BIT Mining's Radical Shift Brings Back Revenue, But Profits Remain Elusive

Key takeaways:

•      BIT Mining’s revenue surged to $495.8 million in the fourth quarter of 2021 from $800,000 a year earlier, as it shifted from previous businesses to crypto mining

•      Despite the surge, high costs resulted in a wider net loss from the year-ago period before the shift 

By Warren Yang

In the span of just a few months last year, BIT Mining Ltd. BTCM completely changed its business model and identity. As swift as that change from online lottery ticket seller to cypto mining specialist has been, the transformation looks like a work in progress that may take some time to bear new fruit in the form of profitability.

Last Thursday, the cryptocurrency mining company said in its latest results that revenue in last year’s fourth quarter surged to $495.8 million from a mere $800,000 a year earlier. BTC.com, a mining pool business BIT Mining acquired in April, accounted for the bulk of revenue during the three months.

The BTC.com purchase marked the last step in BIT Mining’s transformation, which the company started in December 2020, when it abandoned its old name, 500.com Ltd. Prior to that acquisition, BIT Mining was busy buying up mining machines and got its mining business off the ground less than three months after starting to prepare to enter the crypto game.

Before that radical shift, BIT Mining had been a jack of many trades, often focused on online entertainment. It was founded in 2001 as an online reseller of lottery tickets, capitalizing on the huge popularity of gambling in China. But soon after the company went public as in 2013 as 500.com, China began to crack down on such third-party lottery ticket resellers, and the company ended up suspending that business in 2015.    

It bought a provider of sports information services in July 2016, only to unwind the investment less than 18 months later. In October 2016, it also acquired a majority stake in an online spot commodity trading company in China. In late 2016, it bought a majority stake in a company providing mobile poker games, and the following year it bought TMG, an operator of online gaming sites.

BIT Mining officially disposed of what was left of its lottery business in China last July, and plans to sell a similar business it owned in Europe under TMG, which is no longer operating. As those old businesses become history, the company is now fully focused on mining cryptocurrencies, running a mining pool via BTC.com and operating data centers.

The mining pool business sees miners, apparently including BIT Mining itself, share computing power and split rewards. But apart from that, the company has yet to generate meaningful revenue. In the fourth quarter, it earned just $22.9 million in revenue from its other two businesses, mostly from mining. That figure was up from $6.6 million in the prior three months.

Ethereum bet

The trouble with the mining pool business, BIT Mining’s big breadwinner, is that it appears to be very costly. In the fourth quarter, expenses related to the business actually exceeded revenue from it. After adding in other costs as well, BIT Mining made a net loss of $8.8 million during the three months, wider than $5.6 million a year earlier when revenue totaled only $1.4 million.

Given this, it’s unsurprising that the latest quarterly results didn’t impress investors. BIT Mining shares slid over the three trading days after it reported its latest earnings, losing a combined 11% of their value through Tuesday’s close.

BIT Mining owns and operates data centers, which seem to mostly house its own mining computers, instead of generating revenue from third-party clients. This means the company’s ability to return to profitability will hinge on its ability to mint large volumes of crypto coins.

BIT Mining is betting big on Ethereum. Its operation devoted to mining that digital asset has produced more than 7,000 units of the currency so far. A major appeal of Ethereum is that it is not only a cryptocurrency but also a platform that can perform many other functions, including the issue of other cryptocurrencies, as well as trading of non-fungible tokens (NFTs) that have become the latest hot digital asset class. Also, decentralized finance, or DeFi, which has been generating a lot of buzz recently, mostly runs on the Ethereum blockchain.

Ethereum prices hit an all-time high in November, which helped boost revenue at BIT Mining in the final quarter of last year from the previous quarter. But one issue with the mining business is that in the U.S., where BIT Mining is listed, companies cannot book a valuation gain from their crypto currency holdings until they sell them. For that reason, BIT Mining posted a relatively modest $4 million in fourth quarter revenue from selling cryptocurrencies.

And crypto mining is infamous for guzzling lots of electricity. So the more computers the company runs to mine more digital currencies, the more enormous its power bills will be, eating into its bottom line.    

BIT Mining is also exposed to geopolitical risks because its mining operations are all overseas as a result of China’s ban on such activities. More than a third of its mining capacity is in Kazakhstan, where small protests originally sparked by high fuel prices led to nationwide unrest last month. Also, a sudden influx of Chinese miners into the country following Beijing’s crackdown caused an energy shortage in the relatively poor and underdeveloped country.

Because of unstable power supply, BIT Mining scrapped a plan to build a data center in Kazakhstan, although it says its mining machines in third-party data centers there are running fine.

Reflecting its turbulent past, BIT Mining’s stock has lost more than 80% of its value since the company went public in 2013. Its current market value is a fraction of its 2021 revenue, translating to a price-to-sale (P/S) ratio of just 0.14. The market capitalization of competitor The9 Ltd. NCTY, which similarly transformed from a game operator, is also less than its 2020 revenue, the latest available figure. But its P/S ratio is much closer to 1, at 0.76. 

BIT Mining’s ability to change its business model so quickly is rather impressive. But it’s far from clear how soon this transformation will lead to a profit, if ever, as suggested by the depressed valuation of its stock.