Canaan Gets Left Behind In Latest Crypto Bull Run

Key Takeaways:

• Canaan’s revenue fell 36% year-on-year in the first quarter even as the prices of bitcoin and other cryptocurrencies skyrocketed
• Demand for the company’s mining machines waned as a sharp drop in the amount of new bitcoin being created substantially curtailed the profitability of crypto mining

By Warren Yang

In the crypto universe, it appears that one man’s fortune is sometimes another’s misfortune.

Bitcoin and other digital currencies may be back on a bull run, with prices for the digital currency roughly doubling in the last six months. But that doesn’t mean that a prolonged industry winter is over for companies making the powerful computers used to mine such virtual coins. In fact, one major driver of the latest crypto rally is making life more difficult for makers of crypto mining equipment.

This dichotomy is on prominent display in the latest quarterly results reported by crypto mining machine maker Canaan Inc. CAN last Friday. The company’s revenue for the January-March period tumbled 36% to $35 million from a year ago. That actually surpassed the company’s previous projection, but its shares still slipped after the report came out.

Canaan’s falling revenue might leave some scratching their heads, since bitcoin prices skyrocketed during the three months, hitting an all-time high in March. Logically speaking, that should mean that companies like Canaan and others in the crypto industry should thrive since their fortunes are closely tied to demand for the bellwether cryptocurrency.

But that wasn’t the case for Canaan. A major factor behind the bitcoin rally was a looming so-called “halving” event for the cryptocurrency that happened in April. After that, the amount of new bitcoin being created under its algorithm fell by half, meaning miners would only get half as much of the cryptocurrency for the same amount of effort. So, while the big bitcoin rally may have bought big profits for longtime holders of the currency, people suddenly had far less incentive to engage in mining for new currency.

Canaan’s sales of mining equipment, which account for the bulk of its total revenue, dropped in the first quarter, both sequentially and year-on-year, as disincentivized miners cut back on their purchasing.

A similar cycle could happen again in another four years, which is how often halving occurs, once again pressuring both miners and companies like Canaan, as their main suppliers. Making matters worse, costs of mining machines are constantly increasing as they become more powerful, giving miners even less incentive to shell out the money needed to engage in the activity.

“The (revenue) decreases compared to the fourth quarter of 2023 and the first quarter of 2023 were mainly due to the decrease in total computing power sold and average selling price resulting from the softened demand before the halving event, despite a gradual recovery in the price of bitcoin,” Canaan said, explaining the first-quarter revenue drop.

Another difficulty for miners is intensifying competition for electricity with artificial intelligence (AI) companies, which are financially better off and don’t mind paying substantially more for power that is one of the biggest costs for both industries. Such challenges only add to the softening demand for mining machines from Canaan and its peers.

Accounting Boost

While demand for its machines fell, Canaan’s own mining operation, which forms a smaller part of its business, received a big boost during the quarter from a rule change for the accounting treatment of valuation changes for digital assets. The company opted to adopt the Financial Accounting Standards Board’s (FASB) new requirements for the disclosure of cryptocurrency holdings from the start of this year, although they don’t become mandatory until December.

Under the change, a company can book changes in the fair value of its crypto assets as unrealized gains or losses, and include them in its net income. Canaan held about 1,272 units of bitcoin, including 214 in customer deposits, at the end of March. It recorded a valuation gain of $33.6 million related to those assets, which was separate from its revenue and operating income.

That’s not an insignificant sum for the company, about the same as its total revenue and more than offsetting its operating loss. As a result, Canaan’s net loss narrowed substantially in the latest quarter. So, at least for now, the early adoption of the new FASB rule is providing a nice offset for the longer-term fading attraction of crypto mining. But the accounting change is really just a one-time fix, and losses could easily follow if the recent bitcoin rally runs out of steam.

Returning to Canaan’s main business of selling crypto mining machines, there’s another variable we need to examine, namely high interest rates. Many miners finance their new equipment buying with borrowed funds, which are quite pricey now as interest rates hover at highs not seen for more than a decade. That could also be dampening current buying, as miners delay their purchases in expectation of rate cuts in the next year, with inflation cooling.

That might bode well for the medium-term future, but it’s not helping Canaan’s near-term outlook. The company said it expects its revenue to total about $70 million in current April-June, slightly less than what it reported for the year-earlier period, although that’s double its sales for the first quarter.

Canaan’s shares are down more than 80% since the company’s IPO in 2019. The stock has lost more than half of its value this year, in sharp contrast to the big gains in crypto prices. It now trades at a meager price-to-sale (P/S) ratio of 1.2, which looks quite depressed compared with smaller rival Ebang’s (EBON.US) ratio of nearly 12.

In an effort to shore up its stock price, Canaan’s CEO and CFO pledged to use their personal funds to buy at least $2 million of the company’s shares, though that’s just a drop in the bucket compared with its latest market value of $366 million. The company is also trying to reduce its reliance on the crypto industry by expanding into the manufacturing of AI chips.

But for now, Canaan’s fortunes remain heavily tied to sentiment in the mining community, which, at least at the moment, is more fixated on the impact of the bitcoin halving rather than simple movements in crypto asset prices. That’s vividly illustrated by the current disconnect between the company’s underwhelming financials and the euphoric mood among crypto traders. 

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.