Ahead of the impending Bitmain IPO, it would appear the cryptocurrency mining giant is holding a massive, illiquid stock of bitcoin cash (BCH).
Following up on a post back in March this year, a medium user has updated details from an investigation into risks related to the upcoming Bitmain IPO. Specifically, as predicted back in March, Bitmain could suffer huge losses as a result of holding large amounts of bitcoin cash (BCH) that it cannot sell.
Blockstream CSO Samson Mow recently uploaded an image on Twitter from the Bitmain pre-IPO investment deck showing what appears to be large volumes of bitcoin (BTC) sold off to acquire bitcoin cash (BCH) in the first three months of 2018. It would seem the movement of assets was a gamble made on bitcoin cash that didn’t foresee the extended bear market that cryptocurrency has been suffering this year.
Selling bitcoin for bitcoin cash
Developments leading up to today are covered in more precise detail, but in summary, Bitmain sold almost all its BTC and acquired about one million BCH, seemingly to prop up the price of BCH (although the exact reasons are unclear). Since the sale, the drop in the value of BCH and the crypto market in general means the company has lost potentially half a billion dollars over the past few months.
The post goes on to show how Bitmain was unable or unwilling to sell any mined BCH, using up resources that could have been better-spent mining bitcoin (BTC). Screenshots of a number of wallet addresses show large amounts of hoarded BCH that has garnered zero profits. Further graphs show a decreasing dollar balance but no decrease in BCH balance.
Lack of liquidity
The problem is that BCH doesn’t have the liquid market that BTC does. There are almost zero BCH over-the-counter (OTC) market opportunities and far less BCH buyers in a bear market where BTC has recently increased its dominance to 50 percent. While Bitmain admittedly has managed to divest approximately 25 percent of its BCH holdings, without a significant market turn, it will simply continue to make losses off of them. If Bitmain decides to cut its losses and dumps its support of BCH, the network will be very susceptible to a 51 percent attack.
Furthermore, Bitmain is struggling to compete on the hardware side of its business which is presumably where it makes the majority of its revenue. The companies recent Antminer S9 is struggling to give a good return on investment (ROI) in face of increasing mining difficulty and decreasing market prices.
Bitmain IPO investment risks
In reality, the situation is very complex, but the long-and-the-short of it is that anybody investing in the Bitmain IPO risks taking on the responsibility of a huge stash of potentially illiquid BCH assets. While it’s likely that a bullish market will return at some point in the coming months, the timing of the Bitmain IPO right now is understandably suspicious.
As the author of the post notes:
“How do you realize the value of this monolith crypto business and your holdings? You IPO and pass the bag on in one huge lumped stock offering and hope investors don’t realize all of your current assets are very, very illiquid.”
Mark Hartley is an IT specialist, freelance writer, keen traveler, and blockchain enthusiast. He has worked on the trading floors of the world’s biggest interdealer broker in London and helped integrate crypto-services into IT trading systems. When he’s not searching for the world’s most beautiful beach, he’s nose deep in any crypto and blockchain related news.