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Jensen Huang, CEO, NVIDIA, speaking at the GPU Computing Conference in San Jose in May 2017 Yevgeniy Sverdlik
Jensen Huang, CEO, NVIDIA, speaking at the GPU Computing Conference in San Jose in May 2017

Chipmakers Nvidia, AMD Ride Cryptocurrency Wave -- for Now

Ian King (Bloomberg) — During California’s Gold Rush, it was often the sellers of pickaxes and shovels who made the most money. In the frenzy to get rich quick from cryptocurrencies, some investors are calling computer chipmakers the modern-day equivalent.

Shares of Nvidia Corp. and Advanced Micro Devices Inc. have gained at least 14 percent since the beginning of June, spurred in part by about a 10-fold boom from April to June in a market, known as ethereum, for a currency that can be used to buy computing power over the internet.

What’s the link between ethereum and these Silicon Valley chipmakers? It lies in the really powerful graphics processors, designed to make computer games more realistic, that are also needed to gain access to encrypted digital currencies. Nvidia and AMD have rallied in the last month and a half even as investors have ignored chip stocks leaving the benchmark Philadelphia Stock Exchange Semiconductor Index up about 1 percent. Nvidia has gained 14 percent and AMD rallied 27 percent.

See also: Immersion Cooling Finds Its Second Big Application: Bitcoin Mining

While some of that has come from optimism around new products for other markets, analysts are projecting that sales related to cryptocurrencies will result in a spike in revenue for both companies.

“The sharp increase in demand from cryptocurrency miners has rapidly depleted excess channel inventory” for Nvidia and AMD graphics cards, Michael McConnell, an analyst at Pacific Crest Securities, wrote in a recent note to clients. “Surging demand from cryptocurrency miners in China and Eastern Europe since early May” will boost quarterly unit sales by as much as 20 percent, the analyst predicted, a sharp turnaround from his prior forecast that saw at least a 10 percent contraction in sales.

Even so, investors shouldn’t bank on a lasting impact from the cryptocurrency boom, said Stacy Rasgon, an analyst at Sanford C. Bernstein & Co.

“This has happened before,” Rasgon said. “It lasted about a quarter.”

In the case of ethereum, digital-currency miners use machines outfitted with powerful chips to solve puzzles in a competition to win blocks of code. Those blocks of code are called ether, and they in turn act as tokens used in transactions on a new computing platform designed as an alternative to big internet providers like Inc. or Alphabet Inc.’s Google.

Like bitcoin, ethereum is an attempt by an online community to create an economy that doesn’t rely on government-backed currencies. Unlike bitcoin, it’s focused solely on offering decentralized computing and storage services. Those seeking to use these services — and speculators looking for a quick profit by creating and then selling ether — have seized on graphics cards, which excel at performing multiple simple calculations in parallel, as a faster way to claim the blocks of code that act as the currency of the ethereum market.

Demand from ethereum miners has created temporary shortages of some of the graphics cards, according to analysts, who cite sold-out products at online retailers. Estimates of additional sales from this demand run as high as $875 million, according to RBC Capital Markets analyst Mitch Steves. That would roughly equal AMD’s total sales from graphics chips last year, or half of Nvidia’s quarterly sales of those components. But Steves and other analysts are also quick to warn that the market opportunity could fizzle out. The first indication of just how much impact mining-gear sales are having will come when AMD reports earnings on July 25.

Already there are signs that investors and speculators are becoming less interested in cryptocurrencies. Overall the sector, including bitcoin, the largest cryptocurrency has lost about a third of its market value since peaking in early June, according to Coindesk, pushing it into what traditional equity market analysts label as a bear market. Ethereum has fallen about 30 percent since July 4.

Unlike the world of pickaxes and shovels, the technology of cryptocurrencies and computer graphics is constantly evolving. To ensure that the world isn’t flooded with new blocks of the code that make up ether’s value, the procedure for solving the problems to create the tokens was designed to become incrementally more difficult.

That complicated and fast-changing process for creating value in the market may lead to a repeat of what happened with bitcoin, which also must be mined using increasingly sophisticated computing power. During a boom that started in 2013, the puzzles required to mine that currency soon outran the capabilities of graphics chips. That required the use of specialized semiconductors — application specific integrated circuits, or ASICs — designed for the purpose of mining bitcoin only. That meant that the flood of graphics chips initially sold to mine bitcoin was dumped back into the second-hand market once they were no longer useful for that task, causing a glut — which hurt pricing and sales of new cards.

“My strong belief is that all of these will be solved by ASICs in the end,” said Matt Ramsey, an analyst for Canaccord Genuity. “I don’t think it’s even remotely strategic to either company.”

Some analysts say this time is different, arguing that the ethereum algorithm was written in a way that disadvantages ASICs, forcing miners to stick with graphics chips. Others counter that it’s just a matter of time before someone designs the right ASIC. Within the ethereum community, there’s also a movement to change the algorithm from its current format to curb the associated energy consumption. Running graphics cards — which can draw as much power as a small tube TV — is a suck on energy resources, particularly when those resources aren’t being used for a productive purpose. A shift to a system that doesn’t require mining would remove the need for committing computing resources, and therefore graphics chips, to solving the puzzles.

The right hedge for graphics-chipmakers may already be out there. Computer-card manufacturers, including Asustek Computer Inc., which buy chips from Nvidia and AMD, are making products specifically for the cryptocurrency-mining market. Crucially, they’re leaving off all or most of the video connections from the finished products, meaning that even if the cryptocurrency market is soon mined out, the cards will be no use to gamers and therefore less likely to cause a glut by flooding the resale market.

Asustek, one of the largest contract manufacturers of computers, offers two cards for the market. One doesn’t have any ability to connect with a display and the other only has a digital video interface port, or DVI, a connection technology that debuted in 1999 and was superseded about a decade ago making it useless to gamers who crave realism.

Nvidia declined to comment on the cryptocurrency market opportunity. AMD said it’s sticking to its focus on gamers.

“The gaming market remains our priority,” the company said in an emailed statement, repeating what it said earlier this quarter. “We are seeing solid demand for our Polaris-based offerings in the gaming and newly resurgent cryptocurrency-mining markets based on the strong performance we are delivering.”

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