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Canaan falls behind in the latest crypto rush
Main advantages:
- Canaan’s revenue fell 36% year-over-year in the first quarter, even as prices of bitcoin and other cryptocurrencies soared
- Demand for the company’s mining machines has declined as a sharp drop in the amount of new bitcoins created has substantially reduced the profitability of crypto mining.
By Warren Yang
In the crypto universe, it seems that one man’s fortune is sometimes another man’s misfortune.
Bitcoin and other digital currencies may be back on the rise, with digital currency prices nearly 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 these virtual currencies. In fact, one of the main drivers of the latest cryptocurrency rally is making life more difficult for cryptocurrency mining equipment manufacturers.
This dichotomy is highlighted in the latest quarterly results reported by the crypto mining machine manufacturer Canaã Inc. (NASDAQ:CAN) last Friday. The company’s revenue for the January-March period fell 36% to $35 million from the previous year. This actually surpassed the company’s previous projection, but its shares still fell after the report was released.
Canaan’s drop in revenue may leave some scratching their heads, 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 industry should prosper since their fortunes are closely tied to demand for the leading cryptocurrency.
But this was not the case in Canaan. A major factor behind bitcoin’s rise was an imminent event called the cryptocurrency’s “halving,” which took place in April. After that, the amount of new bitcoins created under its algorithm halved, meaning miners would only receive half the cryptocurrency for the same amount of effort. So while bitcoin’s big rally may have brought big profits to longtime holders of the currency, people suddenly had much less incentive to get involved in mining new currency.
Canaan’s mining equipment sales, which represent the majority of its total revenue, fell in the first quarter, both sequentially and year over year, as disincentivized miners reduced their purchases.
A similar cycle could happen again in another four years, which is how often the halving occurs, putting pressure once again on miners and companies like Canaan, as their main suppliers. To make matters worse, the costs of mining machines constantly increase as they become more powerful, giving miners even less incentive to shell out the money needed to get involved in the activity.
“The (revenue) decreases compared to the fourth quarter of 2023 and the first quarter of 2023 were primarily due to the decrease in total computing power sold and the average selling price resulting from the reduction in demand prior to the halving event , despite a gradual recovery in the price of bitcoin,” said Canaan, explaining the drop in first quarter revenue.
Another difficulty for miners is the intensification of competition for electricity with artificial intelligence (AI) companies, which are financially better off and do not mind paying substantially more for energy, which is one of the biggest costs for both industries. Such challenges only contribute to the decrease in demand for mining machines by Canaã and its peers.
Accounting boost
Although 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 due to a change in rules for the accounting treatment of digital asset valuation changes. The company chose to adopt new Financial Accounting Standards Board (FASB) requirements for disclosing cryptocurrency holdings starting early this year, although they will not become mandatory until December.
Under the change, a company can account for changes in the fair value of its cryptoassets 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 $33.6 million valuation gain related to these assets, which was separate from its revenue and operating profit.
This is not an insignificant amount for the company, almost equal to its total revenue and more than offsetting its operating loss. As a result, Canaan’s net loss narrowed substantially last quarter. So, at least for now, the early adoption of the new FASB rule is providing a good offset to the dwindling attraction of crypto mining in the long term. But the accounting change is really just a one-time solution, and losses could easily follow if bitcoin’s recent rally loses steam.
Returning to Canaan’s core business, which is selling crypto mining machines, there is another variable we need to look at, namely high interest rates. Many miners finance the purchase of new equipment with borrowed funds, which are quite expensive now as interest rates fluctuate at levels not seen in more than a decade. This may also be dampening current purchases, as miners delay their purchases in anticipation of rate cuts next year, as inflation cools.
This may bode well for the medium-term future, but it is not helping Canaan’s short-term prospects. The company said it expects its revenue to total about $70 million between April and June, slightly less than what it reported in the year-ago period, although that represents double its first-quarter sales.
Canaan shares have fallen more than 80% since the company’s IPO in 2019. Shares have lost more than half their value this year, in sharp contrast to the big gains in cryptocurrency prices. It now trades at a weak 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 bolster its stock price, Canaan’s CEO and CFO have committed to using their personal funds to purchase at least $2 million worth of the company’s stock, although that is just a drop in the bucket compared to its most recent market value of $366 million. The company is also trying to reduce its dependence on the crypto industry by expanding into AI chip manufacturing.
But for now, Canaan’s fortunes remain strongly linked to the sentiment of the mining community, which, at least at the moment, is more fixated on the impact of bitcoin’s halving than on simple movements in the prices of crypto assets. This is vividly illustrated by the current disconnect between the company’s dismal financials and the euphoric mood among crypto traders.
This article is by an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.