Canaan Inc. Faces Challenges Amid Bitcoin Production Increase

The cryptocurrency mining machine manufacturer is ramping up production while navigating market uncertainties.

Key Takeaways:

• Canaan boosted its bitcoin production by approximately 10% in March compared to February, following a bitcoin “halving” event that reduced demand for its mining machines.
• The company’s increased mining activity coincides with new challenges in the crypto market caused by recent U.S. protectionist policies.

Canaan Inc. (CAN.US), named after the biblical Promised Land, finds itself distanced from prosperity amid a thriving cryptocurrency market last year. The fortunes of this cryptocurrency mining machine manufacturer typically align with fluctuations in digital asset values, where strong markets usually drive demand for its products.

However, Canaan missed out on substantial gains during last year’s cryptocurrency bull run, primarily because the rally was driven by a “halving” event that lowered the number of new bitcoins generated, making it more challenging for miners to achieve profits and subsequently reducing the demand for new mining machines. This situation was reflected in Canaan’s significant losses throughout the year, even as crypto prices rallied.

In an effort to lessen its dependence on machine sales, Canaan has developed its own mining operations to directly benefit from rising bitcoin prices, and these new initiatives are yielding some profits. The company’s growth in self-mining is evident in its most recent monthly report, although self-mining presents challenges common to all miners attempting to capitalize on the current crypto rally.

After experiencing a boom last year, during which bitcoin briefly peaked above $100,000, the cryptocurrency market is facing renewed instability. Concerns over Donald Trump’s tariffs have raised fears of a global economic downturn. Bitcoin just endured its weakest first-quarter performance in seven years, with a similar trend observed among other significant cryptocurrencies, including Ethereum.

Amid this challenging environment, Canaan grapples with a potential double setback: falling demand for its mining machines and declining values of its bitcoin reserves. The latest monthly report indicates that Canaan mined 90 bitcoins in March, a 10% increase from February, marking its highest monthly total since December when it began providing updates on its bitcoin production. As of March’s end, the company held 1,408 bitcoins, valued at approximately $120 million using current prices.

Despite current price declines, bitcoin values remain significantly higher than one year ago, even after dropping roughly 25% from a record high in January, which was spurred by hopes for more crypto-friendly policies following Trump’s election. As a result, Canaan can still realize substantial valuation gains from bitcoins mined prior to the currency reaching its peak.

New Financial Accounting Standards Board (FASB) regulations, published in December 2023, mandate that crypto miners reflect changes in digital asset values as gains or losses in their financial statements. Prior to this rule, companies could only recognize losses when values dropped, but not gains.

While compliance with the FASB’s updated treatment of crypto assets becomes mandatory this year, early adoption was allowed, which Canaan seems to have embraced. The company recorded a $42 million gain last year due to an increase in its bitcoin portfolio’s value. However, for 2023, it faced a $4.7 million impairment based on its latest quarterly results released recently.

Bitcoin Volatility

This new accounting method has enabled Canaan to reduce its net loss for the previous year. However, the firm must prepare for potential valuation losses if prices continue to decline throughout 2023.

“Starting in February, significant global political and economic changes have resulted in considerable bitcoin price volatility,” stated Canaan CEO Zhang Nangeng during the company’s earnings call last month. “This has adversely impacted market sentiment and expectations, particularly influencing financing activities across markets. Given these factors, we maintain a cautious outlook for Q1 2025.”

Despite challenges, Canaan projects significant revenue growth this year, forecasting a jump to as much as $1.1 billion, quadrupling from $269 million in 2024.

The company’s favorable prospects include recent achievements in the U.S. It secured a considerable order from a new strategic customer in January and established agreements with two U.S. partners to utilize their mining facilities in Pennsylvania and Texas, enhancing its bitcoin production capabilities.

These partnerships are likely to contribute to revenue growth, supporting Canaan’s positive revenue forecast. The company is nearing a return to gross profitability, a milestone it has not reached since 2022, as it scales operations. However, high operating expenses may still eclipse any gross profits for some time. Additionally, valuation losses on its bitcoin holdings could hinder its efforts to achieve net profitability, another status the company has not attained since 2022.

Canaan’s prolonged lack of profits stems from its pursuit of new orders for its primary mining machine business while investing in its emerging mining division. In the first quarter, it raised nearly $100 million through new convertible preferred shares and secured a $21 million term loan backed by its bitcoin holdings, and also raised around $43 million through an at-the-market offering of American depositary shares.

Despite these fundraising efforts, Canaan’s stock has declined 37% over the past year, resulting in a low price-to-sales (P/S) ratio of just 0.8. This is notably lower than Ebang (EBON.US) at 6, and below other publicly traded mining companies such as Bitfufu (FUFU.US) and Marathon Digital Holdings (MARA.US), which trade at P/S ratios of 1.5 and 6, respectively.

The company’s strategy to obtain direct exposure to bitcoin prices—initiated in 2022—may be unsettling investors. Indeed, achieving a favorable outcome may depend on a future rally in bitcoin prices and wider acceptance of cryptocurrencies. While this remains a strong possibility, it is not a certainty in the ever-evolving market landscape.

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