Jason Stutman is peddling his Technology & Opportunity letter ($99/yr) with a new tease about blockchain, so I thought it would be good to take a look at that after we sniffed around in Paul Mampilly’s (older) blockchain tease yesterday.
The spiel is all about an “arms race” in bitcoin mining that will be spurred by the “halving” that is coming in May, but the tease is not to buy bitcoin or any of the various altcoins, it’s all about buying the “picks and shovels” beneficiary — the seller of arms into this “arms race.”
Here’s a bit from near the top of the ad:
“You Don’t Have to Buy Bitcoin, Ethereum, or Any Altcoin
“How to get started today with as little as $5….
“The Last Time This Happened, Investors Made 2,683.71% Within 36 Months….
“And you don’t need a crypto wallet or anything complicated like that. A simple brokerage account is sufficient to reap such extraordinary gains.”
So what’s the story? Stutman says that we’re headed into a “bitcoin supply shock” that will drive prices higher… and that the “halving” that’s coded into the bitcoin system will further pressure bitcoin miners, making them invest in the best equipment so they can still be profitable despite the lower returns from mining.
What is “halving?” That’s just the gradual decrease in the creation of new bitcoin that is written into the code — roughly every four years, the reward for bitcoin mining gets cut in half and the creation of new bitcoin gradually slows, eventually ending with the total maximum bitcoin issuance that they estimate will be hit in 100 years or so. There’s a pretty good explanation here at bitcoinblockhalf.com if you’re curious. The original idea of bitcoin was to create an inflation-resistant currency, and this gradual reduction in new issuance was designed to help support the price of bitcoin (of course, whether the design works or not depends on human behavior… which is a lot less predictable, and bitcoin’s code can be altered by consensus, which is probably unlikely but certainly not impossible). The next halving date is expected to be around May 13 at this point, but it depends on actual activity on the network so could shift a little.
That does not mean the current supply of bitcoins will be cut in half, to be clear, just that the rate of creation of new bitcoin by mining will be reduced by half. Which means that mining will become much less rewarding, since you’ll have to expend twice as much computing power to earn the same reward (assuming, of course, that bitcoin prices stay the same). That is deflationary, slowing the increase of new bitcoin, but whether it’s enough to drive the price of bitcoin higher in the short term is an open question — pricing is not just about supply, it’s also about demand.
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But we’re working with the assumptions from the ad here, so what is the company that Stutman thinks will make us rich as bitcoin surges higher? Here are some clues…
“This Company Could Make 27x Your Money Within Less Than 36 Months
“This company is perfectly positioned to come out as the winner in the battle over Bitcoin because of its first-mover advantage…
“Its founder and CEO invented the world’s first dedicated Bitcoin mining tech while pursuing his Ph.D. in electrical engineering.
“But he’s not just a genius inventor; he’s a gifted entrepreneur as well… That’s a rare combination to come by.
“After seeing how successful his early machines were, he decided to go all in and found the company I’m talking about. That’s when he brought the very first ASIC rigs to the market that are now hugely popular with Bitcoin miners.”
And apparently this company has been an innovation leader, per the ad:
“… this manufacturer keeps shocking the market with one innovation after another…
“It was one of the first to reveal a 7-nanometer mining chip before most competitors even announced the use of such semiconductors.
“The result? Its 2019 product line was five times faster than predecessors.
“Recently, this company escalated the arms race even further by uncovering machines with 5-nanometer chips.”
The ad tells us that the company should be soaring, too, with huge demand for their products:
“Its rigs belong to the fastest and most energy efficient machines out there.
“Bitcoin miners will do anything to get their hands on them, otherwise the halving event will kill their business.”
And apparently the company has been able to attract a lot of capital, even when things aren’t going well — more from the ad:
“Just consider the sustained Bitcoin bear market in early 2019…
“Back then, mining hardware manufacturers suffered badly. The whole industry seemed to be dead…
“But that didn’t stop this young company from successfully completing a round of financing worth hundreds of millions of dollars in March 2019.
“It received a valuation in the billions of dollars following that pre-IPO funding round.”
And we’re told that it has now gone public, so us “average Americans” can participate.
And apparently this company is exposed to more than just bitcoin mining, too, as Stutman thinks they’ll become a “superstar” in the blockchain industry in general, with companies everywhere exploring the use of blockchain for supply chains and financial tracking.
But the reason the ad teases this is a hot opportunity right now, on top of the “halving” date for bitcoin, is that Stutman sees three catalysts…
The first is the “global turmoil” that he thinks will send people to bitcoin as a “safe haven”, he calls it the “gold of the digital era.”
We can argue about that in the short term, for sure… so far this buying bitcoin price has been awfully similar to buying a 2X-levered exposure to the Nasdaq 100 — here’s the year-to-date chart comparing bitcoin (blue), the 2X ProShares Nasdaq ETF (QLD, orange) and gold (red):
But generally, something that rises this quickly and falls this quickly doesn’t deserve the “safe haven” term in my book. A safe haven is a place you run to when you want to get away from the volatility in the market, but this is that same chart over the past three years:
Bitcoin, at least so far, is nowhere near being “digital gold” or a “safe haven” — it’s investor emotions expressed in numbers. It might be where people go to hide money when taxes rise or governments begin to place their hand more fully on the scale in the aftermath of this coronavirus crisis, and it might rise dramatically if people flee regular currencies, but it’s not a “safe haven” in the traditional “cash in your mattress, gold coins buried in the backyard” way most of us think of that term.
Reason two that he gives is “excessive dollar supply” and low or negative interest rates.
Hard to argue with that, this should end badly for the dollar at some point, particularly as we absorb the several trillion new dollars being created by the government, with help from the Federal Reserve, that are likely to be spent on the coronavirus rescue… but that’s also been true for most of the past decade and the dollar has held much firmer than anyone could have expected. It’s easy and logical to say “the dollar should go down,” and it probably will continue to decline over time as it has for the past 50 years… but it’s a different thing entirely to bet on when that will happen.
Plenty of folks agree with Stutman here that the huge infusion of new dollars will bring down the value of the dollar, and send investors to bitcoin as they trust that cryptocurrency’s programmatically limited inflation, and it’s a logical argument… but maybe don’t bet your house on it, logic hasn’t ruled the day for global currencies for a long time.
And the third catalyst is just that “bitcoin is going mainstream” in more general terms — you can trade bitcoin futures on real exchanges now, the big banks and brokerage houses have learned how to deal with bitcoin, and some folks are accepting it for purchases, though that’s still a cumbersome and largely experimental procedure for most of them, remains a tiny portion of bitcoin trading, most of which is really just price speculation… no retailer wants to have to guess at how much the value of their bitcoin changes between the time they book the sale and the time they translate it back into dollars so they can pay their rent and make payroll.
And one more bit from the ad before we get to our solution…
“Bitcoin mining will be harder than ever before… That’s why miners will be fighting tooth and nail for new rigs.
“Early AMD and Nvidia investors made 13,268.88% after the last halving… And I expect this company to make more than 27 times your money starting in 2020.
“I’ve never seen such a perfect opportunity for the everyday investor to lock in a ground-floor opportunity…
“For a MASSIVE potential upside.
“This opportunity is bigger than Tesla, Apple, and Disney put together.
“The best part about it is…
“You don’t need to invest anything you wouldn’t be comfortable losing…
“Because a $500 stake could buy you some serious chips at the table.”
So what does the Thinkolator conclude from all this hinting?
There are a fairly large number of decent-sized blockchain mining chipmakers, most focused on bitcoin still — and most of them are still private or venture-funded, like market leader Bitmain, smaller chipmaker Ebang, and the somewhat more diversified Bitfury.
The one that has actually gone public and matches those clues, though, is the Thinkolator’s answer today: that’s Chinese chipmaker Canaan (CAN), which makes Avalon mining rigs and is not quite a $5 stock anymore — it’s now down to about $3 and facing the waves of shareholder lawsuit press releases that every stock faces when it declines sharply, particularly after an IPO.
Canaan was founded by N.G. Zhang, who was indeed in a doctoral program at the time and had been experimenting with bitcoin mining, first developing specialized mining chips using FPGA technology and then moving to found Canaan and develop truly application specific chips (ASIC stands for Application Specific Integrated Circuit).
And that’s generally the trajectory with most new technologies, by the way — early innovators develop chips by programming more expensive FPGA chips (field programmable gate array, in case you’re wondering, that’s a market dominated by Xilinx and Intel), and then, once the needs of the specific application are better understood, developing custom silicon to perform those tasks more efficiently and cheaply than would be possible with a programmable chip. Canaan has been a leader in this niche, and arguably was the first to develop an ASIC for bitcoin mining, but they’re not the only player in the game.
Canaan’s IPO turned out to be pretty ugly — they originally tried to go public in Hong Kong and were briefly urged by Chinese officials to list in mainland China in the wake of the trade war, trying to move more technology companies “in house” as pressure mounted on firms like ZTE and Huawei, but China is still also nervous about bitcoin businesses and they didn’t get timely approval for mainland or Hong Kong listings, and they finally decided on a US listing on the Nasdaq last year. One of their IPO backers also pulled out late, and though the deal did go through, in November, they ended up raising only $90 million of the $400 million they had initially hoped for.
The shares actually did jump a little bit on IPO day, briefly getting to $13 or so from the $9 offering price, but it’s been pretty much straight down since then. Since that November IPO, Canaan is down about 66% while the bitcoin price has fallen 25%.
If you want a great counter-perspective to the “bitcoin halving will send rig orders surging” opinion, check out this CoinDesk article from December that focuses on the struggle the rigmakers are having as they engage in a price war… here’s a little excerpt:
“Cryptocurrency mining computer-maker Canaan Inc. may have picked the worst time for its initial public stock offering, which valued the company at $1.3 billion….
“Industry executives say the big makers of bitcoin-mining computers, colloquially known as ‘rigs,’ are in a sales slump. That’s a surprising development since many observers predicted a frenzy of upgrades ahead of bitcoin’s once-every-four-years mining-reward halving, expected in May. When that happens, the reward for successfully mining a new block of data will get cut in half. It’s widely expected that prior-generation mining rigs will become unprofitable for operators who don’t have access to unusually cheap electricity.”
That doesn’t mean Stutman will end up being wrong in the end, or that Canaan can’t recover if demand really does surge for mining chips and rigs and alleviate the pressure of their competition with market leader Bitmain and others… it just means that it’s not a simple and linear relationship between bitcoin experiencing its “halving” moment and Canaan’s share price surging 10,000%.
And oh, in case you’re wondering about that big competitor — Bitmain has also been thinking about a US IPO after failing to list in Hong Kong, with (perhaps tepid) backing from Deutsche Bank (they haven’t released a real S-1 or prospectus yet, the initial filing with the SEC was confidential, so there’s nothing imminent). Canaan and Bitmain have been largely neck and neck on the competitive front, it seems as though Bitmain still has the advantage (from what I read, I’m no expert), but they’re pretty close — and yes, to finish matching our clues, both Bitmain and Canaan are in the process of trying to roll out 5-nanometer designs in partnership with their fabricator, Taiwan Semiconductor (TSMC). And yes, moving from 7nm to 5nm will make them more efficient, with lower energy consumption and faster performance… though I assume the costs of making these new chips are also rising.
You can see the Canaan IPO prospectus here if you’d like to read some of the story of the company and their plans. And the income statement in that prospectus, which is the newest data we have since they haven’t reported their fourth quarter yet, will reinforce any worries you might have had about their financials — 2018 was a pretty good year for Canaan, but 2019, at least through September, was quite horrible as they went from a profit to a loss on crashing revenues… for the first nine months of 2019, their revenue fell by more than 60% compared to that same time period in 2018.
That doesn’t necessarily mean it’s a terrible company, they are also clearly in a fast-changing business and the decline was driven by crashing demand for their older machines, though it’s not a good sign that the newer machines didn’t make up much of that shortfall, at least not yet — and the total volume of “computing power sold” did rise by more than 30% from 2018 to 2019, so it looks like a lot of the revenue decline is because computing power is getting dramatically cheaper for bitcoin miners, which means revenues and margins will be a challenge for those who sell equipment to miners.
That’s not a shock or a new development for anyone in the semiconductor industry — it’s an ugly industry for small players in general, since the prices keep falling and the pressure to develop faster and better equipment for less money is relentless. Intel can handle that OK thanks to huge R&D spending and a long-history of brand-name leadership, and other strong chip companies have tight relationships with customers or technology leadership in particular areas, but smaller semiconductor designers and producers who are trying to break in to larger businesses can often seem like they’re running on a treadmill that keeps speeding up. It will be interesting to see what the full-year results looked like for Canaan, but they’re a foreign issuer so they can probably delay their filing until the end of April (I think they get four months to complete annual filings… though the first quarter filing with the SEC should be due soon after that, probably by mid-May if I understand the rules, so there might be a veritable deluge of new info over the next couple months).
Since my job is largely to “cool your jets” when an overheated promo pitch comes rolling through, giving some of the opposite perspective, I’ll add a few paragraphs here from the “risk factors” section of their prospectus:
“Our results of operations have been and are expected to continue to be negatively impacted by sharp Bitcoin price decreases.
“The demand for, and pricing of, our Bitcoin mining machines is determined primarily by the expected economic return of Bitcoin mining activities, which in turn is significantly affected by expectations with respect to the Bitcoin price, among other factors. The price of Bitcoin has experienced significant fluctuations over its short existence and may continue to fluctuate significantly in the future. Bitcoin prices ranged from approximately US$14,166 per coin as of December 31, 2017 to approximately US$3,792 per coin as of December 31, 2018, according to Blockchain.info. According to the same source, from January 1, 2019 to October 31, 2019, the highest Bitcoin price was US$12,686.39 and the lowest was US$3,225.30. The decrease in the Bitcoin price in 2018 resulted in a material decrease in our sales volume and in the average selling price of our Bitcoin mining machines. As the Bitcoin price only started to recover in the second quarter of 2019 and our operations generally lag behind the increase of Bitcoin price, our revenue for the nine months ended September 30, 2019 also decreased by 60.5% from the nine months ended September 30, 2018. We expect our results of operations to continue to be affected by the Bitcoin price, as 99.6%, 99.7% and 98.3% of our revenue were from sales of our Bitcoin mining machines and other Bitcoin mining machine parts and accessories in 2017, 2018 and the nine months ended September 30, 2019, respectively. Any future significant reductions in the price of Bitcoin will likely have a material and adverse effect on our results of operations and financial condition. We cannot assure you that the Bitcoin price will remain high enough to sustain the demand for our Bitcoin mining machines or that the Bitcoin price will not decline significantly in the future. Furthermore, fluctuations in the Bitcoin price can have an immediate impact on the trading price of the ADSs even before our financial performance is affected, if at all.
“Various factors, mostly beyond our control, could impact the Bitcoin price. For example, the usage of Bitcoins in the retail and commercial marketplace is relatively low in comparison with the usage for speculation, which contributes to Bitcoin price volatility.
“If the Bitcoin price or Bitcoin network transaction fees drop, the expected economic return of Bitcoin mining activities will diminish, thereby resulting in a decrease in demand for our Bitcoin mining machines. As a result, we may need to reduce the price of our Bitcoin mining machines. At the same time, if transaction fees increase to such an extent as to discourage users from using Bitcoins as a medium of exchange, it may decrease the transaction volume of the Bitcoin network and may affect the demand for our Bitcoin mining machines. In addition, any shortage of power supply due to government control measures or other reasons, and any increase in energy costs, would raise the costs of Bitcoin mining. This in turn could affect our customers’ expected economic return for mining activities and the demand for and pricing of our current Bitcoin mining machines.”
And, on the push they’ve made to try to develop ASIC products for the broader artificial intelligence market to diversify away from reliance on bitcoin mining…
“Until 2018, we have been offering a single line of Bitcoin mining machines, which historically accounted for substantially all of our total revenue. As of September 30, 2019, we shipped more than 53,000 AI chips and development kits. Our future revenue growth will depend largely on our ability to successfully expand our business in the AI market and penetrate into new application markets. We cannot predict how or to what extent the demand for our products in the AI market will develop going forward. Furthermore, as ASICs may not develop into mainstream solutions for AI technologies and applications, we might not be able to capitalize on the growth in the market for AI technologies and applications with our ASICs. If the AI market does not develop as we currently anticipate and we are unable to penetrate into new application markets, our future revenue and profits could be materially and adversely affected.”
Incidentally, I applaud their decision to diversify into other computing-intensive areas, and for their sake I hope their ASIC products for AI are commercialized to great acclaim… but I’d also worry because they’re going from competing with Bitmain for mining rigs to competing against many of the strongest and largest semiconductor companies in the world for chips that will be used in new AI applications. I can’t tell you that they will fail, and I don’t really know their products or the company well after my little hour-long sojour in their filings this morning, but I’d probably rather be in a price war with Bitmain than trying to take market share from Intel, AMD, NVIDIA, Xilinx and the other mega-billion-dollar chip companies who presumably have miles-long head starts in AI.
Finally, I’d be remiss if I didn’t also note that there is a meaningful fraud allegation from a short seller currently circulating (that’s part of the reason for the drop in the shares, though it’s hard to parse reasoning for these things during a market crash). Marcus Aurelius Value on February 20 released its short report on the stock, you can see the full report here but this is from the summary:
“We view CAN as the latest US-listed Chinese company to have deceived investors about its business. After failing three times to list itself on Asian exchanges since 2016, CAN took advantage of these frothy markets to complete a NASDAQ IPO in November 2019. Shares surged by more than 80% in a single trading day last week, pushing the company’s market cap above $1 Billion, in a move that appears to have enticed thousands of unsuspecting retail investors into the speculative fervor. But our investigation of this bitcoin mining machine maker reveals undisclosed related party transactions, irregularities involving many customers and distributors, as well as a business model that we view as broken. Regardless of your outlook on the future of Bitcoin, we believe that CAN’s business is simply far worse than promoted. We therefore see significant downside potential and believe the stock is uninvestible.”
Short sellers aren’t always right and are sometimes just manipulating the stock, of course, with practices that shouldn’t always be applauded, but I do have a cautious respect for short sellers in general — they risk a lot in betting against the prevailing winds, and they often do uncover real frauds and provide an important counterbalance. I don’t know anything about this particular firm or their track record, but if you’re thinking of risking money in a heavily shorted stock you should at least take a short seller’s perspective into account (there was also an FT article about this one a few weeks ago, and the usual wave of shareholder lawsuits followed the publication of that report, so this “short attack” is not new or unknown info, and if you’re feeling more optimistic it could certainly be that some of that criticism is “in the price”).
I don’t want to pile on too much here, and Canaan is very small and entrepreneurial and could turn the corner quickly if things start to go surprisingly well, particularly if bitcoin prices really do rise dramatically again, but I’ll just leave you with one more skeptical perspective: EVERY analyst on earth who covers bitcoin is expecting the “Halving” to be a Big Deal, dramatically increasing the value of bitcoin as the inflation rate is cut in half and smaller miners are squeezed out.
And what usually happens after an event when everyone is speculating on that event happening? I’ll give you a hint, it rhymes with “smell the pews.”
Bitcoin may indeed be the next big thing (again), and this company might sell a lot of rigs, but be careful about assuming that you know what will happen to the price of bitcoin… everyone thinks they know, but the price rides on sentiment even more than stocks do, and emotions are unpredictable.
And yes, despite the fact that bitcoin is the old and slow fuddy duddy of the cryptocurrency world now, with thousands of new “altcoins” and other blockchain projects trying to lead the world into a new blockchain-driven future, it remains true that bitcoin represents “blockchain” for the vast majority of investors and speculators, and bitcoin price moves up or down generally wash through all the alternative cryptocurrencies — so if bitcoin surges, probably lots of tiny cryptocurrencies will surge far higher, and if it crashes a lot of them will probably disappear as more and more zeros appear to the right of the decimal point in their quoted prices. We can probably think of Canaan, like small cryptocurrencies, as being “levered to bitcoin prices” in general… and depending on your perspective, that will be either scary or exciting. Or maybe both.
Your call, as usual — it is, after all, your money. Please do share your thoughts with us… excited about the “halving”, anticipating great wealth from altcoins or from mining rig sellers like Canaan? Think the more mainstream chipmakers like AMD, which we talked about yesterday, will be a better bet? Too busy hiding in your bunker to care? Worried about those fraud allegations from the short seller, or think they’re going too far with that? Let us know with a comment below.
Disclosure: Of the stocks mentioned above, I own shares and/or call options on Intel, Apple and NVIDIA, as well as small positions in both bitcoin and ethereum. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.