Baked goods and tea. Emergency rescue. Online lotteries. These are some of the products and services offered by U.S.-listed Chinese companies that have pivoted to bitcoin mining in recent months, trying to capitalize on the current bull run.
This is not just short-term opportunism. Access to Chinese miners, state-owned energy providers and the U.S. capital markets make these companies well-positioned to swiftly expand mining operations. They can also earn high premiums in the stock market, according to industry pros.
These companies’ connections to Chinese bitcoin miner makers, local hosting mining sites and state-run electricity companies give them an edge over their competitors in the west, said Ethan Vera, CFO of Seattle-based crypto mining company Luxor.
“Some of the companies are partially owned by the Chinese government. They could get permits to operate in hydro power-rich areas or great deals with state-run electricity companies,” Vera said.
For example, Shenzhen-based lottery firm 500.com, which used to profit from helping China’s state-run lottery centers sell tickets, has signed contracts with the State Grid Corporation of China, a state-owned energy company, to enjoy discounted electricity for its data centers. The company’s subsidiary, Loto Interactive, also has permits to run data centers in the “excessive hydro power” areas designated by the local government in Sichuan and the Tibetan autonomous region.
Adding bitcoin mining to these companies’ businesses can significantly boost their valuation multiples, said Yulong Liu, managing director at Babel Finance, which is a Hong Kong-based crypto lender.
“These stocks are trading at a very high premium,” Liu said.
Shares of Nasdaq-listed Chinese online gaming company The9, which had the exclusive license to distribute World of Warcraft in China, rose by over 750% year to date after it announced plans to make investments in crypto in January. Sino-Global Shipping, an international shipping company that said it would invest in bitcoin mining, gained over 300% on its stock price on Feb. 3. SOS, a Chinese emergency services provider, had an over 300% year-to-date gain on its stock price. The stock price of Urban Tea, a Chinese bakery and specialty retailer, increased by over 200% year to date after its pivot to bitcoin mining.
Given some of the companies’ current investments in bitcoin mining versus their valuation, these stocks might have been traded at a very expensive price, Liu said.
Being listed on the U.S. stock exchanges also helps these companies expand their mining operations quickly, said Lingxiao Yang, COO of crypto hedge fund Trade Terminal.
However, the largest mining companies, such as f2pool and Poolin, have not gone public yet, which means they can not just issue shares to raise money for expansion.
If miners in China want to expand their operations or maintain cash flow, they would need to sell mined bitcoin through the over-the-counter (OTC) desks or collateralize their bitcoin to take out a fiat loan. Further, there are growing risks for them to do so because China continues to crack down on OTC trading and make financial transactions related to bitcoin in Chinese banks even more difficult.
The sustained bitcoin bull run appears to have emboldened these companies to make hefty investments in bitcoin mining.
Loto Interactive, which is majority-owned by 500.com, set up data centers in China’s bitcoin mining hub, Sichuan province, in early 2019. The firm now has at least three data centers in Sichuan, which contributed 96.7% of its total revenue in 2019. The data centers combined could generate up to 6.27% of the hash rate on the bitcoin network, which would make it the sixth-largest mining pool in the world.
“500.com has been quietly developing its bitcoin mining businesses for a few years,” Liu said. Now, “the lottery firm seems to be doubling down on bitcoin mining as bitcoin is seeing the biggest bull run in history.”
500.com’s stock price soared in December 2020 after its chief executive announced the firm would focus on bitcoin mining, and saw a few more spikes when the company announced that it would to buy $8.5 million mining machines, purchase more shares of Loto Interactive and acquire the mining pool services of Bitmain spinoff Bitdeer.
One reason the companies are going all in on cryptocurrency is the sustained bull run.
“We are currently around $50,000 per bitcoin, which makes it extremely profitable for the miners,” he said. “Even if the price drops to $30,000, the miners are still going to make money.”
It’s not only bitcoin pushing these stocks up. Historic gains on ether, the native asset to the Ethereum network, which is the second-largest cryptocurrency, is another driving force. The9 plans to invest in ether mining, which has been highly profitable thanks to increasing gas fees and its staking services.
A continued rise in bitcoin may push mining companies’ stocks higher but a decline could hit many of these firms when they may not be financially sound otherwise. These companies are searching for a strong revenue stream while they are struggling with their non-crypto businesses. For example, 500.com has posted continuous losses since it suspended all of its online lottery ticket sales due to China’s nationwide inspection on the industry in 2015.
The risks know no boundaries. In the U.S. Riot was a biotech company that made diagnostic machines before rebranding as Riot Blockchain in October 2017. Its penny stock doubled in price after the shift.
But what rises can fall. Shares of Riot Blockchain as well as Marathon and Hive fell dramatically when bitcoin’s price dropped this week, with the companies losing over $1 billion combined. In the meanwhile, 500.com suffered a 16% decrease.
Riot is a success story, at least for now, but another firm pivoting to blockchain at about the same time as Riot, Long Blockchain Corp, is a cautionary tale for many non-crypto-turn-bitcoin public companies.
Long Island Tea Corp, a lemonade and iced tea company, announced plans to invest in blockchain and crypto amid bitcoin’s 2017 bull run. It changed its name to Long Blockchain Corp.
The move came at a time when the tea company was desperately trying to stay listed on Nasdaq. However, it aborted its plan when the bitcoin price crashed in 2018. The company later faced an investigation by the U.S. Securities and Exchange Commission (SEC) and wound up losing its Nasdaq listing anyway.
The boom in Chinese blockchain-related stocks in late 2019 is another lesson for companies that make opportunistic investments in this emerging technology. Shortly after Chinese President Xi Jinping called the nation to seize the opportunity on blockchain, a slew of companies that were unrelated to blockchain claimed they had launched ambitious blockchain projects. Their stocks soared.
Some of the companies, including one obscure porcelain manufacturer, were accused by Chinese financial regulators of misleading investors by saying they are involved in blockchain whereas no financial disclosures had shown they were. The stocks have steadily dropped to their previous levels since the gold rush in blockchain cooled off in the country.