Summary: In this post we will -

Revisit our March 1st, 2018 analysis Comment on some of the conclusions being spread on twitter Give a more accurate representation of what their holdings are like right now and Predict forward.

It’s going to be a long read because this a complex company and ecosystem.

When your favorite, intrepid, diseased feral cat previously left you, Herpes Cat tried to tell you exactly what Bitmain was up to with BCH over 5 months ago.

One gigantic #knew for Herpes Cat

Today, Samson Mow tweeted out a slide from the Bitmain pre-IPO investor deck with the following image —

The first column section is Quantity. The second column section is average price. The third column is USD value x 1000. This image shows that their BCH holdings ballooned to over 1 million BCH by the end of March this year. If you go back to the original Herpes Cat BCH post, we already knew this was the case —

Smack dead in the range & published a month earlier than the slide cutoff.

So, this is confirmation that our analysis and wallet identification (which was easy) was spot on.

Purchasing BCH with BTC? A Clarification.

One of the more common reactions to the pre-IPO investor deck slide was the monumental error Bitmain made in selling BTC for BCH. Here’s just a few such examples —

Pretty much the universal response to these slides.

At the end of the day, the end result is that Bitmain did in fact decrease their BTC holdings while increasing their BCH holdings; however, I think it’s important to revisit how they got to this point since a lot of these tweets are inferring that BTC was sold directly for BCH. Instead, it was a series of gambles / risks that we wrote 5 months ago were super risky and downright harmful if the crypto bear market persisted.

The bear market persisted. The gambles have all lost in a big way … for now.

So, how did Bitmain get here with all this BCH on a more granular level?

August 1st BTC holdings and getting their fork coins Being a primary miner (Antpool) along with ViaBTC under not only declared names, but “Unknown” mining pools. Compounding this was the fact that they were not selling mined BCH, eating all of the electricity costs, eating the opportunity costs of not mining BTC and having to pay their overhead using other revenue streams. See some of the miner wallets hoarding BCH and having realized $0.

3. Exploiting the EDA (Emergency Difficulty Adjustment) to “strip mine” BCH.

4. Bitmain accumulating, and not selling, large amounts of BCH being collected by their hardware business in their two “sales wallets” (identified in March post). Here’s their original BCH wallet that the Bitmain hardware sales business operations was using (notice no decrease in coins) —

Notice no decrease in the blue line up until June.

5. Artificial price support / pumping on exchanges as seen in charts. There are many examples of this, but let’s use the same one we pointed out in March —

This is just one example back from March. You can find many instances of inorganic price support like this.

6. An early policy of hoarding BCH and not selling “onmarket” like they would with their other crypto holdings.

So, it’s not as simple as selling BTC for BCH although the end result is pretty much the same. However, it’s good to understand the mechanics and all the decisions that led Bitmain to have this mega cache of BCH.

The Pre-IPO Slide Ends on 3/31/2018. What’s Happened Since?

There are two very major pieces of the puzzle that have fallen into place in the time after March 31st, 2018 —

Bitmain has attempted to try and start divesting their BCH holdings and realize profits on those coins. Bitmain’s continued attempts at creating their next gen SHA256 ASIC.

Trying to Divest

It is impossible for Bitmain to divest their BCH holdings onmarket. Full stop. The BCH markets are not liquid enough to absorb the amount of coins Bitmain is still holding (probably around 700k or so now). There is no BCH OTC market to speak of (it’s minuscule compared to BTC OTC). Grayscale already created the BCH investment trust so that’s one available option already burned. Bitmain is stuck with these coins or they risk dumping the entire market and hurting the coin permanently.

Now, let’s revisit that original Bitmain sales wallet and look at the BCH balance.

The sales wallet seems to have OTC’d at least part of the 162k BCH txd on June 21st.

Now, let’s check the second sales wallet that were accumulating BCH once they stopped using the wallet above —

Second sales wallet, another 106k BCH divested potentially

So, with the bear market persisting since our post in March, Bitmain has probably only been able to divest about 20-25% of their BCH holdings at best. In addition, they aren’t hoarding all mined BCH, they are offloading at least some of the mined BCH which has created more downward price pressure than existed in 2017-Q1 2018. Finally, in a hilariously pointless attempt to try and manipulate the BCH supply, miners have sent a total of 60 BCH to a burn address. Maximum lulz.

However, one thing is drastically worse now than it was when we wrote the March article — the BCHUSD price. In fact, the BCHUSD value is now half of what it was in March and now significantly below their average cost as defined by the pre-IPO slide. To make matters worse, the opportunity cost of not mining / holding BTC is also worse now as the BCHBTC pair is at a yearly low.

Divesting now is far more painful than it would have been months ago and the longer the bear market continues, the more the pain increases.

BCHBTC at the yearly low & now more people are aware of the BCH supply issue. Woof.

The Next Generation Antminer

The second big issue facing Bitmain is that it’s been their standard operating procedure to release a new version of their ASIC as the competition was closing in to keep their competitive edge over the crypto hardware market. However, we haven’t seen a new Antminer in a while now. So, what’s going on?

Is this bad? Seems bad.

So, we have pressures on the crypto asset front & an inability to really shed their BCH holdings which are now severely underwater. We have pressure on the hardware business side. Things are also not going well so far with their AI efforts. Speaking of their AI efforts, remember the Bitmain B3 miners that were specifically made for a PoW algo that was friendly to AI ASIC chips?

The B3 miners were a total flop / disaster

If you were Jihan what would you do?

The Exit to End All Exits

You have a huge cache of BCH that has no liquid markets and no OTC demand.

You have a mountain of ASICs that lose value as the ROI decreases on the Antminer S9 and the BTC mining difficulty continues to rise. You’re burning capital to try and develop an S11 (or next SHA256 miner).

You have a, so far, unsuccessful transition into the AI marketplace.

You have a persisting bear market.

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. As many people are realizing now (and Herpes Cat stated in March), there’s no way to realize many of these coin assets. To make matters worse, the BCH chain will probably die / get 51% attacked if Bitmain doesn’t continually invest hardware and electricity to keep the chain alive so these assets almost in a sense become liabilities (Side note — If Bitmain ever did pull their support a 51% attack is extremely possible. However, much of the threat of a 51% attack against BCH is overblown right now. If a 51% attack was detected tomorrow, Bitmain, et. al. would pull hash to defend. The real threat is Faketoshi’s reckless pushing of 0 confirmations to businesses and economic nodes, this is a far more serious issue than a deep reorg would be right now).

The IPO is Bitmain trying to dump their bags and if they get the valuation they want (they won’t unless the entire crypto market gets mega bullish), it will be the exit to end all exits. You won’t see an exit this magnificent since the #SkyKing.

Predictions, Looking Forward, Some Misc Questions

Looking forward one thing bails Bitmain out — a mega bullish crypto market. Bitcoin is so powerful that it will drag many altcoin USD values up with it which will give them some breathing room to pump and dump their altcoins. Remember, in the March post, we predicted that a continued bearish market and a necessitated defense of the BCH price would cause ripples in the altcoin markets —

Bitmain only has so many resources, they are finite. You can only fight a war on so many fronts.

This is why we continue to see altcoins pullback harder in the bear market than BTC. Conversely, in a mega bullish environment, these finite resource pressures are alleviated somewhat and it may be possible for Bitmain to continue the process of divesting their BCH holdings. (Side note — I don’t know this for a fact so I hesitate to write this, but don’t we know that Bitmain mined ETH, XMR & SIA at the minimum in secrecy for months? Where are those holdings? Why aren’t they on the slide? Are their pre-IPO deck slides even trustworthy?)

So, the biggest key to all of this? The general crypto market conditions. Bitmain is praying for a bullish market because investors buying Bitmain stock will essentially be longing crypto.

I imagine that Bitmain won’t IPO until they have “favorable market conditions” which means there’s probably a bull market coming in the lead up to the actual IPO date. I also imagine that once Bitmain has shareholders to report to a lot of these extraneous investments / projects may die. I also find it interesting that rumors of the Jihan / Roger / Faketoshi split started in Feb / March 2018 right as all these market pressures and BCH liabilities were stacking up. Jihan is an extremely successful, smart businessman and I’m confident that he saw the same issues Herpes Cat wrote about in March.

Jihan, I hope for your sake crypto gets bullish and in a hurry.