Ebang International Stares Down Huge Risks From Bitcoin

Thanks to the mercurial rise of Bitcoin (CCC:BTC-USD), seemingly everyone wants to get on board the cryptocurrency train. You can’t really blame them. With BTC reaching well above $60,000 at its peak, this rally created a serious case of FOMO or fear of missing out. But smart contrarians have also eyeballed blockchain companies like Ebang International (NASDAQ:EBON). From a fundamental perspective, EBON stock offers many advantages that crypto coins can’t touch.

a crypto mining rig
Source: Mark Agnor / Shutterstock.com

For one thing, you’re dealing with a real business that employs real people and generates real growth. Of course, I’m not suggesting that the cryptocurrency complex is irrelevant, because that’s not the case at all. However, it’s fair to point out that if you were looking to acquire a peer-to-peer (P2P) payment platform, you have many options besides Bitcoin. Indeed, BTC is more of a store of value these days than a function-driven crypto.

Second, EBON stock is tied to crypto mining, with the underlying company specializing in application-specific integrated circuits (ASICs). Ebang bills itself as “a leading bitcoin mining machine producer in the global market with steady access to wafer foundry capacity.” Theoretically, this should insulate shares from volatility because the business is tied to the infrastructure of cryptocurrencies rather than a specific coin.

Plus, ASICs cater to energy-intensive proof-of-work protocols like Bitcoin. That’s significant because while many crypto adherents see tremendous value in the less-energy intensive (and therefore more environmentally friendly) proof-of-stake protocols, getting there is a lot easier said than done. For now, it seems EBON stock has years of relevancy ahead.

Of course, innovation happens lightning-quick in the crypto market. Because major blockchain projects like Ethereum (CCC:ETH-USD) are pushing for a proof-of-stake transition, this race may have pressured EBON stock; hence, the equity unit’s volatility well ahead of the Bitcoin correction.

Still, proof-of-stake may be a minor challenge in the grand scheme of things.

Tailwind Could Be Trouble for EBON Stock

While it’s the obvious culprit, the inherent volatility of Bitcoin remains in my opinion the biggest culprit for EBON stock. Sure, I’m not breaking any new ground by saying this. However, just because something is low-hanging fruit doesn’t impugn its impact.

First, the reason people mine Bitcoin and other cryptocurrencies isn’t because they’re a bunch of do-gooders wishing to keep the ecosystem alive, like an indigenous and endangered community striving to maintain their language and culture against the rude intrusions of modernity and its inherent complacency.

No, crypto miners want to make a buck, several of it actually. It doesn’t help the cause if the BTC coin declines sharply in value, which it will do at some point. And if that some point is either now or soon, shareholders of EBON stock should be very careful.

This segues into my second concern. Bitcoin is very expensive to mine. According to a Forbes article published on June 7, 2020, the cost to mine one BTC was $8,206.64. Further, the mining cost for big mining centers and individual miners ranged between $5,000 and $8,500. Coinmarketcap.com reveals that at the time of publication, BTC mining cost averaged around $9,687.

At that margin, there was no incentive to hold. Lacking a crystal ball, you just sold. Otherwise, you might get stuck with a hefty $8,200 bill or more.

Moreover, crypto miners must take into account the difficulty of mining Bitcoin, which fluctuates with price but has a strong upward bias. Interestingly, Bitinfocharts.com has a Bitcoin-Mining Profitability index, which shows that over the long run, mining profitability has a decidedly negative rate.

Ironically, this metric basically matches that of the benchmark interest rate. Monetary policymakers suppress rates to spark economic activity but too much or too frequent suppression leads to speculation, thereby causing more economic problems.

Similarly, Bitcoin’s declining miner profitability hurts the “supply building” process, sparking deflation and moving BTC further away from its original P2P utilitarian objective.

Beware the Mass Panic

One of the profound joys of Bitcoin’s rise of course is how high it went. Psychologically, you’d figure that if BTC can reach $60,000, then $100,000 is not out of the realm of possibility. But will that happen in this run or years down the line?

Since I’m not a YouTube guru, I have no idea where prices will head next. But the problem I see is that BTC’s lofty price is also a double-edged sword for EBON stock. As the price corrects — that’s how the market works — miners who are holding profitable positions will have an incentive to sell.

But probably not before the big institutions. Remember, several big names got involved with BTC at five-digit prices. With their balance sheet exposed to a highly volatile asset, they have a fiduciary duty to their stakeholders to not act irrationally. “HODL-ing” as it’s known in crypto parlance comes readily to mind.

Therefore, watch the current weakness in the Bitcoin chart very carefully. If it gets too gnarly, a steep correction isn’t out of the picture. And that would represent bad news for EBON stock.

On the date of publication, Josh Enomoto held a long position in BTC and ETH.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.


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