Thanks to the enormous popularity of cryptocurrencies in recent years, the concept of bitcoin and the blockchain has gained mainstream interest and credibility. So much so that now, publicly traded companies focusing on cryptocurrency mining – the highly complex mechanism that blockchain reward tokens are “born” – have become a reality, with Canaan (NASDAQ:CAN) making its debut on the Nasdaq. Still, a historical moment hasn’t translated to profitability, with CAN stock down nearly 67% year-to-date.
Ironically, the problem is credibility, something that Canaan’s debut was supposed to cement among the eyes of traditionalists. After all, with the company’s initial public offering in November 2019, the bitcoin mining-machine manufacturer became the first such organization to be listed on the world’s second-biggest security exchange. But immediately, CAN stock suffered from severe volatility and it’s been a downward trek overall.
Perhaps not surprisingly to bitcoin skeptics, Canaan courted much controversy. If you want to understand why dark clouds hang over CAN stock, please check out Financial Times Alphaville’s. In short, the company has a litany of accusations against it, particularly “false and misleading statements to make its financial health appear better than it was.”
The attacks against the crypto mining firm attracted short sellers, like Marcus Aurelius Value, which reported “some rather disturbing details about the company’s antics in the run up to the Nasdaq listing, and also its three previous unsuccessful listing attempts.”
Another fact that doesn’t sit well with investors is Canaan’s Chinese roots. Frankly, the world is getting tired of China’s impact on global affairs in 2020. And the fiasco that was Luckin Coffee (OTCMKTS:LKNCY) doesn’t do any favors.
But is there any potential for Canaan?
The Ludicrous Case for CAN Stock
In the new normal, I don’t think it’s wise for most investors to chase “opportunities” like CAN stock. Honestly, you have multiple high-quality names that are on discount. Depending on how the economic winds blow, you could see even bigger discounts later this year.
Still, do contrarian speculators have any chance of profitability with CAN stock? Believe it or not, they do. Let me explain.
As long as Canaan is legitimate in its claims about developing mining hardware utilizing application-specific integrated circuits (ASICs) – and assuming these ASICs perform as advertised – the company could enjoy substantial demand. That’s because with cryptocurrency experts generally optimistic on bitcoin prices over the long run, the current difficulty rate in mining the digital token offers a compelling, though risky bullish argument.
Moreover, on a year-to-date basis, the CAN stock price and bitcoin’s mining difficulty share an inverse relationship. Granted, the correlation coefficient isn’t quite strong at -46%. Ideally, you’d like to see an inverse relationship feature a coefficient toward -60% or “greater.”
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Source: Chart by Josh Enomoto
However, the main takeaway is that generally, as bitcoin difficulty increases, Canaan stock declines in value and vice versa. You would expect this relationship because as bitcoin mining becomes more difficult, it requires miners to consume more energy. That translates into higher utility bills, making the venture increasingly riskier.
If you think about it, this basic summation of the blockchain’s mechanism prevents bitcoin supply inflation. But increased difficulty makes mining unsustainable for regular miners, reducing demand for ASICs. Of course, that’s bad for CAN stock.
Nevertheless, if the bitcoin price rises dramatically, then it may be worthwhile for miners to take their risks. That’s why if you believe that cryptocurrencies will experience another massive move higher, Canaan isn’t completely unreasonable.
Big Question Marks Remain
Still, if you want to gamble in the virtual currency space, you’re probably better off going with the tokens themselves. Here’s the main problem with CAN stock as a bitcoin alternative: you’re introducing another variable into an already volatile sector.
If you follow cryptocurrencies, you know the market is very much like the butterfly effect manifested in a digital ecosystem. In this case, something that happens in another part of the world could have a devastating effect on your holdings.
But by acquiring a crypto-related publicly traded company, you not only have to worry about the butterfly effect, you also have to worry about the target organization’s own fundamentals. If its books are cooked for instance, that’s likely going to hit you hard, even if it doesn’t affect pure cryptocurrency holders.
At the same time, what happens if bitcoin hits six figures? In that case, CAN stock at these prices would be a once-in-a-lifetime bargain.
Look, we’ve seen some crazy things happen, which keeps alive the speculative embers here. Just be ready for fireworks – and a few cannonballs – if you decide to partake.
On the date of publication, Josh Enomoto is long bitcoin.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.