Daily Management Review

How the popularity of mining became a trap for NVIDIA and AMD


Crypto currencies have been rising during the lasy year, and so did the capital of most investors. The year 2018 started a little differently - in a month of correction, the total capitalization of crypto-currencies decreased by tens of billions of dollars.

StockSnap via flickr
StockSnap via flickr
Despite the volatility, interest in crypto-currencies remains high. There are many expectations associated with the blockchain technology: these are changes in the financial industry, and the distribution of crypto-currencies like bitcoin and lightcoin (LTC/USD), which theoretically can replace the money we are accustomed to as a means of payment.
Blockchain is a distributed and decentralized registry, which is responsible for logging of all transactions of the system; most of the known crypto-currencies are based on the technology. It is believed that blockchain can help speed up the processing of transactions, as well as reduce their cost.
Nowadays, there is an opportunity to earn crypto-currencies by mining. What it is? A person or company buys powerful computers, after which they try to solve complex mathematical problems. This task is part of the encryption system that protects transactions in the blockchain. The first miner, who will be able to solve it in the process of verifying the block of transactions, receives the reward. Thus, this energy-consuming procedure is sometimes rewarded with a certain amount of crypto currency.

This mechanism does not work in all crypto-currencies. Some of them use the Proof-of-Stake mechanism, when the owners of tokens get the opportunity to check the blocks as a result of the draw. However, where there is a "reward for block" mechanism, and it can be quite profitable. Even now, when the cost of bitcoin has fallen by almost 60%, you can earn about $ 3,500 on the mining of one bitcoin in the US, if you consider that the electricity for this procedure on average goes around $ 4758.

Bitcoin is a special case. At first, it was still possible to muffle something using a conventional video card, but now it requires special ASIC-chips. Nevertheless, the majority of crypto-currencies can be fully mined with the help of "home" video cards, and on the wave of this market launch, NVIDIA and AMD, which produce graphics processors, saw a sharp rise in both sales and share prices.

During the last two weeks, NVIDIA and AMD published quarterly reports. Both companies reported an exceptional year-on-year sales growth, which, of course, partly obliged to mining: NVIDIA's sales in the fourth quarter were $ 2.91 billion (up 34%), while AMD's same figure reached $ 1.48 billion (also an increase of 34%).
What part of this turnover does NVIDIA GeForce and AMD Radeon have? It is not known, because none of the companies provides such detailed data, and they themselves do not know the share of demand due to mining.
Nevertheless, NVIDIA noted during the final teleconference: "Although it is still difficult to assess the overall contribution of crypto-currencies to our business, we believe that in comparison with the previous quarter it grew in percentage terms." Probably the same can be said about AMD.

This rapid growth in sales looks great on paper, and shareholders who bought shares of NVIDIA and AMD over the past two or three years have repaid their investments many times. However, this growth in turnover due to mining carries problems. The thing is that NVIDIA and AMD - especially NVIDIA, which for many years has mainly been engaged in the production of graphics processors - are developing their GeForce and Radeon video cards for gamers, and all this mining is just a cherry on the cake. It's only recently that the miners have overheated the market and inflated retail prices for video cards - in some places they doubled or tripled compared to the recommended ones.

How is this possible? To begin with, the balance of supply and demand usually determines the price. As demand for video cards has risen and production has failed, prices have gone up. Yes, both companies announced their intention to increase production in the coming months, but we know that AMD was faced with a shortage of memory GDDR5 and HBM2, which limited the possibility of scaling.
Another problem is speculators buying up all the video cards to which they can reach, and then reselling them with a double-triple mark-up. In an attempt to somehow reduce the damage from such actions, retail networks began selling video cards only together with other electronics or to limit the number of devices released in one hand, but they could not cope with the increase in prices.

So what NVIDIA and AMD should do? They can still receive extra money from the miners, at the risk of scare off their main audience with high prices. They can also try to prohibit the sale of video cards to miners or develop a separate graphics card for mining, not suitable for gamers, at the risk of losing this fast-growing source of income.

It should be borne in mind that the volatility of the crypto currency market is likely to also affect the income of NVIDIA and AMD. The above-mentioned 67% correction probably caused a drawdown in sales, but we will not know about it until three months later, when the companies report for the first quarter. So, what do leading video card manufacturers do? Encourage miners or dealers? Your move, NVIDIA and AMD.

source: fool.com