The winter on the crypto market has begun to thaw, as bitcoin prices skyrocket to almost $12,000. Companies like Facebook and JPMorgan are introducing their own coins; meanwhile, blockchain companies are expanding aggressively in traditional markets.
With the resumption of growth in the crypto market, blockchain companies are blowing the dust from their old plans for ICOs (Initial Coin Offering) — the crypto equivalent of an IPO — with their eye on conquering the $68 trillion stock market.
Among such companies is the mining giant Bitmain, which had already tried to enter the traditional stock market once before.
Previously, the plans ended up with nothing. But the interest of traditional investors in cryptocurrency is growing, and the company again wants to try its luck.
What is an IPO?
IPO is the most significant step in the life of any company. It can push the company to success — or bury it.
In theory, the process of holding an IPO is fairly simple: private companies hold an offering to attract capital from institutional and commercial investors and to enter the stock market. In essence, companies sell part of their business to investors in the form of shares.
In an ideal scheme, everyone is happy: the company gains investments, and investors earn income in the form of either dividends or the opportunity to sell shares when prices rise.
Eventually, the crypto market developed an analog of IPO called Initial Coin Offering (ICO). The key difference is that IPO’s are tightly regulated by governments. Part of this is the requirement that companies holding IPO’s disclose their financial information to the public, negating the possibility of fraud.
ICO’s, on the other hand, are in most cases not regulated at all and investors have little ability to verify claims of the companies hosting the ICO. In this environment, finding a promising ICO in which to invest can be like swimming through a shark tank to find a pearl.
Another difference is in size. The total capitalization of the world stock market, according to the World Bank, exceeded $68 trillion in 2018. The capitalization of the crypto market, by contrast, is at the time of writing only about $324 billion.
IPO’s are, therefore, a key tool for companies hoping to pull in investments from outside the crypto niche.
In mid-June, Bloomberg, citing its own sources, reported that Bitmain is preparing for an IPO in the United States. Potentially, the placement could happen as early as the second half of 2019.
Bitmain plans to raise $300-5000 million in its US stock market entry, according to Bloomberg. The mining giant did not confirm this but has not denied it either.
This is not Bitmain’s first attempt to enter the traditional market. Back in early 2018, the mining giant was planning to hold an IPO on the Hong Kong Stock Exchange (HKEX), aiming to raise more than $3 billion in investments.
With the BTC still trading around $20,000 at the beginning of last year, the plan didn’t seem far-fetched. The company itself demonstrated excellent results. In 2017, Bitmain earned $1 billion in net profits. By the end of the first half of 2018, the company had added to its profits another $1 billion.
But then winter came to the market, and BTC, together with other cryptocurrencies, entered a freefall. Bitmain suffered along with them. The company lost $500 million in the third quarter of 2018 and by the end of the year was forced to lay off half of its employees.
Bitmain’s situation was made worse still by its reliance on mining or sale of mining equipment for revenue. In the face of such volatility of the crypto market, HKEX began to doubt that their’s was a sustainable business model. Regulatory uncertainty was the final nail in the coffin for Bitmain’s IPO bid and the company failed to enter the traditional market.
At the same time as Bitmain, two other mining giants were also planning an IPO: Canaan and Ebang.
They also had chosen the Hong Kong stock exchange as a launching pad and, again like Bitmain, their plans failed. The reasons are the same: the collapse in the market, which led to company losses, and regulatory uncertainty about cryptocurrencies around the world.
But after the resurgence of the cryptocurrency market, Canaan also renewed its plans for an IPO. In fact, the company plans to conquer the US stock market now, Bloomberg sources say.
As for Ebang, it is completely unclear whether it will conduct an IPO or if it has already ditched its plans.
Bithumb and Galaxy Digital: Reverse IPO
An IPO is a rather expensive and long path to the public stock market. In addition, it depends heavily on the appetites of investors, which may change at any second.
In lieu of this option, some companies prefer a reverse merger, the “short path” to the stock market. Here, a private company purchases a public one that is traded on the stock market. After the merger, the private company becomes public, and it doesn’t need an IPO.
BTHMB Holdings, the parent company of South Korean crypto exchange Bithumb, decided in January 2019 to take this route. Then it agreed with an investment company, traded on the US stock exchange, to merge into one public firm.
Bithumb can become the first publicly traded cryptocurrency exchange in the United States if it will able to finalize the deal with Blockchain Industries.
But the South Korean exchange is not the first crypto reverse merger. Galaxy Digital, founded by Michael Novogratz, sealed a reverse merger in Canada in early 2018. The company’s shares have been traded on Toronto’s TSX Venture Exchange since August 1 of that year.
IPO or Hype?
Crypto companies have to be applauded for their ambition to conquer traditional markets. But, as history shows in the case of past IPO bids, investors simply do not have enough appetite to sustain for crypto firms.
On top of this is a more troubling question: are companies like Bitmain and Canaan really going to hold an IPO, or are their announcements just a play at more publicity?
No matter the answers, one thing is sure: crypto companies should not take the decision to hold an IPO lightly, nor should investors the decision to contribute to one.