BIT Mining Limited (BTCM): Down 95% YTD, this one is NGMI

BIT Mining Limited (NYSE: BTCM) is a corporation that has a roller coaster history. From its IPO in 2013 until today, the company has gone through several business model pivots. Some of these areas of interest included selling lottery tickets, sports information services, cash trading of goods and online games. The chronology of these changes is well detailed in this month of February 2022 company coverage by Bamboo Works. After the gambling business was dismantled, the corporate entity changed again; now to a collection of crypto-focused business models where it aims for a diverse footprint across self-mining, mining pools, data center services, and miner manufacturing.

The evolution of the share price since the beginning of the year really speaks for itself. If uncertainty breeds investor fatigue, BTCM offers that in spades. While all publicly traded crypto miners are struggling as mining margins tighten, most are down 60-75% year-to-date. BTCM is down about 95%. I’m a firm believer that when a potential investment is down more than 90%, it’s either a very attractive entry opportunity or bankruptcy. Unfortunately, BIT Mining Limited looks like the latter.

Potential Delisting, Dilution and Letter to Shareholders

As a stock listed on the NYSE, the dramatic drop in the share price over the past few months has exposed BTCM shares to delisting risk. The company disclosed on August 5 that it had received a non-compliance notice from the New York Stock Exchange on July 29. The non-compliance stemming from the company’s ADS shares closing below $1.00 for 30 consecutive trading days. In the same disclosure, BIT Mining Limited said the NYSE had been notified of the company’s intention to remedy the deficiency and regain listing compliance.

About two weeks later, the company shared news of a $9.3 million direct offering that will see approximately 15.6 million new shares outstanding before the possibility of further dilution by warrants. This comes less than two months after a $16 million direct offer which added 16 million new ADS shares outstanding with more via warrants. Unfortunately for shareholders, dilution has been the name of the game over the past two years with only 43 million shares at the end of September 2020 and around 100 million expected by the end of the current quarter.

To the company’s credit, Chairman Bo Yu recently issued a letter to shareholders end of August, recounting some of the challenges the company has faced and explaining why the management team remains optimistic:

After overcoming many obstacles, what was once a gradually growing confidence in our company’s ability to redefine itself has turned into enthusiasm for the next challenge ahead, as every crisis we have faced has transformed into a new opportunity for growth. We would like to remind our investors that fluctuations in our stock price will not affect our regular business operations or cause us to lose sight of our long-term growth strategy.

While I think some shareholders may take comfort in these words, the fact is that BIT Mining Limited is facing some pretty serious headwinds and the fate of the company looks troubling. The letter made no mention of the company’s plans to regain NYSE listing compliance and the company appears to be devoting resources to building machines for altcoins like Dogecoin (DOGE-USD) and Ethereum Classic (ETC-USD). ); each of which has historically had questionable network usage fundamentals.

Top Cryptonets Remain Strong, Miner Creditworthiness Less so

When it comes to cryptocurrency adoption, I think the best coins are here to stay. Even though the price of Bitcoin (BTC-USD) and other cryptocurrencies has sold off dramatically over the past 10 months, the Bitcoin network has never been more secure from a hash rate perspective. . Hashrate continuously hits new all-time highs despite falling prices:

And non-zero address adoption is near all-time highs for Bitcoin and has exploded for Ethereum (ETH-USD):

The network effect we see in crypto adoption is still valid, in my opinion. But the mining space is incredibly competitive, and miner profitability continues to be squeezed by the double-edged sword of higher costs and lower prices. Miners’ incomes are now at their lowest in two years:

Likely due to the added layers of third party risk, so far we see some of the crowd-mining organizations showing less resilience than the self-miners. Compass Mining’s recent struggles have been well documented; alleged payment defaultsexecutive resignationsand site closures.

Self-mining revenue

The biggest problem I see for BIT Mining Limited’s self-mining business going forward, however, is its reliance on Ethereum mining. In the unaudited financial results for the end of June 2022, the company cited $11.2 million in recognized revenue from ETH mining and only $3.6 million in recognized revenue from BTC mining.

Recognized Rev of Mining	ETH	BTC	ETH % of total
Q1-22	$16.0 million	$6.9 million	69.9%
Q2-22	$11.2 million	$3.6 million	75.7%

Click to enlarge

Source: BIT Mining Limited

This means that BIT Mining actually became more dependent on Ethereum mining for its mining production in Q2 than in Q1. This is problematic because after the Ethereum merger in mid-September, the block reward disappears when transactions are validated by Proof-of-Stake rather than Proof-of-Work. I have covered this and why ETC is not the safe haven for ETH miners moved in detail here.

Summary

The company cites four different crypto-related business models under the corporate umbrella and I see clear issues for two of them. BTCM’s self-mining revenue will take a massive haircut when Ethereum transitions from PoW to PoS. The mining manufacturing arm of the company appears to be spending resources on altcoins that may not survive the crypto winter. And to be clear, data centers and mining pools aren’t exactly safe either, because they add an element of third-party risk that self-mining doesn’t necessarily have. While I would never recommend shorting a stock after a 95% sell, I also can’t say I would buy this one. If I was a shareholder, I would probably cut my losses.