Summary:

Summary:

1. In the past few years, the income of Bitcoin mining has not been good, especially for non-top mining machine manufacturers like Canaan.

2. Canaan's new generation of mining machines can't even compete with Bitmain's old generation of mining machines, and the profit margin is even lower.

3. The halving of the Bitcoin block reward has been completed, which means that the BTC that miners can now get is half of the previous mining income.

4. Jianan Zhizhi previously tried to transform its business to artificial intelligence chips, but due to "some reasons" the transformation failed, and perhaps this transformation will never succeed.

Considering that Canaan’s expected revenue and losses do not seem commensurate with the company’s current market capitalization of US$850 million, Canaan’s real company valuation should be between US$100 million and US$200 million. Canaan Zhizhi's current core business is the sale of bitcoin mining machines. Apart from this, it has no other important business, nor does it receive other recurring software income. Given the current price of Bitcoin and the electricity bills required to run the mining rigs, it may not be profitable for miners to use Canaan Mining rigs.

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Mining with Canaan Mining Machines is not actually profitable

According to Bitcoin mining expert Drew Vosk, Canaan will send him the latest mining machine AvalonMiner 1066Pro for free so that he can evaluate it on the YouTube channel. According to Drew Vosk, this mining machine is sold by the distributor BlokForge at a price of $999. Although it has good functions and performance, professional packaging, and stable operation, the mining efficiency and profit margin are not high unless miners can Get a very low electricity price, otherwise it is only possible to make a profit when the price of Bitcoin rises sharply.

Drew Vosk's review was published on May 7, 2020, when Bitcoin was trading at $9,000 and before the "halving." If the "halving" is taken into account, the AvalonMiner 1066 mining machine can only mine 0.163824 BTC a year. If calculated on the basis of 1BTC=9000 US dollars, the income is about 1481.86 US dollars, and the electricity cost is as high as 1438.37 US dollars. The annual income of Canaan’s latest mining machine is less than US$44, and it will take more than 20 years to break even. In addition, currently only the cost of electricity is considered, but in fact other costs of mining include:

1. The time value of money;

2. The time and cost required to set up the mining machine and circuit;

3. Maintenance and monitoring costs;

4. Bitcoin depreciation risk;

5. The risk of rising electricity costs;

6. Storage space;

7. The next "halving" event in four years' time.

There is no doubt that mining Bitcoin will only become more difficult as time goes by. The figure below shows the trend of Bitcoin mining difficulty. Simply put, the higher the mining difficulty, the higher the computing power required to mine the same number of Bitcoin blocks, and the higher the computing power, the more mining machines need to spend The higher the electricity price, the higher the electricity price paid.

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The rise in Canaan’s stock price was actually stimulated by the rebound in the price of Bitcoin

In the past few weeks, the cryptocurrency market has started to improve due to the impact of the Bitcoin block reward halving event, and the global stock market has also recovered. The following chart shows the Bitcoin rally in the past month:

As the chart above shows, bitcoin prices rose in mid-April 2020, when the stock market also started to recover. In addition, the halving of Bitcoin block rewards is another factor that leads to price increases. Due to the reduction of miners' mining volume, the number of Bitcoins flowing into the market is also decreasing, which in turn makes the inflation rate lower. But in fact, the "halving" narrative is not the main reason for the Bitcoin bull market, nor will it cause the price of Bitcoin to skyrocket in a short period of time. Generally speaking, the impact of "halving" on the price of Bitcoin will take months or even years to show, so the recent market rally is likely to be nothing more than speculation and excitement about the "halving" event.

Canaan’s company performance is highly correlated with the price trend of Bitcoin, but they have not developed their own mining business like Bitmain, and they do not hold any Bitcoin. The only source of income is the sale of mining machines. Once the mining machine sales are unprofitable, Canaan can only sell the mining machines at a loss, which is one of the reasons why their gross profit margin in 2019 has become negative.

It is worth mentioning that the real reason for the skyrocketing price of Bitcoin in 2017 was not from the "halving", but because of the crazy speculation of investors. But the current market environment is very different from 2017, because Bitcoin investors have become mature enough, so many people think that the possibility of a sharp rise in the price after the third "halving" in the history of Bitcoin is not great . On the other hand, the price of bitcoin is currently still suppressed by speculation, and there are not many practical applications for using bitcoin to buy goods and services.

If people who invest in Canaan's stock believe that the price of Bitcoin will rise significantly, why don't they just buy Bitcoin directly? It should be noted that for Jianan Zhizhi short sellers, if they are worried that the price of Bitcoin will rise and cause Canaan Zhizhi’s stock price to rebound, then buying Bitcoin directly can also be regarded as a hedge for their short investment, but the problem is However, even if the price of Bitcoin rises sharply, there is no 100% guarantee that Canaan will be profitable.

In addition, many Bitcoin mining farms do not seem to have purchased Canaan's AvalonMiner mining machines.

Basically, a Bitcoin mine is like a "warehouse" full of mining equipment. Since Bitcoin mining requires a lot of electricity, using a mine to mine is one of the ways to make miners profitable. Judging from the public data, many Bitcoin mining farms do not seem to have purchased Canaan’s mining machines:

1. Riot Blockchain (RIOT) is a blockchain technology company with its own bitcoin mining operations. They dug up 139.28 BTC in the fourth quarter of 2019. In December last year, the company purchased 4,000 S17 Pro mining machines from Bitmain, and then announced on May 7 this year that it had purchased 2,040 next-generation Bitmain S19 Antminers in April and May.

2. Marathon Patent Group (MARA), a Bitcoin mining farm, announced on May 11, 2020 that it had purchased 700 next-generation M30S + ASIC mining machines from MicroBT. The company said that the new mining machines will make its mining energy consumption better than before The Bitmain S-9 mining machine used.

3. Another mining company, Marathon, also purchased mining machines from a Canaan competitor (not Bitmain). According to data from asicminervalue.com, even MicroBT’s M30S mining machine has a higher profit margin than AvalonMiner.

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Canaan AI chips may not be able to compete with 'big players'

Canaan has found that it is not enough to sell only mining machines, and also realizes the importance of selling other products. In the 2019 annual report, Jianan Zhizhi stated:

"The development of artificial intelligence technology, especially the technology related to edge computing and ASIC chips supporting artificial intelligence applications, is crucial to the diversified development of Canaan Zhizhi's future products. In September 2018, Canaan Zhizhi released the first A generation of artificial intelligence chip Kendryte K210, and mass production began in the fourth quarter of 2018. K210 is an SoC chip that integrates machine vision and machine hearing functions. Canaan Zhizhi is also the first in the industry to provide And self-developed commercial edge computing artificial intelligence chips for neural network accelerators, the performance of these chips is very good."

But so far, Jianan Zhizhi has many problems in the sales of artificial intelligence chips:

1. Jianan Zhizhi began mass production of artificial intelligence chips in April 2018, but in the whole year of 2019, its sales of artificial intelligence chips were only 2.7 million yuan (about 400,000 U.S. dollars), accounting for only 2.7 million yuan (about 400,000 U.S. dollars). 0.2% of the company's total revenue;

2. Canaan simply cannot compete with established AI chipmakers Nvidia and AMD, which currently dominate the chip industry. On the other hand, the fact that Nvidia and AMD have not produced bitcoin mining machines so far also shows that the current bitcoin mining market is not large enough for them to manufacture such products.

3. Jianan Zhizhi has not explained the advantages of its artificial intelligence chip, nor disclosed who the final buyer is. On the company's official website, there is no K210 chip deployed in any product equipment.

For Canaan, whose AI chip revenue is only $400,000, unless they have some kind of innovation, their market value cannot be $800 million, but Canaan has not yet surfaced any innovation in AI chips. On the other hand, Bitmain, the leading Bitcoin mining machine manufacturer, has not been successful in artificial intelligence chips. After releasing the first artificial intelligence chip BM1680 in April 2018, we have not heard any related news.

Canaan's executive team lacks experience

Canaan Zhizhi's executive team is relatively young, mostly around 30 years old (as shown in the figure below), lacking industry and business experience, so they don't know how to compete with big companies in the artificial intelligence chip industry.

Summarize

Summarize

According to the above analysis, we can’t find any reason for miners to buy a Canaan AvalonMiner mining machine instead of Bitmain’s Antminer. Even after the “halving” occurs, the profitability of the Antminer is better than AvalonMiner miner.

Not only that, in addition to Bitmain’s Antminer, there are many other manufacturers whose mining machines are more profitable than AvalonMiner’s. For example, MicroBT also has its own ASIC mining machine. It is undeniable that if the miners who use Canaan Mining Machines to mine continue to be unprofitable, the sales of their mining machines will undoubtedly be affected, so in 2020 it is very likely to repeat the mistakes of 2019-suffer another big loss .