Northern Data, which operates racks of high-powered servers, surpassed $1bn in market value for the first time this month © AFP/Getty Images

The latest tech sensation out of Germany reached an important milestone this month. Northern Data, which operates racks of high-powered servers, surpassed $1bn in market value for the first time. 

A few days later an article on Medium accused the Frankfurt-based company of overstating its prowess in “high performance computing” and understating its reliance on bitcoin miners. Moreover, its hosting services seemed so strangely profitable that either Northern Data was “cooking the books” or it had “found the dumbest customers in the crypto industry”. Either way, the situation was unsustainable, the company was “grossly overvalued” and did “not warrant its current unicorn level valuation”.

The critique contained no inside information or smoking gun. It lacked the imprimatur of an established short seller such as Muddy Waters. But it still packed a punch: Northern Data shares plunged by a third, toppling it from the “unicorn level”.

That is the Wirecard effect. Having sat by with their fingers in their ears as questions were raised during Wirecard’s rise, fund managers in Germany are much more skittish after the fintech company’s fall. In a market where it has been notoriously difficult to be a short seller, it is suddenly a lot easier — and a lot more difficult if you are the target.

“It’s a very unpleasant point in time,” says Maximilian Martin, head of finance at Northern Data. “It gives the anonymous trolls a power of influence.” He adds, however: “I’m not concerned because I know we’re no criminals — that’s the biggest point of differentiation. We’re as transparent as it gets.”

Certainly, the company — which published a thorough rebuttal — has offered an unusual level of access: look at our records, talk to our auditors, visit the headquarters in Frankfurt and the new data centre in Texas.

“We never hid that we were working in the blockchain sector and actually we are proud of it,” says chief executive Aroosh Thillainathan, who used to run a bitcoin mining company. Northern Data’s annual reports bear this out. If it has exaggerated its artificial intelligence prowess, that is also true of Tesla and plenty of other megacap tech companies.

None of this needs to be a fraud for the anonymous writer to be correct in his “grossly overvalued” assessment, however. Northern Data reported sales last year of about €10m. Its peak valuation of almost 100 times that is more than a little aggressive. It relies on the company making good on its forecasts — reaffirmed this week after the attack — of a stratospheric surge in sales to about €130m this year and earnings of about €50m before interest, tax, depreciation and amortisation — and maintaining that pace for years.

This is where the pricing allegations are important. Customers mining bitcoin pay hosting services for the electricity consumed by their power-hungry machines, which carry out calculations 24 hours a day to earn the cryptocurrency. The Medium author estimates Northern Data offers a rate of 6 cents per kWh, which he says is uncompetitively high. This is, incidentally, the same estimate made by analysts at Baader Bank, which is positive on the company. Northern Data, though, says it is not correct and a happy customer, blockchain company Block.one, says it pays a different and competitive price.

This is a rabbit hole. To add to the complexity of the bitcoin burrow, some customers, including Block.one and SBI Holdings, a Japanese financial services group with a crypto mining arm, are also shareholders.

For investors, unravelling all this will take time. There are parallels with bitcoin itself: in a trustless world, there is a way to make money, but you have to do the work.

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