Short sellers target Ebang, the Chinese Bitcoin mining stock worth $1B

Who knows whether Ebang is a real crypto mining business or not? Hindenburg, for one, says it's fraudulent.

Bitcoin mining stock Ebang recently caught the ire of short selling crew Hindenburg Research, which says it’s now betting against the company.

The financial forensics firm last week accused Ebang of self-dealing, strange monetary transactions, and suspicious uses for cash influxes.

Ebang’s share price tanked 20% following release of the report.

Ebang stock (EBON) is now negative since its US IPO.

Ebang touts itself as “a leading Bitcoin mining machine producer in the global market,” and says it sells ASIC chips to customers worldwide.

The company listed on Nasdaq’s Global Select exchange in June last year. Ebang now boasts a near-billion dollar market value — making it one of the bigger crypto stocks trading publicly.

Hindenburg’s report details a multitude of allegations against Ebang, but the most glaring relate to execs funnelling proceeds of the company’s US IPO (roughly $100 million) to its underwriter AMTD.

In the IPO context, an underwriter is an individual or entity that assesses risk to determine a stock’s initial share price.
Usually, underwriters are the first buyers of stock — after which they’ll distribute the shares amongst their network.
This process works similar to a pre-sale, with all of the benefits and detriments (early access is great but can be risky if priced incorrectly).

On one hand, the entity being underwritten — Ebang — is a Chinese entity involved in a notoriously opaque and risky industry in cryptocurrency mining, which makes it difficult to price.

The other points to Hong Kong-based AMTD’s involvement in a series of its own controversies over the past six months, including allegations of fraud.

Both amount to Hindenburg claiming Ebang’s genesis story involves a dodgy underwriter sponsoring a failing crypto business hailing from one of the most volatile industries in contemporary history.

Ebang denies allegations, announces announcement

Hindenburg also noted local media had caught Ebang in an alleged sales inflation scheme with failed peer-to-peer lender Yindou. Yindou defaulted on 20,000 retail investors in 2018 after “losing” $655 million in deposits.

The relationship between Ebang and Yindou was reportedly enough to suspend Ebang’s 2018 plans to IPO in Hong Kong.

Ebang’s recent venture into the realm of crypto exchanges also drew flak. Hindenburg labelled Ebang’s new platform Ebonex little more than an out-of-the-box white label, despite the company raising $84 million to develop it.

Ebang responded to the claims with two press releases. The first one on April 7 stated: “Based on the review by the Company’s management team, we believe that the Hindenburg Report (sic)contain many errors, unsupported speculations and inaccurate interpretations of events.”

Ebang is the fifth biggest crypto mining stock on public markets.

The second on April 9 said the company plans to further address the allegations shareholders in an open letter at the beginning of this week.

“In the open letter, [we] will reaffirm [our] vision for the Company’s future and provide updates to its ongoing expansion plans,” said Ebang.

First Ebang giveth to US residents, then taketh away

Throughout all of this, Ebang and Ebonex’ website has seen a flurry of activity.

Before Hindenburg’s report, Ebang frequently referred to a glowing review by San Antonio consultancy firm Frost & Sullivan found inside its “Global and China Integrated Circuit Chip and Communication Equipment Market Study.”

Frost & Sullivan’s study — which Ebang allegedly paid for — implied Ebang could compete in the crowded Chinese cryptocurrency mining landscape, though the numbers were apparently cherry-picked as the analysis excluded important ASIC manufacturers like MicroBT.

All of those references have now disappeared, though it’s still possible to find an agreement between Ebang and Frost & Sullivan in the former’s SEC filings.

That Frost & Sullivan review showed up in state-sponsored China Daily’s report on Ebang’s IPO.

More curiously, on the day of Hindenburg’s short announcement seemingly anyone could access Ebang’s new crypto exchange. This reporter accessed the site from the US without a VPN or other discretionary measures.

But the site was down the very next day, and when US residents attempt to go to the site today, they’re met with a new homepage that states the platform no longer supports investors from that region due to regulatory concerns.

Hindenburg also claimed Ebang fakes most of Ebonex’ trading volume in a bid to suggest it’s one of the largest spot exchanges in the world.

In crypto, white label exchanges usually consist of a homepage, a trading platform, a trading engine, and, sometimes, an offer to share liquidity.

Protos asked Hindenburg if there was any on-chain data that clearly shows exactly how much volume Ebonex processes, but a spokesperson admitted it’s difficult to distinguish Ebonex from Ebang’s white label exchange provider Blue Helix.

“If Ebang can present evidence that its claimed exchange volume is genuine that would be a great start,” said Hindenburg in an email.

A spokesperson added: “We think investors also deserve clarity on why the company directed IPO proceeds into low-yield long-term bonds issued by an opaque Cayman-based entity linked to its underwriter.”

Low-yield bonds could just be a smart move

Matt Yamamoto, a research analyst for the tech and cryptocurrency industries, isn’t convinced by Hindenburg’s report.

Yamamoto says there’s logical explanations for Ebang moving its IPO money into low-yield bond markets, as cryptocurrencies have only begun to shoot up in price over the last six months.

Ebang’s execs could’ve simply decided to direct the money into bonds after demand for its crypto mining chips dried up.

Additionally, he said the $84 million collected for starting a new crypto exchange probably “isn’t enough” and shorting anything in this bull market “is very risky.”

For what it’s worth, a Hindenburg spokesperson agreed with the latter. “In a corner of the market where meme-based currencies and altcoins regularly trade at multi-billion dollar market caps, every crypto-oriented short certainly has its high risk, no matter how obvious a scam it might seem,” they said.

HKIB (AMTD’s ticker on the NYSE) is trading neutral since Hindenburg’s short report.

In any case, while the claims in Hindenburg’s short report are dubious to Yamamoto he did agree it “appears management is willing to bend the appearance of financials to shore up the books. [Ebang] will struggle in both mining and exchange businesses.”

Bullish crypto markets attract short sellers

Between bullish traditional equities and crypto markets, and the less-than-transparent nature of crypto mining companies, short sellers are trending towards the digital asset industry.

In January, J Capital released extensive research on why it believes Bit Digital, another NASDAQ-listed crypto mining stock, could be in the beginnings of a death spiral to bankruptcy.

Bit Digital stock has now shed over 30% of its value since that report, but still maintains a market value above $800 million.

J Capital Research released this handy video explaining the allegations it levied against Bit Digital.

We’ve reached out to Ebang, the company’s chief executive Dong Hu, and Frost & Sullivan for comment. None have returned emails or phone calls at press time.

The article will be updated if they respond, and we’ll look to include Ebang’s statement on the matter if made publicly this week.

Meanwhile, Hindenburg told us they’re hopeful the SEC will soon get involved, but the firm warned “China has been a difficult jurisdiction for regulators.”