Markets
Canaan is left behind in the latest Crypto Bull Run
Key takeaways:
- Canaan’s revenue fell 36% year-over-year in the first quarter, even as the prices of bitcoin and other cryptocurrencies soared.
- Demand for the company’s mining machines has declined as a sharp decline in the amount of new bitcoins created has significantly reduced the profitability of cryptocurrency mining.
By Warren Yang
In the world of cryptocurrencies, it seems that one man’s fortune is sometimes another man’s misfortune.
Bitcoin and other digital currencies could see a return to upside, with prices of the digital currency roughly doubling over the past six months. But that doesn’t mean the industry’s prolonged winter is over for the companies that make the powerful computers used to mine such virtual coins. In fact, one of the main drivers of the latest crypto rally is making life more difficult for crypto mining equipment manufacturers.
This dichotomy is highlighted in the latest quarterly results reported by the crypto mining machine manufacturer. Canaan Inc. (NASDAQ:CAN) last Friday. The company’s revenue for the January-March period fell 36%, to $35 million, compared to last year. This actually exceeded the company’s previous projections, but its shares fell further after the report was released.
Canaan’s decline in revenue may leave some perplexed, as bitcoin prices soared over the three months, reaching an all-time high in March. Logically speaking, this should mean that companies like Canaan and others in the crypto sector should thrive since their fortunes are closely tied to the demand for the flagship cryptocurrency.
But this was not the case for Canaan. One of the main factors behind the bitcoin rally was the cryptocurrency’s impending so-called “halving” event that occurred in April. After that, the amount of new bitcoins created according to its algorithm halved, meaning miners would only get half the cryptocurrency for the same effort. So even though bitcoin’s big rally may have brought big profits to long-time holders of the currency, people suddenly had much less incentive to engage in mining new currencies.
Canaan’s mining equipment sales, which account for most of its total revenue, fell in the first quarter, both sequentially and year-over-year, as disadvantaged miners reduced their purchases.
A similar cycle could happen again in four years, which is how often halving occurs, once again putting pressure on both mining companies and companies like Canaan, which are their mainstays. suppliers. Worse still, the costs of mining machines are constantly increasing as they become more powerful, making it even less attractive for miners to shell out the money needed to get into the business.
“The declines (in revenue) compared to the fourth quarter of 2023 and the first quarter of 2023 were primarily due to decreases in total computing power sold and average selling price resulting from slowing demand prior to the reduction event. half, despite a gradual recovery in the market. bitcoin price,” Canaan said, explaining the first-quarter revenue decline.
Another difficulty for miners is the intensifying competition for electricity with artificial intelligence (AI) companies, which are financially better off and do not hesitate to pay much more for the electricity which represents the one of the largest costs for both sectors. Such challenges only add to slowing demand for mining machines from Canaan and its peers.
Accounting help
While demand for its machines fell, Canaan’s mining operation, which represents a smaller part of its business, received a significant boost during the quarter thanks to a rule change for the accounting treatment of changes valuation of digital assets. The company opted to adopt the Financial Accounting Standards Board’s (FASB) new requirements for disclosing cryptocurrency holdings starting earlier this year, although they won’t become mandatory until December.
Under this change, a company can recognize changes in the fair value of its crypto assets as unrealized gains or losses and include them in its net income. Canaan held approximately 1,272 bitcoin units, including 214 in customer deposits, as of the end of March. It recorded a $33.6 million gain in value related to these assets, separate from its revenue and operating profit.
This is a significant sum for the company, which roughly corresponds to its total turnover and which more than compensates for its operating loss. As a result, Canaan’s net loss narrowed significantly in the most recent quarter. So, at least for now, the rapid adoption of the new FASB rule is a nice compensation for the long-term appeal of cryptocurrency mining. But the accounting change is really just a one-time solution, and losses could easily ensue if Bitcoin’s recent rally runs out of steam.
Coming back to Canaan’s core business of selling cryptocurrency mining machines, there is another variable we need to look at, and that is high interest rates. Many miners are financing the purchase of their new equipment with borrowed funds, which are now quite expensive as interest rates hover at levels not seen in over a decade. It could also dampen current purchases, as mining companies delay purchases in anticipation of rate cuts next year amid slowing inflation.
This might bode well for the mid-term future, but it doesn’t help Canaan’s short-term prospects. The company said it expects revenue to total about $70 million for the current April-June period, slightly less than what it reported for the year period previous year, although this represents double its sales for the first quarter.
Canaan shares have fallen more than 80% since the company’s IPO in 2019. The stock has lost more than half its value this year, in stark contrast to large gains in cryptocurrency prices . It now trades at a meager price-to-sales (P/S) ratio of 1.2, which looks quite depressed compared to its smaller rival. Ebang (EBON.US) ratio of almost 12.
In an effort to support its stock price, Canaan’s CEO and CFO have committed to using their personal funds to purchase at least $2 million of the company’s stock, although this is only one a drop in the ocean compared to its last market value of $366 million. The company is also trying to reduce its reliance on the crypto industry by expanding into AI chip manufacturing.
But for now, Canaan’s fortunes remain heavily tied to the sentiment of the mining community, which, at least for now, is more obsessed with the impact of bitcoin’s halving rather than simple price movements crypto assets. This is clearly illustrated by the current disconnect between the company’s disappointing financial results and the euphoric mood among crypto traders.
This article comes from an external, unpaid contributor. It does not represent reporting by Benzinga and has not been edited for content or accuracy.