Chinese state-owned capital is now indirectly backing a major bitcoin mining business

The recent acquisition of bitcoin mining pool BTC.com by another Chinese company named after a web domain — 500.com — raised eyebrows for at least three reasons.

First, this wasn’t just any mining pool. Founded in-house by mining hardware giant Bitmain, BTC.com was once the largest bitcoin mining pool and still remains one of the top five by hash rate, accounting for around 10% of the network's total. The acquisition came shortly after Jihan Wu stepped down from his roles as the chairman and CEO of Bitmain in January.

Second, 500.com was not a mining business — or, at least it didn't appear to be. It is best known as an online platform that sells tickets to enter betting pools focused on sporting events like European Football League matches. Founded in 2001 in Shenzhen, it was one of the first Chinese state-sanctioned companies to enter the internet lottery space. 

Finally, 500.com’s biggest shareholder is a Chinese semiconductor chip maker whose controlling shareholder is a state-owned enterprise. In other words, the state is now indirectly exposed to substantial bitcoin mining businesses — including self-mining, farm colocation and mining pool operation.

From sports betting to bitcoin mining

In fact, a deeper look reveals that 500.com’s pivot to bitcoin mining actually started in early 2019 and has largely remained under the radar until recently.

The story of its transformation begins in 2013. That’s when the company went public in the U.S., raising $58 million at a $330 million valuation. 

At the time of the IPO, 500.com reported growing revenue and net income on the back of China’s booming internet environment. At its prime in 2014, 500.com’s market capitalization was about $1.5 billion.

But in 2015, Chinese regulators dropped the hammer in an attempt to halt the rampant growth of unlicensed online sport lottery platforms. That had a chilling effect on 500.com, which suspended the sales of online tickets beginning in April 2015 even though it claimed to be properly licensed. Since then, it has sold its lottery tickets via physical stores. 

Following the clampdown, the firm began to struggle financially. In 2017, it purchased a European lottery platform in a bid to expand its overseas revenue, but that didn’t help turn the tide. In fact, 500.com recorded a net loss in each of the first five years following the regulatory clampdown. Its unaudited 2020 financial report showed that its net revenues last year were just $3.3 million with a net loss of $34.2 million. 

But something else important happened in 2017: the firm acquired 40% of a Hong Kong-listed lottery firm called Loto Interactive. It was through Loto that 500.com first entered the bitcoin mining farm business.

Loto began operating bitcoin mining facilities in Sichuan in March 2019 and as of today has built three facilities that host miners for clients, according to the firm's disclosures to the Hong Kong stock exchange in early 2019.

At first, Loto kept its mining business mostly under the radar, only referring to the facilities as “big data centers.” Loto’s 2018 earning report shows that its revenue was $770,000, and it mainly came from lottery sales via physical stores in mainland China. Then, in 2019, its revenue jumped to $8.2 million — $8 million of which came from its “big data center” business.  

In February 2020, Loto said that it already had two data centers up and running and that a third would be operational in June of that year. All of the facilities were located in China’s Sichuan province, which is considered the global bitcoin mining hub due to its abundant hydropower resources.

Revenue from those data centers grew to $36 million for the first nine months of 2020, again accounting for nearly 100% of its total revenue during that period.

As for 500.com, its earnings finally turned from net loss to profit in the third quarter of 2020. On December 2, Loto publicly acknowledged that almost all of the $20 million in revenue it generated that quarter came from service fees earned by hosting “bitcoin mining equipment” inside the three facilities.

A few days later, in a private roadshow, Loto’s executives told potential investors that its three mining farms have a combined capacity of 400 megawatts. “In September, the hashing power hosted in our three data centers accounted for 6.27% of the bitcoin network’s total hash rate,” Liu Jibin, a Loto director, said during the roadshow.

Then Yang Xianfeng, who had been spearheading the Sichuan mining farm operations at Loto Interactive, was appointed as 500.com’s new CEO. And in February, 500.com acquired additional stakes of Loto Interactive to become its controlling shareholder.

After the roadshow, 500.com announced that it was raising $23 million via private placement, which was settled in February in 356.04342 BTC and $11.5 million in cash. Then it announced additional private placement in January to raise $37 million to purchase bitcoin miners for self-mining. 

The firm said the equipment would be fully deployed by the second quarter of this year, and claimed that this would increase its computing power by nearly 2,000 petahashes per second (PH/s). At bitcoin’s current mining difficulty, this amount of hashing power could produce on average about 10 BTC in 24 hours. 

Finally, earlier this month 500.com announced it was acquiring BTC.com from Bitmain via yet another private placement. Meanwhile, 500.com’s stock price has surged by 10 times since December 17, reaching the highest point in nearly six years.

A link to the state

Just as remarkable as 500.com’s transformation is that it was indirectly backed by Chinese state-owned capital.

Back in 2015, after regulators clamped down on internet sports gambling, Tsinghua Unigroup International bought 63.5 million Class A ordinary shares of 500.com with about $123 million in cash. According to 500.com’s filing with the U.S. Securities and Exchange Commission on December 31, 2020, Tsinghua Unigroup International is 500.com’s principal shareholder with 32.59%.

The SEC filing added that Shengwu Wu, who has been the global executive vice president of Tsinghua Unigroup, has also served as a director and chairman of the board at 500.com since December 30, 2019. 

Tsinghua Unigroup International is the investment subsidiary of Tsinghua Unigroup, a Chinese semiconductor chip maker whose controlling shareholder is Tsinghua Holdings (51%). According to Chinese business registration records, Tsinghua Holdings was founded in 2003 with $350 million as incorporation capital fully funded by the Chinese government to manage the public institution’s state capital and investment business. 

This appears to be the first publicly known instance in which state-owned capital is exposed to bitcoin mining, albeit indirectly. 

As for 500.com, its transformation into a full-fledged bitcoin mining company is now complete.

“After the pivot, mining will become 500’s core business,” the firm's newly appointed CEO Yang Xianfeng recently told Chinese business media Securities Times. “By integrating a full ecosystem of the pool, mining farms and miner businesses, the goal is to gain bitcoin at cheaper prices to realize profits.”