So Benchmark’s slapping a “Buy” rating and a 5X price target on Canaan (CAN) seems, um, premature at best. Particularly at a time when the crypto ecosystem just emerged from an historically tough crypto winter, and other experts like Cowen and Company are downgrading rivals like MARA. Creative brilliance in action or a funder’s blind CBDC bet—sustained by Bitcoin’s own (but perhaps short-lived) explosion. I’m betting on the latter, and here’s why you should as well.

Is North American Expansion Really Key?

Benchmark is promoting Canaan’s North American expansion as the big win golden ticket. Of course, it’s all very impressive to plant flags in new territories. Let's connect this to something seemingly unrelated: Big Oil's Greenwashing. It’s all part and parcel of oil companies boasting about their meager renewable energy investments, while two-thirds of their profits continue to be derived from fossil fuels. Likewise, Canaan’s growth may be play-acting. Or are they really serious about building long-term, sustainable growth? Or do they just want to improve their ESG score in an increasingly eco-conscious Bitcoin mining area?

Think about it. North America isn’t exactly famous for inexpensive electricity. Bitcoin mining eats up astronomical amounts of energy—it’s the digitized equivalent of a steel mill. Instead, Canaan is paying a substantial premium for their power—which will ultimately damage their margins. This effect will hold true regardless of how high Bitcoin appreciates. This is nothing like starting a new app company in Silicon Valley. It’s a very resource-intensive industry, and geography is incredibly important.

Plus, let's not forget the regulatory minefield. Governments are catching on to the energy consumption and environmental issues associated with Bitcoin. What if stricter regulations come down the line, making it difficult for Canaan to continue operating, or necessitating millions of dollars spent on carbon offsets? That 5X price target doesn’t seem so attainable all of a sudden.

Bitcoin Price Is a Tailwind, Or Is It?

Naturally, rising Bitcoin price would be a plus. But here's where we need to make an unexpected connection to another area: the Law of Diminishing Returns. Just because Bitcoin is up doesn’t automatically mean Canaan’s profits will 5x. Mining difficulty has risen by an astounding 1100x. The recent Bitcoin halving halved mining rewards, but intense competition in the space is putting even more pressure on margins.

This is a complicated equation, not some sort of straight-line formula. And keep in mind, Canaan’s stock is already down 21% for the past month. That doesn't exactly scream "unstoppable growth." Instead, we point out the fact that a rising tide only lifts all boats if those boats don’t have holes in them.

  • Bitcoin Price Up: Great! More revenue per coin mined.
  • Mining Difficulty Up: Not so great! Requires more computing power to mine each coin, increasing costs.
  • Halving: Ouch! Rewards for mining are cut in half.
  • Competition: More miners vying for the same block rewards.

This is truly where the rubber meets the road. Forget the hype, forget the Bitcoin price. Let's talk about Canaan's financials. Is the company loaded up with a ton of debt? What's their cash flow like? How well running their mining ops compared to peers such as MARA (which, if you recall, recently got downgraded)

Canaan's Financials: Are They Robust Enough?

Now, I don’t have access to Canaan’s internal financial projections, and neither do you. That's the point. Or we’re counting on one analyst’s super optimistic projections, which are based on some very rosy assumptions for Bitcoin price and operational efficiency. That's like building a skyscraper on sand.

Here's the question that keeps me up at night: Can Canaan truly deliver the operational efficiency required to justify a 5x valuation, even if Bitcoin hits new all-time highs?

As a bit of added bonus, Benchmark shares our enthusiasm for Canaan’s efforts to get home mining rigs on the market. It’s a nice concept on paper, but will it actually make a difference? Home mining aside from the fact that with industrial-scale mining continuing to dominate, home mining is a minuscule piece of the pie. It’s a little bit like a baker attempting to earn some extra money by selling cookies on the sidewalk.

It's okay to be excited about Bitcoin. Yet, even though it’s a tremendously progressive technology poised to completely transform the world as we know it, don’t let that excitement blind you to those risks. Canaan is indeed a likely candidate to succeed, and Benchmark’s prophecy is not impossible. But before you jump on the bandwagon, do your own research, scrutinize the financials, and ask yourself: Is this a calculated risk, or just plain gambling?

The Bottom Line:

It's okay to be excited about Bitcoin. It’s a revolutionary technology with the potential to change the world. But don't let that excitement blind you to the risks. Canaan may very well succeed, and Benchmark's prediction might come true. But before you jump on the bandwagon, do your own research, scrutinize the financials, and ask yourself: Is this a calculated risk, or just plain gambling?