Is there appetite for crypto-currency IPOs?

Three of the largest crypto-mining companies – Bitmain Technologies, Canaan Inc. and Ebang International Holdings – plan an IPO in Hong Kong in the near future. The decision comes amid the bear market in crypto-currencies that began in the beginning of this year. The companies will likely capitalize on their success from 2017, when crypto-asset prices exploded. All three companies sell “mining” equipment. The current price of bitcoin is $6,700. Despite the 66% fall in the price of Bitcoin, mining for bitcoin is still going strong. Measured by its hash rate, the amount of capital devoted to mining bitcoin is going steadily upwards, despite the fall in Bitcoin’s price.

This upwards trend is proof of the changing economics of Bitcoin. As the prices of Bitcoin fell, only the most efficient and creative mining operations could survive; thus, many of the amateurs who mined from their basement left the industry to better organized and better capitalized players. This gives companies like Bitmain two big advantages. First, it makes their mining equipment absolutely necessary for success in a low-price environment. Second, as experts in mining bitcoin they can organize extremely efficient operations.

The difficulty they face is that bitcoin has lost a great deal of its speculative demand. The explosion in price from less than $1,000 to more than $20,000 in one year was a self-reinforcing pattern of speculative demand fueling even more speculative demand. With speculative assets, a higher price often attracts even higher demand. The beginning of the bearish trend, however, killed a lot of that demand.

In an attempt to mitigate the risks from its crypto-operations, crypto companies are looking for applications of their developed technologies in artificial intelligence, as it can often require massive amounts of computing power.. The applicability of their technology to AI, however, is still uncertain.

Source: Bloomberg Finance L.P.

Chart: Bloomberg Finance L.P.