Bitdeer, Canaan Mint Hedges Against Crypto Volatility In AI

Key Takeaways:

• Bitdeer said it was picked as a preferred cloud services provider for artificial intelligence cloud services powered by an Nvidia chip
• Cryptocurrency mining machine maker Canaan is looking to create a separate unit for its business making chips for AI applications

By Warren Yang

What do you do with your business model after the latest hot trend in cryptocurrencies goes cold? You turn to the next hot area, in this case artificial intelligence (AI). At least that’s the latest approach coming from two of the crypto-related companies we follow, Caanan Inc. CAN and Bitdeer Technologies Holding Co. BTDR.

After getting burned by gyrations in digital asset prices, the latest forays by each of these companies looks reasonably prudent. Such moves may even look relatively moderate compared with drastic business transformations many Chinese ventures often undergo when their original businesses come under fire. 

Last Thursday, Bitdeer, which operates a cryptocurrency mining platform, said it will launch an AI cloud service with big-name chipmaker Nvidia NVDA, arguably the hottest name right now in AI microchips. Under the collaboration, Bitdeer will be a preferred cloud service provider in Nvidia’s partner network, meaning Bitdeer’s Singapore data center will become one of the first providers of AI cloud services powered by an Nvidia product.

And in its latest quarterly earnings report released two days earlier, Canaan, one of the world’s largest bitcoin mining machine makers, briefly mentioned that it’s working on an internal reorganization to make its AI business an independent operation. On the company’s earnings call, its management elaborated, saying it is seeking to create a separate AI unit that could even attract its own financing. In addition to its core business making crypto mining machines, Canaan also makes chips for AI applications.

“Given the significant changes in the AI industry over the past few months, we have been strategically discussing the future of our AI business,” Canaan CEO Zhang Nangeng said. “In light of our current industry and the marketing environment, we believe that the development of our AI business should take a more defined, independent, and long-term direction.”

The two companies’ efforts to develop AI-related businesses make quite a lot of sense, since revenue from services and products linked to the hot emerging technology can provide them with a nice hedge against wildly volatile crypto markets.

Bitdeer already offers hosting services for crypto mining, so presumably it can repurpose its computing resources to use for AI applications like cloud services. Similarly, developing AI-specific chips isn’t too far from Canaan’s main expertise that includes detailed knowledge of chips used in its crypto mining machines. Such shifts are much more related to their core businesses than the complete overhauls sometimes seen at Chinese tech companies, often in desperate attempts to survive rough times.

Two China-linked crypto miners, The9 NCTY and BIT Mining BTCM, are the products of such radical transformations, with the former originally a game operator and the latter an online lottery ticket seller.

Crypto Winter

Any company in the digital asset ecosystem probably understands the need for business diversification amid a prolonged crypto winter, despite a recent rally in currencies. Canaan’s latest quarterly results vividly illustrate this cold reality. Its revenue shrank 77% year-on-year to $33 million in the third quarter as sales of its mining machines dropped, according to its latest results.

The company has its own mining business as well, and revenue from that operation took a similar dive because of a temporary shutdown in Kazakhstan to comply with new regulations and a contract breach by a project partner in the U.S.

While Canaan’s revenue plunged, its cost of revenue decreased at a far slower rate of less than 30%, partly because write-downs for inventory and prepayments increased. And its operating expenses actually increased. As a consequence, Canaan ended up in the red in the third quarter, swinging from a small net profit a year earlier. 

Bitdeer fared better. It managed to post about 14% year-on-year revenue growth to $87.3 million for the period by deploying more computing power to produce production of virtual coins and increasing its hosting capacity, according to its quarterly results released last month. The company still remained in the red, although its net loss narrowed substantially. 

One recent bright spot for both companies is the rally for digital tokens. The value of bellwether cryptocurrency bitcoin is up more than 150% this year, with growing optimism that current price levels are sustainable. There are some compelling explanations for the price surge.

For one, the U.S. Securities and Exchange Commission (SEC) may approve the first spot bitcoin exchange-traded fund (ETF), which many think can be a game-changer by giving an official regulatory stamp of approval to a virtual currency-linked investment product. Also, an event known as bitcoin halving, which is expected to take place next year, will reduce the amount of new bitcoin entering the market, helping push up the currency’s value.

A rise in bitcoin and other cryptocurrency prices would probably lift the fortunes for both Bitdeer and Canaan, which could plow some of any future profits into developing other revenue sources like AI-related products to hedge against future crypto downturns.

For all the recent bullish sentiment in crypto markets, Canaan management sounded a wary tone on its latest earnings call.

“I believe that the fourth quarter has shown signs of improvement compared to the third quarter,” said Clark Soucy, Canaan’s investor relations director. “However, we shouldn’t expect the best-case scenario of both rising price and (trading) volumes to happen quickly. Based on the overall situation mentioned above, we provide a highly cautious outlook for the fourth quarter of 2023.”

Such caution is probably warranted, given the well-documented history of volatility in crypto markets. At the moment, both Bitdeer’s and Canaan’s revenue are heavily reliant on crypto activities, meaning each has a long way to go in their nascent diversification drives.

Canaan shares currently trade at a price-to-sales (P/S) ratio of just 0.6. Bitdeer is higher but also not so impressive at about 1.8, even after a jump in its stock price following news of the Nvidia partnership. The surest way for both companies to boost their valuations in the longer term is to reduce their exposure to virtual coins, and their moves into AI seem like a good bet to start achieving that.