Why Shares of Bitcoin Mining Company Canaan Are Plunging Today

What happened

For investors in most cryptocurrencies, it’s been a rough year. However, for investors in crypto mining-related companies such as Canaan (CAN -3.41%), it’s been a bloodbath. Today’s 6% decline in Canaan has brought this company’s decline from its 52-week high to more than 70%. 

Canaan isn’t a traditional Bitcoin (BTC -0.72%) mining company, in that this China-based company focuses on selling the integrated circuit mining equipment used by other major players. Thus, it’s a proxy for overall investment in the crypto mining sector, and a stock that’s often looked to as a gauge for potential growth in this space.

Reports circulating today that crypto miners are increasingly tapping equity and selling rigs to shore up cash on their balance sheets appear to be weakening Canaan’s outlook. Notably, many Bitcoin miners are seeing profitability slump, as the price of Bitcoin remains relatively low (around $19,300) and Bitcoin mining difficulty surges.

These headwinds compound existing stresses felt by previous Ethereum miners, who have been forced to migrate their operations to other blockchains. In the wake of the Ethereum Merge, which shifted this network to proof of stake from proof of work (the consensus mechanism that requires miners to solve complex problems to validate transactions), demand for mining machines on a global level has been deteriorating.

So what

These broader sector-specific headwinds will certainly be difficult for Canaan to overcome. Like its peers, Canaan is expected to report earnings in the coming weeks. Significant attention will be paid to not only the company’s results, but also its forecast for future sales and growth. In this environment, it’s likely more Bitcoin mining companies may pause guidance or significantly downgrade their future outlook. Thus, investors appear to be getting ahead of this news, selling shares of Canaan stock in a big way today. 

It’s not all bad news for Canaan, however. The company did announce its latest generation of Bitcoin mining machines today. These Avalon Made A13 series miners provide more computing power alongside improved energy efficiency and an impressive hash rate of 130TH/s. Thus, from a technological standpoint, there is something for long-term investors with a bullish medium- to long-term outlook to grasp on to.

Now what

Like almost any company intimately tied to the crypto sector, Canaan is likely to be under pressure until a recovery in token prices is seen. Thus, this is likely going to be a difficult stock to own for any investor with a shorter time horizon. Given the uncertainty in the market today, it’s clear most investors are taking a risk-off approach. Accordingly, buying the dip on Canaan stock appears to be a rather bold trade in this current market.

While Canaan’s technological improvements appear to be impressive, it’s unclear how well these new mining rigs will be adopted by companies operating in this space. Should a glut of existing mining machines hit the market, Canaan’s future outlook could be substantially muddied. Thus, it appears the market’s reaction to Canaan today is one of justified trepidation.