You donâ€™t have to know much about cryptocurrencies to understand that the market is volatile. By logical deduction, companies that are tied to this never-a-dull-moment sector are inherently risky. And that extends even more so for crypto mining equipment providers like Canaan (NASDAQ:CAN). On a year-to-date basis, Canaan stock is down over 38%, despite the underlying bitcoin (CCC:BTC-USD) price up roughly 135% over the same period.
Unfortunately, the concept of buying publicly traded companies levered to virtual currencies or crypto mining is a pick-your-poison affair. With the blockchain reward tokens, the direct sector has a â€œwild westâ€ element to it that may not suit all investors.
On the flipside, with public corporations, youâ€™re buying equity into a real business. Of course, that business is tied to the fantastical crypto sector, where disaster is sometimes only minutes away.
Further, Canaanâ€™s third-quarter earnings report detailed just how risky its equity units really are. Financially, the numbers were terrible. Q3 net loss came in at $12.7 million or 54 cents per share, more than quadruple the size of Q2â€™s $2.38 million loss (10 cents per share). Not surprisingly, Canaan stock heaped more red ink on an already scarlet technical picture.
Of course, the financials overlook the potential upside to the underlying business. According to Canaan CFO Quanfu Hong, â€œdemand for mining machines in the market continued to rebound in Q3 2020. We have received a large number of pre-sale orders scheduled for delivery starting in the fourth quarter.â€
So, should speculators jump aboard Canaan stock on anticipation of increased demand for crypto mining? Initially, the idea makes sense: though volatile, bitcoin is within touching distance of its all-time high.
However, blockchain mining is an energy-intensive process that involves computers competing with one another to solve complex problems.
Further, the winner-takes-all dynamic of most crypto mining protocols forces would-be miners to be economically rational players.
In other words, is the juice worth the squeeze? With improving solar energy technologies, the answer could be yes.
Canaan Stock Could Receive an Ironic Lifeline
As DigitalJournal.com points out, some critics have complained about bitcoinâ€™s carbon footprint. Essentially, â€œmining is a huge waste of energy that is damaging to the environment.â€
Certainly, if the virtual currency complex collapses, that would be a lot of energy expended for no good reason. As well, thatâ€™s one of the lingering fears associated with buying Canaan stock.
On the surface, bitcoin is a concept that should drive liberals and progressives nuts. To their perspective, virtual currencies and crypto mining represent nothing more than human avarice with a severe environmental cost.
Yet itâ€™s also the advent of one of the leftâ€™s flagship projects â€“ clean renewable energy â€“ thatâ€™s providing an ironic lifeline to investments like Canaan stock.
Although specific details are difficult to come by because of myriad variables, we can safely say that crypto mining is expensive, many times prohibitively so. According to information from Digiconomist.net, the bitcoin miningâ€™s cost percentage, or the ratio of electricity costs to total miner income is approximately 53.8%.
While that might sound enticing, bear in mind that over the long run, miners will incur on average several months of zero income. Just do some quick math based on the above cost percentage and you get a startling idea of how much overhead is involved in a mining operation.
Moreover, energy consumption costs are sure to rise assuming that bitcoin swings higher to new plateaus. From February 2017 to December 2017, when BTC jumped from sub-four digits to its previous all-time record, the bitcoin energy consumption index increased by 264%. Further, the index more than doubled from there into late 2018, even though BTC was only trading hands at around $6,400 by that time.
After a severe drop in the consumption index in November to December of 2018, it again increased as BTC clawed its way back toward five-digit prices.
In the year so far, the index increased over 6% to its present nominal rating of nearly 78 terawatt-hours.
Because bitcoin price enthusiasm quickly raises mining-related energy consumption, itâ€™s very conceivable that the consumption index will rise conspicuously.
In prior years, that may have discouraged mining operations, sinking the crypto market and associated investments like Canaan stock.
However, the cost savings of solar energy could end up supporting higher BTC prices.
Solar Potentially Makes Crypto Mining Great Again
Due to the high energy density of fossil fuels, we may not see solar energy infrastructure replace traditional power sources. However, solar still figures into the picture because it provides energy addendum for â€œfreeâ€ â€“ you know what Iâ€™m talking about.
Moreover, with the capacity of retail solar panels relative to the power needs of an average home, itâ€™s conceivable that your average non-crypto mining consumer can save about 10% to 20% off their utility bills.
And the beauty of solar systems is that the cost savings are more pronounced the more energy you consume.
Now, the math behind crypto mining operations is complicated because of the aforementioned variables. For instance, just living in a different state could save you tons of money.
For simplicityâ€™s sake, just imagine what 10% to 20% can do on an individual scale, where youâ€™re spending several thousands of dollars per month, and tens of thousands annually.
Yes, bitcoin mining will still be prohibitively expensive for most people, even with saving money to the upper range of the spectrum.
If cryptocurrencies become more integrated into the mainstream, we could see less energy-intensive protocols like proof of stake take off. If so, companies like Canaan can pivot to equipment that serves these projects, bolstering the longer-term thesis for Canaan stock.
Nevertheless, this isnâ€™t a wholesale endorsement of crypto mining. Frankly, itâ€™s a whole different animal from the underlying virtual currency market.
But many people will take the plunge, possibly inspired by solar energyâ€™s cost savings. And this could be the underappreciated catalyst for taking this digital sector higher.
On the date of publication, Josh Enomoto held a long position in BTC.
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.