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Canaan Turns To Bitcoin Mining Even As Crypto Hunters Face Mounting Challenges

Cryptocurrency mining rigs in a data center
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Why sell cryptocurrency miners only to others when you can easily use them to find your new digital fortune? Canaan Company. (CAN) is doing just that with the recent addition of cryptocurrency mining to its activities, complementing its core machinery business. But profiting from cryptocurrency mining may be easier said than done.

Last week, Canaan, one of the largest makers of bitcoin mining machines in the world, She said she fell Agreements with several companies in Kazakhstan for joint mining of virtual currency. As of the end of last year, Canaan had operated a total of about 10,000 machines in the Central Asian country, with the Hangzhou-based company setting up its first mining operations in June.

Bitcoin mining is the process of creating new units of the highly volatile but increasingly valuable cryptocurrency. This process sees miners race to solve complex equations generated by the blockchain network, with the first to do so rewarded with a certain amount of bitcoin. The process requires enormous computing power, which creates a demand for advanced specialized equipment made by Canaan and its competitors.

Starting a bitcoin mining business is relatively easy and inexpensive for Canaan because she can deploy her own hardware without having to buy it at exorbitant prices from someone else. The new endeavor could also reduce the headache of inventory in Canaan.

Despite their status as hardware sellers, the fortunes of Canaan and other crypto miner makers are still closely linked to changes in volatile Bitcoin prices, since lower values ​​usually lead to lower demand for miners and vice versa. This means that during a weak market, miners can get stuck with excess inventory that quickly loses value as newer, more powerful machines enter the market.

Using computers that would otherwise remain idle in warehouses, Canaan could kill two birds with one stone: cut inventory and collect one of the most important assets on earth at the moment. The company is doing just that, minting 23.86 units of bitcoin as of the end of September, its management said on a conference call in November to discuss third-quarter earnings with analysts.

But these holdings don’t add much to Canaan’s bottom line, at least not yet. For starters, Canaan’s Bitcoin wallet is only worth about $1 million based on the current market price – which is a fraction of its annual revenue or total assets.

There are accounting techniques. Although there are no specific accounting rules on how cryptocurrencies should be handled, in the United States, where Canaan is listed, they are generally treated as “indefinite” intangible assets. This means that while a company can record the value of its cryptocurrency holdings as revenue on its income statement and assets on its balance sheet, it cannot make a profit even if its price increases until it actually sells it. In other words, there is no such thing as unrealized gains for crypto assets, allowed for traditional financial instruments such as stocks and bonds.

high costs

Cryptocurrency mining is also very expensive, in large part because the computers required for such operations consume a lot of energy, which leads to huge electricity bills. For example, a look at the financial statements of Marathon Digital Holdings (MARA)One of the world’s largest miners, reveals the difficulty of generating real money from minting virtual money. In 2020, the company mined $4.4 million worth of cryptocurrency. But this was overshadowed by revenue costs of $7 million, which includes electricity expenses.

Canaan’s decision to start mining operations in Kazakhstan, rather than in its home country, was the result of a swift regulatory crackdown on crypto mining in China. In the middle of last year, China, once home to more than three-quarters of bitcoin miners globally, banned cryptocurrency mining as it pursues carbon neutrality. The tough action has killed the crypto-mining industry in China, sending surviving miners to overseas locations. This was also followed by a sell-off in bitcoin.

As China pursues the cryptocurrency industry, neighboring Kazakhstan, which provides easy access to cheap electricity, has emerged as the world’s second largest mining hub after the United States, hosting many refugee operators from China. Canaan’s relocation to the country has been relatively easy since he started selling in the country in 2020, thus he already had known clients there prior to the China campaign.

However, Kazakhstan, or any other country for that matter, is not without risks. This reality came to prominence recently after the Kazakh government last week cut off internet access to rein in mass protests that initially erupted over high fuel prices. This, in turn, dealt a blow to crypto miners and sent bitcoin prices down. Even before political instability, the sudden influx of Chinese miners into the country was already causing energy shortages in Kazakhstan, straining miners’ operations.

In addition, a growing list of countries around the world are joining China in banning cryptocurrency mining due to the huge losses it takes to its energy infrastructure and its environmental impact.

Canaan’s revenue slumped in 2019 and 2020, leading to net losses, as bitcoin prices plummeted in 2019, followed by the Covid-19 pandemic the following year. While sales surged in the first nine months of last year, Canaan faces regulatory uncertainty that could hurt its business, as well as fluctuations in bitcoin prices.

Reflecting these difficulties, Canaan’s stock has nearly halved its 2019 IPO price and is down more than 87% from its March peak. Her plan to venture into mining failed to excite investors. And the stock buyback plan did little to shore up the stock, perhaps because investors interpreted the move to mean the company lacked other good investment options.

Canaan shares are still trading at a relatively high price-to-sales (P/S) ratio of over 11. compared to 9.4 for Ebang International Holdings Inc. (EBON), a peer company listed in New York, is also trying to diversify its business with a plan to start a cryptocurrency exchange. Canaan’s noble valuation can be justified if he can consistently increase revenue and generate funds to reinvest in new business. But at least in its current scale, the company’s nascent bitcoin mining operation appears to offer limited potential for such new growth.

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