A recent financial downgrade from Susquehanna Financial for AMD stock has raised questions about the viability of companies that are dependent on at least some of their revenue from cryptocurrency mining on GPUs. The obvious players in the field are AMD and NVIDIA, the two largest suppliers of graphics chips that double as compute processors for specific workloads including, AI, machine learning, and cryptocurrency mining for Bitcoin-like alt-coins. The downgrade from the firm is based on information that a company called Bitmain, that I wrote about two months ago, is close to selling a new ASIC to mine today’s most popular cryptocurrency called Ethereum.
An ASIC (application-specific integrated circuits) miner is a dedicated chip that can generate cryptocurrency calculations faster and more power efficiently than a general-purpose graphics processor, and will significantly devalue graphics cards for mining Ethereum, a crypto-algorithm previously thought to be immune to this kind of processing. Bitmain has made a killing proving that mentality wrong, and often will develop these mining chips in-house, use them for their own mining for a time, before selling them to the public. The financial report believes Bitmain will start selling these ASICs next month.
Recent research shows that at least 6% of the graphics card sales from 2017 were directly related to cryptocurrency mining, and comments from others indicate that blockchain-based computing might represent as much as 10% or more of graphics card sales. Measuring the exact amount is difficult as product sold in the channel is often moved again in the grey market for mining purposes.
One anonymous graphics card partner was quoted in a Barron’s story as saying “more than half of their sales” were related to cryptocurrency. This could be from a company that sells AMD hardware, NVIDIA hardware, or both. Being a leader in cryptocurrency mining and sales is great when the market is booming but creates a revenue and return concern when the markets falter.
The release of an ASIC capable of mining Ethereum would put a serious dent in any demand for graphics chips to be used for blockchain processing and coin mining. Any product in the channel, and any product currently in production, would be at risk of stagnant sales rates. Owners of graphics cards that currently mine could also start flooding resale locations with used cards at deep discounts as all players attempt to recoup their costs. A flood of used hardware lessens the value of new graphics cards, inflating the potential for inventory concerns.
With the value of Bitcoin under $8,000 as I write this, the demand for buying graphics chips for mining purposes has already showed signs of slowing. In the last few days I have seen cards showing as back in stock at online retailers and the shelves of brick and mortar stores like Best Buy. This indicates that the fervent demand that was keeping prices high and inventory at all time lows has backed off. While good news for gamers as they should soon be able to buy cards at expected prices this spring, for companies that were coasting on the markup and sales rates caused by mining, the free lunch may be over.
The risk from this change is larger for AMD than NVIDIA for a couple of reasons. First, NVIDIA holds a strong lead in high margin sales of graphics chips in markets like the data center, artificial intelligence, machine learning, and autonomous driving. These fields give NVIDIA flexibility with the consumer market that its competition doesn’t have. Second, if consumer hardware sales return to being solely based on gaming performance and consumer preference, NVIDIA again holds a lead over the AMD Radeon branded products. If everything were to normalize tomorrow to a pre-coin mining state, I think NVIDIA would maintain these advantages.
For both parties though, a sudden drop in cryptocurrency sales would mean lower revenue and lower margins for the consumer segment than in the most recent quarterly reports. While I don’t think that cryptocurrency or blockchain technologies are going to leave entirely, the demand should level out and return sanity to a market that has been lacking it for some time. If another cryptocurrency takes Ethereum’s place as the new darling of the market, as it did to Bitcoin, its possible that this cycle repeats. Only then, I hope, all parties involved will have a better understanding of the volatility they are playing with.