in this industry. At the time, the industry was even more nascent and was limited to a small group of avid participants. Over the past year, Bitcoin mining groups surged in quantity as it turned into a public frenzy and Bitcoin prices skyrocketed
Bitmain was able to seize the opportunity early and, by our estimates, command a ~70-80% market share of Bitcoin miners, which could represent up to $5-6B in revenue in 2017. Tracking Bitmain purchases from semiconductor company TSMC, we believe the rumor $2.5B in revenue is very likely an understatement and ignores the value of bitcoins mined by Bitmain’s internal mining rigs. A majority of the revenue was largely generated by mining itself and collecting management fees from the mining pools it operates. With it’s main line of business in mining and it’s ancillary services, we estimate Bitmain’s gross margins to hover in the 80%s on an operating margin of 70%. When compared to larger, traditional companies, one can observe that the profitability of Bitmain’s operations rivals that of semiconductor manufacturer NVIDIA. We note that this comparison only includes Bitmain’s operating income stream from Bitcoin and not other cryptocurrencies which they do actively participate in.
Additionally, the company owns AntPool and BTC.com and holds an equity stake in ViaBTC. If all the miners under the Bitmain umbrella were to collude, Bitmain could possibly influence more than 51% of the Bitcoin network. We believe that this influence undermines the very foundation on which the decentralized foundation of what the blockchain was built on. Bitmain has denied this and stated that it has no control over the miners in its pools.
We note that Bitmain’s control of the market is at risk as the barriers of entry are low and several competitors are hovering on the horizon including Canaan Creative, Ebang, GMO Internet, and Halong Mining. However, with limited scalability, a dearth of reliable mining hardware, and limited track records, these rivals may struggle to secure sufficient foundry capacity to challenge Bitmain in 2018.
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