Corporate Finance Session 4 — Financial Planning & Short-term Capital Management
Using the example of Bitmain Tech. (“Crypto-assets and Liabilities”
FMG Case)
As per the Snap Inc., case this lecture mixes technical concepts on
Working Capital Management and strategic details on the case
example
Link to the case
Financial planning = the art of not running out of money (Funding needs – what’s the size of
the need, what are the funding sources available? Also need to manage unexpected
expenses)
/!\ In the Modigliani Miller frictionless world, you could just raise more money. In real life,
there are delays and transactional costs to raising money: perfect time management, aka
raising money to cover short-term needs is key
Good financial planning =
- Knowing your sources and uses
- Deciphering accounting statements to extract cash-flow information
- Managing balance sheet items like working capital and other short-term
commitments
Bitmain Case
Focusing on Net Working Capital (NWC) ratios, cashflow, and Sources & Uses analysis
How does the financing policy Bitmain chose fit with their business model?
Cryptocurrencies (like Bitcoin or Ethereum) are very narrative/story-heavy assets
[Narrative of the blockchain: no-one is behind it, it’s decentralised… but how does it work?
- Network of computers, which form blockchain nodes. Each of them possesses an
entire copy of ALL Bitcoin transactions since the very beginning of Bitcoin/crypto
time. Hence, every transaction must be registered in this collective ledger made of all
computers. For that to happen, each transaction is placed into a block, a set of
transactions.
- There is then a system, called proof of work, which relies on mining: that’s basically
creating a block out of all the transactions to group them, and it’s a guessing-the-
number problem which all nodes are involved in!
- One computer finally finds the answer, creates the block, all other nodes have to
accept it, the block is created, and everyone moves on to the next transaction. At
every creation, some new quantity of Bitcoin is created and some of it goes to the
miner who solved the transaction + they also receive transaction fees. As an
individual, if you voluntarily pay more fees, your transactions will be processed
quicker
- Any blockchain works as described above, either with proof of work or proof of stake]
Bitmain Tech = core business is to develop and sell mining hardware to miners (fabless
model/ they outsource the industrials and just distribute), providing them with computer
power sufficient to mine. They also engage in some mining themselves and run some mining
, pools to provide miners with insurance (small miners coming together to increase their
mining power, and then share rewards) + have mining farms where they are custodians of
the mining equipment owned by the people/customers/miners.
They control a very large share of the cryptocurrency mining business: you’ll buy
equipment from Bitmain, send it to a farm controlled by Bitmain, join one of their
pools, and get money from them.
These days, they have about 90% of the market in terms of chips/mining machines
90+% of their revenue comes from selling the mining equipment, where they are #1 in the
industry, a near monopoly. How did they achieve this so fast, since just 2013? How did they
acquire this position, and how did they manage to sustain it?
- First mover advantage!!
- Deliver very very quickly, through outsourcing/fabless business model: users want to
maximize the hash rate (computing power generated by these machines they use)
o Hash rate is a commodity : harsh competition within the market that sells
computers and machinery for mining because their price is basically marginal
cost as no « blue » or « red, fancy » hash rate can be upsold
o Though there is a huge entry cost, material-purchasing cost to produce these
If you’re the first one to sell, you’re gonna make profit (that’s Bitmain)
While new entrants can ruin you… but from the entrants’ perspective,
what’s the point of putting in all the R&D costs, whereas Bitmain has
HUGE inventory, a contract with TSMC (major chip producer) and an
established spot on the market + on-going production efficiencies …
Bitmain can slash its price to deter any newcomer anyway
- Bitmain got in the market first, and they’re cheap and have very large order-
processing capacity … > discouraging any new entrant
How crypto prices influence Bitmain’s cash-flows :
(1) They hold crypto on their balance sheet > value of assets going down if Bitcoin
(BTC) price falls -> have to account for that as an impairment in their accounting
(2) Unclear whether high crypto prices increase Bitmain’s own rewards for mining
within their own pools (secondary-or-more relationship)
(3) HOWEVER, miners want to mine more when the prices of crypto are higher:
they want to buy more machines when the price of crypto is high, hence demand
for the machines will be higher when the prices are higher !
o High crypto prices create greater demand for equipment and crypto services
(mining pools and farms): during the gold rush, there is more money in the
pick and shovel business than in the actual gold …
Do crypto prices also increase Bitmain’s proprietary mining cash-flows? Relationship unclear
as crypto price-rises attract more competitors across the mining community, making it
tougher for Bitmain’s pools to reap shared rewards
- Explains why Bitmain would not just mine everything by themselves : mining directly
is not SUPER profitable… If the prices of crypto go up, you’re gonna have more
competition
Using the example of Bitmain Tech. (“Crypto-assets and Liabilities”
FMG Case)
As per the Snap Inc., case this lecture mixes technical concepts on
Working Capital Management and strategic details on the case
example
Link to the case
Financial planning = the art of not running out of money (Funding needs – what’s the size of
the need, what are the funding sources available? Also need to manage unexpected
expenses)
/!\ In the Modigliani Miller frictionless world, you could just raise more money. In real life,
there are delays and transactional costs to raising money: perfect time management, aka
raising money to cover short-term needs is key
Good financial planning =
- Knowing your sources and uses
- Deciphering accounting statements to extract cash-flow information
- Managing balance sheet items like working capital and other short-term
commitments
Bitmain Case
Focusing on Net Working Capital (NWC) ratios, cashflow, and Sources & Uses analysis
How does the financing policy Bitmain chose fit with their business model?
Cryptocurrencies (like Bitcoin or Ethereum) are very narrative/story-heavy assets
[Narrative of the blockchain: no-one is behind it, it’s decentralised… but how does it work?
- Network of computers, which form blockchain nodes. Each of them possesses an
entire copy of ALL Bitcoin transactions since the very beginning of Bitcoin/crypto
time. Hence, every transaction must be registered in this collective ledger made of all
computers. For that to happen, each transaction is placed into a block, a set of
transactions.
- There is then a system, called proof of work, which relies on mining: that’s basically
creating a block out of all the transactions to group them, and it’s a guessing-the-
number problem which all nodes are involved in!
- One computer finally finds the answer, creates the block, all other nodes have to
accept it, the block is created, and everyone moves on to the next transaction. At
every creation, some new quantity of Bitcoin is created and some of it goes to the
miner who solved the transaction + they also receive transaction fees. As an
individual, if you voluntarily pay more fees, your transactions will be processed
quicker
- Any blockchain works as described above, either with proof of work or proof of stake]
Bitmain Tech = core business is to develop and sell mining hardware to miners (fabless
model/ they outsource the industrials and just distribute), providing them with computer
power sufficient to mine. They also engage in some mining themselves and run some mining
, pools to provide miners with insurance (small miners coming together to increase their
mining power, and then share rewards) + have mining farms where they are custodians of
the mining equipment owned by the people/customers/miners.
They control a very large share of the cryptocurrency mining business: you’ll buy
equipment from Bitmain, send it to a farm controlled by Bitmain, join one of their
pools, and get money from them.
These days, they have about 90% of the market in terms of chips/mining machines
90+% of their revenue comes from selling the mining equipment, where they are #1 in the
industry, a near monopoly. How did they achieve this so fast, since just 2013? How did they
acquire this position, and how did they manage to sustain it?
- First mover advantage!!
- Deliver very very quickly, through outsourcing/fabless business model: users want to
maximize the hash rate (computing power generated by these machines they use)
o Hash rate is a commodity : harsh competition within the market that sells
computers and machinery for mining because their price is basically marginal
cost as no « blue » or « red, fancy » hash rate can be upsold
o Though there is a huge entry cost, material-purchasing cost to produce these
If you’re the first one to sell, you’re gonna make profit (that’s Bitmain)
While new entrants can ruin you… but from the entrants’ perspective,
what’s the point of putting in all the R&D costs, whereas Bitmain has
HUGE inventory, a contract with TSMC (major chip producer) and an
established spot on the market + on-going production efficiencies …
Bitmain can slash its price to deter any newcomer anyway
- Bitmain got in the market first, and they’re cheap and have very large order-
processing capacity … > discouraging any new entrant
How crypto prices influence Bitmain’s cash-flows :
(1) They hold crypto on their balance sheet > value of assets going down if Bitcoin
(BTC) price falls -> have to account for that as an impairment in their accounting
(2) Unclear whether high crypto prices increase Bitmain’s own rewards for mining
within their own pools (secondary-or-more relationship)
(3) HOWEVER, miners want to mine more when the prices of crypto are higher:
they want to buy more machines when the price of crypto is high, hence demand
for the machines will be higher when the prices are higher !
o High crypto prices create greater demand for equipment and crypto services
(mining pools and farms): during the gold rush, there is more money in the
pick and shovel business than in the actual gold …
Do crypto prices also increase Bitmain’s proprietary mining cash-flows? Relationship unclear
as crypto price-rises attract more competitors across the mining community, making it
tougher for Bitmain’s pools to reap shared rewards
- Explains why Bitmain would not just mine everything by themselves : mining directly
is not SUPER profitable… If the prices of crypto go up, you’re gonna have more
competition
