Latest Bitcoin Meltdown Pressures Chinese Crypto Companies. Following the recent massive selloffs in bitcoin and other cryptocurrencies, Ebang, Canaan, and BIT Mining are dealing with falling share prices and bleak business prospects.
The Nasdaq warned Ebang International Holdings Inc. (EBON), a maker of cryptocurrency mining machines, last Friday that its shares could be delisted if they traded below $1 for 30 consecutive business days.
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Canaan Inc. (CAN) and BIT Mining Ltd. (BTCM), both makers of cryptocurrency mining machines, announced separate moves in response to their respective recent challenges. Canaan announced plans to repurchase warrants issued last year for approximately $6.6 million, while BIT Mining raised $16 million through its own new warrant offering.
Because the fortunes of such businesses are inextricably linked to demand for Bitcoin and other digital assets, shares in crypto-related companies tend to move in lockstep with Bitcoin prices.
While the three events appear unrelated, the underlying theme is falling cryptocurrency prices, which is undermining the companies’ market values and threatening to harm their businesses, which rely heavily on booming cryptocurrency demand. Bitcoin (BTC-USD), the bellwether cryptocurrency, has lost more than half of its value this year and is now worth less than a third of its all-time high reached last November.
While cryptocurrency prices have fallen through the floor, electricity prices have risen through the roof. This adds to the recent problems for cryptocurrency companies, as mining machines consume massive amounts of power in their operations.
For mining machine manufacturers, for example, an increase in cryptocurrency prices typically increases demand from miners looking to mint more virtual coins to capitalise on rising currency prices. Actual miners benefit from rising prices as well, because their revenue is directly related to the value of their digital asset holdings.
Ebang stock was just a bit above $0.47 at the close of trading Tuesday, down about 55 percent this year and worth a fraction of its IPO price of $5.23 in 2020. If the stock rises above the $1 market for at least 10 consecutive days in the next six months, it will avoid delisting; otherwise, the company will have another 180-day grace period to meet the $1 requirement.
Desperate Measures By Chinese Crypto Companies
Ebang is attempting to obtain a license to operate a foreign exchange or remittance shops in Hong Kong, possibly as a hedge against volatility in cryptocurrency markets. But that plan hasn’t stopped Ebang’s stock from falling, possibly because it appears to investors to be a desperate move rather than a sign of hope.
Canaan stock is doing the best of the three, down about 35% year to date. A quick glance reveals that the company had a strong first quarter, with revenue and net profit more than tripling year on year. However, the results fell short of the company’s expectations, in part due to disruptions caused by China’s strict anti-COVID measures. The company’s second-quarter results may not be as rosy, given that cryptocurrencies plummeted during that time period.
Canaan’s stock is therefore likely to remain under pressure for some time. Its decision to buy back its warrants appears to indicate that the company believes its shares are unlikely to recover in the short term, at least not to a level that would appeal to contract holders.
Issuing such instruments can be an appealing method of raising funds for a company. In addition to raising funds through warrant sales, the company may profit if warrant holders later decide to exercise their right to purchase company stock at a predetermined price. However, warrants are classified as liabilities on a company’s balance sheet. So, if the warrant holders never exercise their right to buy the underlying stock because the share price never rises above the exercise price, the company’s balance sheet is only left with liabilities.
Canaan issued the warrants a little over a year ago, giving holders the right to purchase their shares at $16.38 per share. Perhaps the exercise price didn’t seem so high back then. However, with the company’s stock has lost nearly 90% of its value since its peak in March of last year, trading at less than $4, the exercise price appears out of reach for Canaan stock. As a result, the company may have determined that it would be better served by removing the warrants from its books now, giving it the flexibility to pursue other fundraising options, such as another offering of warrants with a lower exercise price or straightforward equity or debt sale.
Finally, there’s BIT Mining, which has the smallest cash buffer of the three. BIT Mining had only $20 million in cash and cash equivalents at the end of March, compared to about $240 million for Ebang at the end of December, the majority of which came from its new share issuance last year, and $417 million for Canaan.
As a result, the $16 million cash infusion from its new warrant offering is significant for BIT Mining, providing the company with the potential to raise additional funds if warrant holders purchase the company’s shares. This year alone, the stock has dropped nearly 90% to less than $0.65 as of Tuesday. However, the exercise prices for the warrants are not far off, at $1.10 for Series-A shareholders and $1 for Series-B shareholders.
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