Ebang's Australia Progress Excites – Or Not – Or Maybe, As Bitcoin Gyrates

Key takeaways:

•      Ebang said last Thursday that its Australian unit received regulatory approval to register as a digital currency exchange operator in the country

•      A 14% gain in the company’s shares after the news was erased the next day as bitcoin prices fell, highlighting the close link between its stock and the bellwether currency

By Warren Yang

Publicly traded crypto-related companies can send investors on a roller-coaster ride on any given day. Their stocks frequently swing wildly, often tracking the ever-erratic bitcoin. And like any other stock, they can also fluctuate sharply on company-specific or industrywide news. Nothing illustrates those wild ups-and-downs better than Ebang International Holdings Inc. EBON.

Last Thursday, the Hangzhou-based company, whose revenue comes mostly from selling cryptocurrency mining machines, said the Australian Transaction Reports and Analysis Centre approved its Australian unit’s registration as a local digital currency exchange operator.

The development reflected relatively quick progress in Ebang’s recent efforts to diversify beyond its volatile main business, and also outside its home base in China where crypto mining and trading have been outlawed. The company got into the exchange business only last year, with the introduction of a platform named Ebonex, following its establishment of the Australian subsidiary in the second half of 2020. Ebang shares jumped 14% the day it announced the latest news.

But the stock gave back those gains and more the next day, perhaps as investors woke up realizing they gave Ebang too much credit for the development. After all, investors could certainly be justified in worrying that expansion into a foreign market may not be a walk in the park for Ebang. For one thing, even though adoption of cryptocurrencies is increasing fast in Australia, the government has lately vowed to rein in cryptocurrency trading after some popular exchanges collapsed.

While the Australian government has yet to detail what it plans to do next, drastic restrictions could significantly hurt Ebang’s future business in the country. Also, it’s not clear how Ebang, as a Chinese company with little experience running an overseas operation, can quickly and appropriately respond to regulatory changes, potentially making it vulnerable to fines or even lawsuits.

Last but not least, Ebang will need to compete with large, well-known exchanges, such as Binance and Coinbase, not an easy task.

But as sensible as this line of thinking may be, it’s quite unrealistic to believe it drove investors to collectively change their minds about Ebang so quickly and dump its stock on the scale of the post-rally plunge last week. As if to drive home that point, the stock jumped 11.4% during the latest trading day on Monday.

Instead of the Australia news, a more reasonable explanation for the dramatic shifts in Ebang stock may have been a 2.7% drop in bitcoin BTC/USD prices on Friday, followed by a recovery. Indeed, shares in rival bitcoin mining machine maker Canaan Inc. CAN declined quite a bit as well on Friday.

Tied to bitcoin

The correlation between shares of crypto mining equipment makers and bitcoin makes perfect sense, since the value of the digital money can determine whether such machines fly off the shelves or sit in warehouses for months.

Accordingly, speculative investors may also see such stocks as a way to bet on bitcoin without actually owning the digital currency, reinforcing the link between the two asset groups. Buying crypto currencies requires fees, and cashing out of them isn’t always straightforward. So why not just buy a stock that may move in the same direction as bitcoin?

For mining machine makers, the big challenge is that wild fluctuations in bitcoin prices make it difficult to predict sales. Particularly, unsold inventory during a period of weakness can be a big headache because these computers can become obsolete quickly due to constant demand for more powerful machines. In what looked like a move at least partly to put its idle inventory to work, Canaan last month announced its own move into crypto mining.

Moreover, making and selling crypto mining machines carries thin margins, with costs for components and production alone often exceeding revenue in Ebang’s case.

All this explains why Ebang wants to branch out to new businesses, including the operation of exchange in Australia. That move also comes after China last year imposed a blanket ban on cryptocurrency trading and mining, leaving related businesses scrambling to move their operations out of the country. In addition to Australia, Ebang has been also taking steps to move into Singapore and Canada. 

Like Canaan, Ebang has also moved into crypto mining, with its own operations outside China. Yet neither mining nor exchange operation generates any meaningful revenue yet for the company, which earned more than 80% of revenue from equipment sales and the rest from fees for hosting and maintenance services in the six months to last June.  

Ebang is also looking to provide fintech solutions for companies that lack technical support and security as another potential new revenue source. But whether that business will grow large enough to significantly reduce reliance on its hardware business is an open question.

All that means that Ebang shares are likely to remain tied to bitcoin, at least to some extent, even as company-specific news like the latest Australia announcement or a short-seller attack like one last April could affect it on a daily basis.

Last year Hindenburg Research published a long list of allegations against Ebang, including misuse of proceeds from its IPO in June 2020. While Ebang denied the assertions, its shares took a big hit – even as bitcoin reached a record high. Beijing began its crackdown on cryptocurrencies soon afterward, sending the prices of bitcoin and crypto-related stocks including Ebang’s all plunging.

Ebang shares have a lot of ground to recover following last year’s bloodbath. As of Monday, they have lost more than 70% of their value since their IPO, and the company has yet to turn a net profit.

The stock still trades at a price-to-sale (P/S) ratio of about 14, slightly higher than 13 for Canaan, which generates larger revenue and made a net profit in the first three quarters of last year. Such a valuation metric may not mean as much, however, since the prices of such stocks can often change dramatically as reflected by the latest volatility in Ebang’s share price.