Why Shares of Bitcoin Mining Company Canaan Are Plunging Today

What happened

For investors in most cryptocurrencies, it has been a tough year. But for investors in cryptomining-related companies such as Canaan (CAN -6.81%), it has been a bloodbath. Today’s 6% decline in Canaan has brought this company’s decline from its 52-week high to more than 70%.

Kanaan is not a traditional one Bitcoin (BTC -1.09%) mining company, in that this China-based company focuses on selling the integrated circuit mining equipment used by other major players. Thus, it is a proxy for total investment in the cryptomining sector, and a stock that is often seen as a gauge of potential growth in this area.

Reports circulating today that crypto miners are increasingly turning to equity and selling rigs to raise cash on their balance sheets appear to dampen Canaan’s prospects. In particular, many Bitcoin miners are experiencing a drop in profitability as the price of Bitcoin remains relatively low (around $19,300) and the difficulty of Bitcoin mining increases.

These headwinds amplify existing stresses felt by the past Ethereum miners, who have been forced to migrate their operations to other blockchains. In the wake of the Ethereum merger, which moved this network to proof-of-stake from proof-of-work (the consensus mechanism that requires miners to solve complex problems to validate transactions), the demand for mining machines at a global level has worsened.

So what

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

It’s not all bad news for Kanaan, though. The company announced its latest generation of Bitcoin miners today. These Avalon Made A13 series miners provide more computing power along with improved energy efficiency and an impressive hash rate of 130TH/s. From a technology point of view, then, there is something for long-term investors with a bullish medium to long-term outlook to grab onto.

What now

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

While Canaan’s technological improvements appear to be impressive, it is unclear how well these new mining rigs will be adopted by companies operating in this area. Should a glut of existing mining machines hit the market, Canaan’s future prospects could become significantly clouded. Thus, it appears that the market’s reaction to Kanaan today is a justified fear.