Nvidia and AMD Are Benefiting From Bitcoin and Ether Miners, but for How Long?

 As interest in cryptocurrency mining sparks GPU shortages, leads shares of GPU vendors to be upgraded and spawns articles on how to create a cryptocurrency mining rig, it's worth taking a trip down memory lane. 

In late 2013, skyrocketing prices for Bitcoin and a sister currency known as Litecoin led to major shortages of AMD Inc. (AMD)  GPUs that were well-suited for cryptocurrency mining. Stories abounded that year about large-scale mining operations, and the big profits that some of them were racking up. 

But  the party didn't last long. After peaking in December 2013, Bitcoin  shed over 80% of its value over the following 13 months, and didn't  really begin staging a recovery until late 2015. The GPU shortages,  needless to say, soon disappeared. And with Bitcoin's architecture  making mining less and less lucrative for small-scale participants over time, interest in the activity gradually diminished. 

Today,  to paraphrase an old saying, history isn't repeating, but it is  rhyming. Bitcoin mining has made a bit of a comeback as the  cryptocurrency's price soars to more than twice its 2013 peak and leads speculators  to predict further massive gains are in store. But there's much greater  mining interest in a rival currency known as Ether, whose price has  risen by more than a factor of 40 since the start of 2017. 

Ether's  current total value of $33 billion is within striking distance of  Bitcoin's $44 billion, and well above Bitcoin's value two months ago.  And importantly, whereas Bitcoin mining is now largely done via  expensive hardware rigs running specialized ASICs,  Ether was designed to only be effectively mined via GPUs. That has  opened the door for miners with limited computing budgets to join the  fray. 

Thanks to these miners, shortages have been reported in recent weeks for mid-range and high-end desktop GPUs based on AMD's power-efficient Polaris architecture. And on Tuesday, Pacific Crest upgraded Nvidia Corp. (NVDA)  to  Sector Weight after talks with Asian graphics card makers pointed to  "surging demand from cryptocurrency miners in China and Eastern Europe  since early May." 

Pac  Crest now expects desktop graphics card shipments to be up 10% to 20%  sequentially in Q2, after previously forecasting a 10% to 15% decline  due to lower gaming-related demand during the seasonally weak quarter.  Both AMD and Nvidia cards are said to be on allocation due to plummeting  inventory levels. 

 AMD shares, which popped two weeks ago after the company confirmed  mining activity has boosted Polaris GPU demand, was up 6% to $12.64 on  Tuesday. Nvidia, whose mining exposure as a percentage of total sales is  lower than AMD's, finished the day down 0.2% to $157.09. 

Why  the massive interest in Ether? It has a lot to do with hopes that the  currency's underlying technology, known as Ethereum, will lead to  widespread corporate and developer adoption. Though Bitcoin and Ethereum  both rely on the blockchain,  a distributed ledger that can securely facilitate and record  transactions without the need for a third party, Ethereum's abilities go  beyond supporting a cryptocurrency (Ether) to executing smart contracts -- code that can enable a variety of secure transactions. Importantly, Ether is used to enable these transactions. 

This versatility has led Ethereum evangelists to dream up  many uses, from facilitating real estate transactions to accessing  healthcare records to securely letting people vote online. They've also  led Microsoft Corp (MSFT) , JPMorgan Chase & Co. (JPM) and a number of other corporate giants to form the Enterprise Ethereum Alliance, which aims to create standards and governance rules for smart contract usage. 

Though  smart contract do open up intriguing long-term possibilities for  Ethereum, adoption is still in its very early stages. And for usage to  really take off, companies will need to be willing to dramatically shake  up how they conduct and facilitate transactions, relative to how  they've done so for decades. In the meantime, Ether is being used even  less than Bitcoin to make real-life purchases. 

It's  also worth remembering that a few years ago, corporate interest in  Bitcoin was swelling, as the likes of Microsoft, Expedia and PayPal began supporting  Bitcoin payments. You hear less about that today, as hopes that Bitcoin  (on account of its lower fees) would replace credit and debit cards as a  means of making online purchases have petered out. Instead, Bitcoin  backers trumpet its ability to act as a store of value like gold or silver, while providing a level of security and accessibility that precious metals lack. 

Likewise, though many financial services firms have predicted big things  for the use of blockchain technologies in general, their efforts are  still mostly in the experimental stage. And some of these firms aren't  supporting the Enterprise Etherium Alliance, but a blockchain consortium  known as R3. 

Meanwhile,  Bitcoin and Ether are now worth close to $75 billion between them.  There have already been signs over the last two weeks that the  speculative frenzy propelling them to such heights has begun to wane, and if the history of such parabolic run-ups is any guide, recent selling pressure might be a sign of things to come.  

If  that happens, odds are that graphics card sales to cryptocurrency  miners will go downhill in a hurry as well. Just like they did in 2014.