In March 2018, shortly after bitcoin’s bull run to $20,000, a publicly-traded Chinese company invested 500 million yuan, worth $80 million at the time, to buy 100,000 bitcoin mining units. 

As the bear market kicked in during the months that followed, so, too, did a contract dispute, offering a rare window into Chinese public firms tapping into bitcoin mining as a new business stream and reflecting the prolonged magnitude of last year’s market sell-off.

The $80 million mining investment made by Beijing Cailiang, an app developer fully-owned by Shenzhen-listed Wholeasy, brought home almost negligible profit return in 2018. Yet it dragged the company into a lawsuit involving $15 million in debt and a potential criminal case with accusation of fraudulent public disclosure.

Though the amount at dispute may seem insignificant, the case sheds light on the increasing investments by institutions in China into an area where even public entities typically shy away from public discussions.

The missing bitcoin miners

Gaming app and marketplace provider Wholeasy, with now a $500 million market cap, disclosed last Thursday that Chinese law enforcement has opened a criminal case against bitcoin miner supplier Ebang. Wholeasy’s Cailiang subsidiary filed the complaint, accusing Ebang of committing sales fraud.

That evening in China, Ebang, one of the three Chinese bitcoin miners that attempted to go public in Hong Kong in 2018, said in an urgent response that Cailiang filed the police report in a malicious attempt to play the victim.

The miner maker released a dozen pages of sales contracts and delivery receipts as supporting documents to debunk Cailiang’s story. Ebang said it had already filed a separate report to financial regulators in China accusing Cailiang of fraudulent disclosure on its liability as a public company.

The escalation followed a civil contract dispute case over an unpaid amount of 100 million yuan, worth $15 million, as part of the two parties’ $80 million bitcoin miner sales agreement in March of last year.

Ebang sued Cailiang in April 2019, demanding the defendant to pay the remaining overdue balance for the shipment of all 100,000 units of bitcoin miners. However, Cailiang claimed that it had only received 65,000 units and thus shouldn’t be liable for the remaining payments. The case was tried on Nov. 26 and is pending the judge’s ruling.  

“Their malicious report to the police is nothing but an attempt to escalate it to a criminal case to interfere with a civil lawsuit,” Ebang said of its miner buyer’s motivation. 

Following the news on Friday, Wholeasy’s share price dropped by eight percent on the Shenzhen Stock Exchange. It has further declined by 10 percent as of press time during China’s Monday trading hours.

As of June 30, Wholeasy’s cash in its current asset on the balance sheet was $7 million, down from $10 million on Dec. 31 2018.

$80 million investment

Started out as a gaming app developer and in-game ad distributor, Cailiang was fully acquired by Wholeasy in July 2017 under the condition that it should bring the parent company a net profit of $7 million, $8 million and $10 million for 2017, 2018, and 2019, respectively. 

Soon after the acquisition, Cailiang kicked off a business unit during Q4 2017, amid bitcoin’s price surge, that it called a “high capacity cloud computing server business and hosting service”, according to Wholeasy’s 2017 financial report. 

There was no mention of bitcoin, mining, miner or even blockchain in the report. That year, Cailiang made $5 million in net profit on a revenue of $21 million. 

But Cailiang’s 2018 financial report indicated that the only new business area that it had expanded into in the year was “a new cloud computing server (miner) brokerage and rental service” available for individual and institutional customers. 

In fact, Cailiang incorporated a mining farm in July 2018 called Mobcolor, headquartered in California with offices in Colorado and North Dakota. 

And Cailiang’s 2018 revenue indeed saw significant growth with $52 million, more than double compared to 2017, while the net profit grew to $8.2 million. 

But assuming Cailiang’s gaming business made the same revenue and profit in 2018 as it did in 2017, its mining-related business may only have brought home $3 million in net profit on a $31 million revenue.

And that’s after the $80 million investment, which bought 100,000 units of Ebang’s older E9+ model that have a much shorter utility life compared to more advanced products that hit the market recently.

Further, Cailiang doubled down in 2018 on its research and development cost on crypto-related services including a mining pool and, notably, a crypto exchange service despite China’s tough stance on crypto trading activities. 

Based on the 2018 financial report, as of October last year, Cailiang completed the main development work for “a digital asset exchange that offers crypto-to-crypto as well as over-the-counter trading for mainstream digital assets such as BTC and ETH.”

The firm said the main goal of the exchange is to facilitate assets trading for overseas mining customers via its mining pool in order to “improve its profitability.” 

Winding down?

Based on Ebang’s sales agreement with Cailiang released in its Thursday response, the bitcoin miners sold to the buyer in 2018 was the E9+ series, at a price of 5,000 yuan each, or $720.

At bitcoin’s current price, mining rewards and difficulty, these machines can only make a slightly positive daily return if electricity costs falls below $0.04 per kilo-watt hour, according to f2pool’s mining profitability index.

As such, the valuation of these units in the second-hand market likely won’t be anywhere near the original price. The ask and bid prices for more widely-used Bitmain’s AntMiner S9 can now be seen around $100 to $150.

Cailiang’s financial report for the first half of 2019 indicates that mining-related service is no longer among its top three businesses, although it had acquired another $3 million worth of mining equipment with ongoing mining site construction.

For the first six months of 2019, Cailiang made $3.5 million in net profit on an $18 million revenue, not yet half way through the promised target of $10 million in net profit. The company has not responded to email request for comment. 

The crypto market’s downturn, especially in the second half of 2018, had caused more than 600,000 miners to shut down amid a broader industry reshuffle. 

But bitcoin’s price rebound since March 2019 rejuvenated interests in mining, pushing bitcoin network’s mining difficulty to an all-time-high near 100 exahashes per second (EH/s) around October.

As bitcoin’s price has largely remained unchanged over the past month, the network’s total computing power kept steady at the 90 EH/s level.

However, faster and more efficient mining machines than the allegedly unpaid-for E9+ models are already in place elsewhere, so it may be too late for Cailiang.