Bitcoin Surges Past $102,000: Can OKX's "Selling Water" Strategy Ensure Profitability?

Bitcoin Surges Past $102,000: Can OKX's "Selling Water" Strategy Ensure Profitability?On January 17, 2025, the price of Bitcoin briefly exceeded $102,000 per coin, reaching a new high since January 7th. This news once again brought attention to OKX (formerly OKCoin), a once-dominant digital asset trading platform

Bitcoin Surges Past $102,000: Can OKX's "Selling Water" Strategy Ensure Profitability?

On January 17, 2025, the price of Bitcoin briefly exceeded $102,000 per coin, reaching a new high since January 7th. This news once again brought attention to OKX (formerly OKCoin), a once-dominant digital asset trading platform. However, despite the soaring Bitcoin price, the company's financial situation appears complex and even worrying. OKX's interim report for the first half of 2024, released on December 17, 2024, revealed that for the six months ended September 30, 2024, the company's revenue reached HK$195 million, yet its net profit was a negative HK$3.615 million. Even more surprisingly, amidst the bullish Bitcoin market, OKX chose to sell off 888 Bitcoins. What corporate strategy and financial difficulties lie behind this "cash infusion" maneuver?

OKCoin, the predecessor of OKX, under the leadership of its founder Star Xu, once reigned supreme among digital asset trading platforms. Leveraging his experience and connections from Yahoo China and Douban, OKCoin secured funding within just three months of its launch and enjoyed long-term favor from the capital market. In 2014, Xu became a representative of young entrepreneurs, invited to the "2014 China Youth Angel Association Annual Summit." In 2016, he was appointed as a special expert for the Zhongguancun Internet Finance Industry Association and a member of the National Internet Finance Security Technology Expert Committee, enjoying immense prestige.

However, the good times didn't last. On September 4, 2017, the People's Bank of China and six other departments jointly issued a "Notice on Preventing Risks of Token Issuance Financing," tightening regulations on digital asset trading platforms. This policy forced the OK group to accelerate its overseas expansion. In 2019, Xu and OK group's overseas entities appeared on the shareholder list of Hong Kong-listed Qianjin Holdings Group, completing the acquisition of controlling stake. The same year, OK Group officially adopted the Chinese name "OK Group," later changing to "OKX" in 2020.

Despite OKX's efforts to "sever ties" with the domestic market, its OKLink product continues to operate in China and received complaints on the Heimao complaint platform in 2024. This shows that even with a shift to overseas operations, risks associated with its domestic business persist. Similar to OKX, other cryptocurrency exchanges face numerous challenges. For example, Binance, due to a lack of effective anti-money laundering mechanisms, saw its founder Changpeng Zhao sentenced to four months in prison and fined $50 million by a Seattle federal court. Although Zhao was allowed to retain most of his stake during his sentence, he was permanently banned from holding any leadership position at Binance, highlighting the regulatory risks faced by cryptocurrency exchanges.

Although Xu has authored four industry books "Blockchain: Reshaping the Economy and the World," "Illustrated Blockchain," "Token Economy," and "A Fun Look at Financial History" demonstrating his expertise and influence in the blockchain field, he has gradually withdrawn from OKX's daily operations. He resigned as CEO of OKEx in 2017, stepped down as the legal representative of OK Group in April 2019, and resigned as a non-executive director of OKX in January 2022. On October 25, 2023, Beijing Lekuda Network Technology Co., Ltd., the former operating entity of Okcoin, was deregistered, further marking Xu's "severance" from OKX. However, it's noteworthy that Xu still holds 72.71% of OKX's shares, indicating significant control over the company.

OKX's Transformation: Becoming a "Water Seller," a Two-Pronged Approach?

To navigate cryptocurrency market regulations and business transformation, OKX adopted a "water seller" strategy. As early as 2016, the company launched the digital asset trading platform OKCoin and the cross-border remittance platform OKLink. OKCoin primarily traded Bitcoin and Litecoin, once a leading Bitcoin exchange in China. Its international site, independent from the Chinese site, supported USD and contract trading, generating substantial funds through withdrawal fees and leverage fees. OKLink aimed to address the issues of lengthy processing times, high fees, and low transparency in cross-border remittances, leveraging blockchain technology to enhance transaction authenticity and reliability.

Over the following years, OKLink's business expanded, introducing a multi-chain blockchain explorer, Chain Eye, and Chain Guardian, among other products, and releasing regular security reports, such as the Q3 2024 OKLink Security Quarterly Report, which highlighted a total of $743 million in losses from chain-wide security incidents, raising user awareness of digital asset security. OKLink acts as a "water seller" in the blockchain industry, providing infrastructure, data services, and security support, collaborating with OKCoin to offer Anti-Money Laundering (AML) and Know Your Customer (KYC) services. For example, OKLink partners with OKCoin Japan to provide KYC services, enhancing platform compliance and security.

However, OKX's "water seller" strategy hasn't been without its challenges. In 2019, a dispute arose between Xu and investor Yongxing Yang, with Yang alleging that nearly 800 million yuan in assets on the OKEx platform were frozen and cancelled, sparking accusations of "embezzlement" by the exchange. In 2020, online articles circulated claiming that Xu was arrested, and allegations of "embezzlement" at the exchange fueled further damage to the company's reputation. While OKEx responded that individuals responsible for certain private keys were cooperating with the police investigation, the incident severely tarnished its credibility.

The synergistic effect between OKLink and OKCoin also faces limitations. While OKLink can provide OKCoin users with more comprehensive market information and trading references, whether its influence can translate into actual user growth and profitability for OKCoin remains a challenge.

Asset Sales Fail to Mask Weakness: Core Business Struggles

Despite possessing OKCoin and OKLink, OKX's business model hasn't demonstrated strong profitability. In the first half of 2024, its revenue primarily stemmed from ground and building construction engineering and related services (HK$89.862 million), digital asset-related businesses (HK$31.742 million), and technology services (HK$2.241 million). Surprisingly, for a blockchain technology company, its largest revenue source is traditional construction engineering. Other ventures even incurred a loss of HK$93,000.

Sales costs exceeding HK$153 million further squeezed the company's profit margin, leading to a net loss of HK$3.615 million for the half-year. Notably, OKX's financial statements don't separately list R&D costs, making it difficult to assess the company's investment and return on technological innovation.

OKX's asset structure is also concerning. As of September 30, 2024, the company held significant digital currency assets, including stablecoins, Ethereum, and Bitcoin. Faced with rising digital currency prices, OKX sold off 888 Bitcoins and 8487.5 Ether, generating hundreds of millions of Hong Kong dollars, but this cash injection didn't significantly improve its cash flow. Cash and cash equivalents at the end of September 30, 2024, stood at HK$142 million, significantly less than the amount generated from the asset sales.

Simultaneously, the company's debt ratio remains high. As of September 30, 2024, OKX's debt ratio reached 76.07%, although down from 87.43% at the end of March 2024, total assets decreased by HK$648 million, a drop of 48.61%. This indicates that while selling digital currencies eased the debt burden, the persistent losses in its core business are OKX's true challenge.

Conclusion: OKX's Path Forward

OKX's OKLink and OKCoin product lines exhibit synergy in terms of business, technology, and brand, but this hasn't yet translated into sustainable profitability. The company's "water seller" strategy shows some promise, but it needs to further enhance its core business competitiveness and profitability to escape persistent losses. While selling Bitcoin and Ether provided short-term financial relief, it's not a long-term solution. OKX's future hinges on improving the profitability of its core business and effectively addressing the regulatory risks in the cryptocurrency market. Only by resolving these core issues can OKX achieve sustainable development.