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The Greatest float in Australian history that never happened

The Greatest float in Australian history that never happened

Posted by Ben Bucknell

“Ah, if only I’d invested in Bitcoin”

I’m kicking back on the beach listening to the person next to me bemoan the missed opportunity that would have meant retirement, 60 foot yachts, and the rock-and-roll lifestyle of the famously wealthy that comes with unconstrained financial liberation….ok, maybe I’m taking a few liberties there…but how many times this summer have you heard about the remarkable rise of Bitcoin?

And, of course, yesterday the papers were all about the plunge off its highs…its meteoric rise, the investment professionals opining that it’s worthless, and the speculators that have made millions (and no doubt for those that bought in just lately, those that have lost).

I can almost hear you thinking…If only we’d had the foresight to invest in Bitcoin 2 years ago….

I don’t claim to know what the future of Bitcoin holds. Will Bitcoin be a case study in speculative bubbles, or morph into a widely adopted alternative to government-issued fiat currency? I really don’t know. But, it makes for a great story while the price is flying. So, here’s the story of how Australian investors missed out on the opportunity to invest in the greatest float that never happened.

Take yourself back to October 2015. We were launching OnMarket. The usual naysayers to innovation were feigning interest with banal questions like ‘who’s going to be your guinea pig?’

We wanted something aligned; something cutting edge, tech savvy and an appealing investment for our OnMarket members. Enter stage left, Sam Lee. Founder of The Bitcoin Group. Oh, you can hear the howls of derision. Remember this was October 2015.

The business model of Bitcoin Group was to undertake Bitcoin mining. Bitcoin mining is the act of securing the Bitcoin Network through the verification of Bitcoin transactions. Verification is performed by Bitcoin specific applications which solve encryption algorithms attached to each Bitcoin transaction. The amount of Bitcoins received is determined by the company’s Hash Rate (computing power) as a percentage of the Global Bitcoin Network Hash Rate. The company generates its Hash Rate by connecting and powering purpose built Bitcoin mining machines.

In his Chairman’s letter, Andrew Plympton said: “Bitcoin group is an Australian pure-play Bitcoin mining operator, currently producing 1.19% of the global mining output, by operating 6.1 to 6.3 petahashes of mining equipment in six mining sites.”

90% of the capital raised was to be invested into expanding the Bitcoin mining operations in addition to meeting the costs of existing mining operations. From its capital raising, Bitcoin Group forecast in its prospectus that it expected to mine between 80,000 to 115,000 Bitcoins.

Now, in order to satisfy ASX and ASIC that it would have sufficient working capital, Bitcoin Group needed to establish revenue forecasts. As we all now know, the price of bitcoin is volatile. Bitcoin Group assumed an average bitcoin price for FY2016 of $347 for their forecasts, which was the price on 7th September 2015. That translated to mining revenue for FY2016 of between $27.76 million to $39.91 million for Bitcoin Group.

Wait a sec….did I just say they’d put in a forecast Bitcoin price of $347? Um…and what is it now? Even after the recent falls…?

In case you missed it - here’s a chart.

The problem was that – despite Mum and Dad investors pouring into the IPO – ASX wasn’t convinced. In an article dated 9 March 2016 and titled “ASX nixes Bitcoin Groups Sharemarket Float Over Capital Concerns”, The Sydney Morning Herald quoted the company’s statement that it was giving up on the float having been delayed by regulators 6 times:

"The key reason for the withdrawal of the offer is due to the requirement of the ASX, that Bitcoin Group procure a working capital report from an independent accounting firm, a report not specifically required for a listing on the ASX"

"In preparing the working capital report, Grant Thornton, the independent accountant, was required to factor in the reduction of newly minted bitcoins released on the occurrence of block halving in July 2016, without regard to the expected increase in bitcoin price.

"The last time block halving occurred (28 November 2012), the bitcoin price increased in value by 1032 per cent in the proceeding six months (from US$12.16 to US$125.58). Unfortunately, [ASIC] prohibited any forecasting on the bitcoin price which resulted in a report which did not allow for any increase in bitcoin price upon the number of bitcoins available to be mined halving in July 2016….

Appointed to provide an independent valuation report, Grant Thornton forecast various scenarios, the "base case" being a $500 Bitcoin price which would see it needing to raise funds again by September 2017. But, according to Sydney Morning Herald:

“the ASX rejected the findings and said if the company wished to continue trying to list it would have to reopen its offer and raise additional funds to "an amount sufficient to deliver it adequate working capital to carry out its stated objectives and to have a sustainable business model."

“The company gets bitcoins as a reward for doing this [bitcoin mining], so its future is closely tied to the value of the digital currency.”

The Bitcoin Group forecast of 80,000 to 115,000 Bitcoins, at a price of $347/Bitcoin, giving annual revenue of $27.8m to $39.9million. At the time of writing, the Bitcoin price was $13,828…and had been as high as $25,717.

Yikes! They were mining 1.2% of the world’s bitcoins, and predicting the IPO proceeds would enable them to mine 80,000 to 115,000 bitcoins per annum…..That is revenue of roughly $1.1 billion to $1.6 billion per annum in today’s prices. Yep, that wasn’t a typo.

Incoming investors were offered 60% of the Bitcoin Group Ltd in the IPO via OnMarket. The pre-money valuation was $13 million. You can do the maths…

The IPO was shelved and we, and the Bitcoin Group, had to return $5.9 million in applications to investors. What would that investment in Bitccoin Group be worth today? I’ll guess we’ll never know. (But it is worth noting that the bitcoin price has risen 43x since the day the IPO was pulled and we returned the funds)… just what could have been…if it hadn’t been blocked…because apparently it was going to fail….even though Dick Smith, Vocation, RAMS Home Loans, Wellard….all +$100m IPOs that were allowed and yet collapsed within a year or two of listing….funny, they were all large IPOs that made it through the listing process ... I’ll let you draw your own conclusions....

Of course, it goes without saying that, if you’d followed a strategy of selling out after 6 months, then it would have been someone else getting the big price rise in Bitcoin, rather than you.

…..but, in good news, we’ll be equity crowdfunding companies in 2018. Yes, they’ll be high-risk. But, if we can bring you another Bitcoin Group, without the regulatory impediments of ASX’s listing committee stopping it from going ahead, well….hold onto your hats.

Happy investing. Back to the beach to dream about what your $5.9m would be worth now….

Ben (and all the OnMarket team)

p.s. If you’ve been missing out on our regular IPO notifications but reading this one, then its only going to happen while I’m at the beach. You’ll need to reply “Subscribe” to get IPO notifications.

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