Cango’s latest pivot uncovers gold in bitcoin mining

The auto trader is making a huge bet on cryptocurrency, mining more than 4% of the world’s bitcoin output since it entered the business in November

Key Takeaways:

• Cango has made a major new move into cryptocurrency, mining an average of 18.85 bitcoins per day since it entered the business last month
• The company acknowledged that revenue from its new mining business will likely be larger than from its older car-trading business over the near-term 

By Doug Young

Talk about big pivots.

After spending most of its life dealing in China’s vast car market, Cango Inc. (CANG.US) is charting a new direction into the digital realm, where it’s finding sudden profits in a brand-new bitcoin mining operation. The move was quite sudden, not even mentioned in Cango’s latest financial results and earnings call on Nov. 4.

The first public mention of the pivot didn’t come until Nov. 6, when the company announced a major acquisition of bitcoin mining machines worth hundreds of millions of dollars. We’ll review the details of that announcement shortly, which also includes the introduction of some major new shareholders who will get two seats on Cango’s board.

Financial results from the pivot have also been quick. After entering the business at an unspecified date last month, Cango revealed last week that it mined 363.9 bitcoins in November, or about 18.85 per day. To put that in perspective, about 450 bitcoins were mined globally each day last month, according to the website MacroMicro.me. Thus, in just the space of a month, Cango has gone from nothing to minting more than 4% of the world’s bitcoins, making it one of the world’s top two miners by hash rate.

The company’s bitcoin stash at the end of November was worth about $36.4 million based on the cryptocurrency’s latest price, or roughly 10 times Cango’s third-quarter revenue of 27 million yuan ($3.7 million).

While the bitcoin business looks like a winner right now as the cryptocurrency trades near record highs of about $100,000 per coin, we should also point out this pivot isn’t without some big risks. Some of those are industry-wide while others are specific to Cango, particularly due to its Chinese roots. We’ll also return to that topic shortly.

After spending most of its life as an auto financier, Cango made its first major pivot in 2022 when it started downplaying its original business and shifted to car trading in response to increasingly tight regulation in China’s financial services sector. It initially focused on self-trading, but a year later opted for an asset-light trading services model to reduce inventory risk in China’s rapidly slowing and hypercompetitive car market.

This year it made yet another major shift when it entered the global market with its launch of AutoCango.com, a marketplace where Chinese used car owners could sell to global buyers. Company management emphasizes that Cango isn’t abandoning any of its latest car initiatives, though it acknowledged that the bitcoin business “may comprise the vast majority of the company’s total revenues” while the latest car-related initiatives ramp up.

As we’ve already noted, Cango’s revenue totaled just 27 million yuan in the third quarter, plunging from 354 million yuan a year earlier as it exited the self-trading car business. It forecast its revenue would drop further still to between 15 million yuan and 17.5 million yuan in the fourth quarter, though it’s possible we could see some revisions to that outlook with the launch of the new bitcoin mining business.

Energy-related products

Cango management pointed out the company started looking at energy-related projects as early as 2022, including solar power plants and new energy storage systems, when it began transitioning from its original auto financing business. With the rapid rise in computing power fueled by demand from AI, the company developed an “energy + computing power” strategy.

“During this transition, we recognized the effective role of bitcoin/crypto mining in grid rebalancing and absorbing excess electricity generation,” the company said. It pointed out how it was able to use its big financial resources, including 3.8 billion yuan in cash and short-term investments at the end of September, to quickly enter the crypto mining space with its purchase of $256 million worth of machines with 32 EH/s of capacity from Bitmain, one of the industry’s leading producers.

“By acquiring the bitcoin mining machines from Bitmain, we achieved an industry-leading scale of computing power,” Cango management said.

In addition to the Bitmain machines, Cango plans to further boost its mining operation with the acquisition of machines worth about an additional $150 million from another group of sellers, including Golden TechGen Ltd., which is owned by former Bitmain CFO Max Hua. Those sellers will get paid with new Cango shares, giving them about 37.8% of the company. Hua will emerge as the largest major new shareholder, with his Golden TechGen holding up to 20% of Cango’s shares and getting two seats on Cango’s board.

But Cango also noted that its own two founders, CEO Lin Jiayuan and Zhang Xiaojun, will stay squarely in control of the company by holding more than two-thirds of its voting power through their Class B shares with super voting rights.

So, what did investors think of all this? They seemed to strongly applaud the shift, with Cango’s shares rising 64% since it first unveiled its cryptocurrency pivot. The stock was already performing well even before that and has more than quadrupled since the start of the year, giving the company a market value of $475 million.

The de-emphasis of its China’s car business looks relatively shrewd, at least for now, as that market slows after years of breakneck growth and many players now operate at losses. In the latest distress sign from that space, GM announced last week it would write down assets and take a $5 billion restructuring charge in the fourth quarter related to its China business.

By focusing on crypto mining for now, Cango can earn some money from that business in the present while continuing to lay the groundwork for a time when China’s auto market might eventually recover.

But we should also point out the risks associated with such a radical shift. The biggest of those is the volatility of cryptocurrencies, which are currently rallying but lost huge amounts of money in a major downturn in 2022. Bitcoin exemplified that downturn with its loss of around three-quarters of its value from its peak to its low-point.

The other big risk is Cango’s China roots, since the country bans all mining activity within its borders. Cango has pointed out that its new mining operations are outside of China, mostly in the U.S. But as tensions between China and the West continue to mount, there’s no guarantee that China may not try to use its regulatory control over China-based companies to influence their overseas operations.

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