The cryptocurrency mining machine maker missed a market boom last year, and is ramping up its own bitcoin production just as the sector shows signs of stumbling
Key Takeaways:
- Canaan boosted its bitcoin production by about 10% in March from February after a bitcoin “halving” event last year dampened demand for its mining machines
- The company’s stepped-up mining efforts come as the crypto market enters a new phase of uncertainty created by recent U.S. protectionist policies
By Warren Yang
It’s named for the biblical Promised Land, but Canaan Inc. (CAN.US) seems stuck far from paradise these days, even as the crypto market around it boomed last year. The cryptocurrency mining machine maker’s fortunes are typically tied to changes in digital asset values, with strong markets typically boosting demand for its products.
But the company failed to benefit much from a crypto bull run last year because the rally was largely fueled by a “halving” event for bitcoin. That mechansim is built into the algorithm that creates new bitcoins, and reduces the number of new bitcoins being created by half, making it more difficult for miners to make profits and hence dampening demand for new mining machines. That reality was reflected by Canaan’s continued large losses last year, even as crypto prices soared.
To diversify beyond its reliance on machine sales, Canaan has been building its own mining operations to capitalize directly on gains in bitcoin prices, and is making some extra money through those efforts. That newer business is growing, as shown by the company’s latest monthly report published last week. But self-mining comes with the same headaches now being faced by all miners trying to cash in on the recent crypto craze.
After booming last year, as bitcoin briefly touched the $100,000 mark, cryptocurrencies are on shakier footing again as Donald Trump’s tariffs threaten to plunge the global economy into recession. Bitcoin is just coming out of its worst first-quarter performance in seven years, and the story was similar for other major cryptocurrencies like ethereum.
Against this backdrop, Canaan is facing a potential double whammy posed by a drop in demand for its mining machines, as well as falling values of its own bitcoin holdings. The company’s latest monthly report shows it minted 90 bitcoins last month, up about 10% from its February total and the most since last December, the first month it started providing monthly updates on its bitcoin production. Canaan held 1,408 bitcoins at the end of March, worth about $120 million based on current prices.
To be sure, bitcoin prices are still far higher than they were a year ago even after falling by about a quarter from a record high reached in January, after Trump’s election last year fueled hopes for more crypto-friendly policies. That means Canaan can still book significant valuation gains on bitcoin it mined last year before the currency hit its peak.
Financial Accounting Standards Board (FASB) rules published in December 2023 require crypto miners to incorporate changes in the value of their digital assets as gains or losses in their financial reports. Before that, they could only book impairment charges when the values of their crypto assets dropped, but had no way of including gains.
While the FASB’s new requirements for the treatment of crypto assets weren’t mandatory until this year, early adoption was permitted, which Canaan appears to have done. For last year, the company recorded a $42 million gain to reflect an increase in the value of its bitcoin portfolio, whereas for 2023, it took a $4.7 million impairment hit, according to its latest quarterly results released late last month.
Bitcoin volatility
That new accounting treatment of bitcoin holdings helped Canaan narrow its net loss last year. But the company will have to stomach valuation losses if prices continue to slide this year.
“Starting in February, major changes in the global political and economic environment have caused significant bitcoin price volatility,” Canaan CEO Zhang Nangeng said on the company’s earnings call last month. “This has negatively affected market sentiment, future expectations and especially financing activities across the markets. Given these combined factors, we are maintaining a very cautious outlook for the first quarter of 2025.”
Canaan is still projecting a pretty substantial jump in its revenue for this year. It expects the figure to reach as high as $1.1 billion, quadrupling from $269 million for 2024.
The company does have a lot going in its favor, particularly in the U.S. Its main mining machine business won a major order from a new strategic customer in the U.S. in January. And last month, it signed agreements with two partners in the country to use their facilities in Pennsylvania and Texas for mining, which will give a boost to its own bitcoin production.
Such deals will lead to revenue growth, hence the company’s forecast for strong top-line gains this year. And the company is getting close to returning to gross profitability – something it hasn’t achieved since 2022 – as it builds scale. But its operating expenses will likely continue to outweigh any gross profit it makes for some time, and valuation losses on its bitcoin holdings will also work against it as it tries to return to net profitability – something it also hasn’t done since 2022.
The company’s lack of profits for the last two years comes as it tries to find new orders for its original mining machine business and spends to build up its newer mining business. In the first quarter, it raised nearly $100 million by issuing new convertible preferred shares, and it took out a $21 million term loan backed by its bitcoin holdings. It also raised about $43 million through an at-the-market offering of American depositary shares.
Despite all these efforts — or maybe because so much fundraising hints at a desperation for cash — Canaan shares are down 37% in the past year to trade at a price-to-sales (P/S) ratio of just 0.8. That’s far below the 6 for Ebang (EBON.US), a smaller maker of crypto mining machines. It’s also well below most publicly traded crypto miners like Bitfufu (FUFU.US) and Mara (MARA.US), which trade at ratios of 1.5 and 6, respectively.
Perhaps direct exposure to bitcoin prices, the result of a strategic decision Canaan made in 2022, is making investors jittery. For the company, it may be a long game that can pay off nicely if bitcoin and other crypto currencies rally again and generally trend upward over the longer term. That’s certainly a strong possibility as cryptocurrencies gain wider acceptance, though it’s far from a certainty in the fast-changing landscape.
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