Key Takeaways:

• Bitdeer said it was picked as a preferred cloud services provider for artificial intelligence cloud services powered by an Nvidia chip
• Cryptocurrency mining machine maker Canaan is looking to create a separate unit for its business making chips for AI applications

By Warren Yang

After getting burned by gyrations in digital asset prices, the latest forays by each of these companies looks reasonably prudent. Such moves may even look relatively moderate compared with drastic business transformations many Chinese ventures often undergo when their original businesses come under fire. 

“Given the significant changes in the AI industry over the past few months, we have been strategically discussing the future of our AI business,” Canaan CEO Zhang Nangeng said. “In light of our current industry and the marketing environment, we believe that the development of our AI business should take a more defined, independent, and long-term direction.”

The two companies’ efforts to develop AI-related businesses make quite a lot of sense, since revenue from services and products linked to the hot emerging technology can provide them with a nice hedge against wildly volatile crypto markets.

Two China-linked crypto miners, The9 (NASDAQ:NCTY) and BIT Mining (NYSE:BTCM), are the products of such radical transformations, with the former originally a game operator and the latter an online lottery ticket seller.

Crypto Winter

Any company in the digital asset ecosystem probably understands the need for business diversification amid a prolonged crypto winter, despite a recent rally in currencies. Canaan’s latest quarterly results vividly illustrate this cold reality. Its revenue shrank 77% year-on-year to $33 million in the third quarter as sales of its mining machines dropped, according to its latest results.

The company has its own mining business as well, and revenue from that operation took a similar dive because of a temporary shutdown in Kazakhstan to comply with new regulations and a contract breach by a project partner in the U.S.

While Canaan’s revenue plunged, its cost of revenue decreased at a far slower rate of less than 30%, partly because write-downs for inventory and prepayments increased. And its operating expenses actually increased. As a consequence, Canaan ended up in the red in the third quarter, swinging from a small net profit a year earlier. 

One recent bright spot for both companies is the rally for digital tokens. The value of bellwether cryptocurrency bitcoin is up more than 150% this year, with growing optimism that current price levels are sustainable. There are some compelling explanations for the price surge.

For one, the U.S. Securities and Exchange Commission (SEC) may approve the first spot bitcoin exchange-traded fund (ETF), which many think can be a game-changer by giving an official regulatory stamp of approval to a virtual currency-linked investment product. Also, an event known as bitcoin halving, which is expected to take place next year, will reduce the amount of new bitcoin entering the market, helping push up the currency’s value.

A rise in bitcoin and other cryptocurrency prices would probably lift the fortunes for both Bitdeer and Canaan, which could plow some of any future profits into developing other revenue sources like AI-related products to hedge against future crypto downturns.

For all the recent bullish sentiment in crypto markets, Canaan management sounded a wary tone on its latest earnings call.

“I believe that the fourth quarter has shown signs of improvement compared to the third quarter,” said Clark Soucy, Canaan’s investor relations director. “However, we shouldn’t expect the best-case scenario of both rising price and (trading) volumes to happen quickly. Based on the overall situation mentioned above, we provide a highly cautious outlook for the fourth quarter of 2023.”

Such caution is probably warranted, given the well-documented history of volatility in crypto markets. At the moment, both Bitdeer’s and Canaan’s revenue are heavily reliant on crypto activities, meaning each has a long way to go in their nascent diversification drives.

Canaan shares currently trade at a price-to-sales (P/S) ratio of just 0.6. Bitdeer is higher but also not so impressive at about 1.8, even after a jump in its stock price following news of the Nvidia partnership. The surest way for both companies to boost their valuations in the longer term is to reduce their exposure to virtual coins, and their moves into AI seem like a good bet to start achieving that.