Bitcoin pushed beyond $8,000 this week, a boon to those willing to pour money into a risky and speculative piece of code that's hoarded more than spent.
But the crypto craze is leaving behind the very technology companies that were meant to benefit without having to touch the stuff. Despite all the evangelizing about the blockchain's decentralized nature, the days of a global network of laptop-toting techies mining Bitcoin from home or the coffee shop appear to be over. They've been usurped by specialist firms with the resources to make their own powerful mining kit.
This isn't great news for big listed chipmakers such as Advanced Micro Devices, Inc. and NVIDIA Corp., whose graphics cards have been used to do the power-sucking computations needed to confirm transactions. These cards are made to handle sophisticated gaming graphics so they're very good at repetitive data crunching.
Still, they haven't kept pace as Bitcoin's supply cap puts ever greater computing demands on each new transaction confirmation. AMD and NVIDIA shares have done better than their peers in recent years, in part because of their usefulness to the crypto crowd, but their stock didn’t react much to the latest Bitcoin highs.
For Bitcoin at least, it seems the only way for an equipment supplier to make money is to be involved in the whole chain: that is, make the mining gear, use it yourself and sell it to others, and trade the coins too. It's hard to imagine a $100 billion-plus listed company getting that past investors.
Take the world's biggest Bitcoin mining collective, Bitmain, which runs 25,000 custom-built machines in Inner Mongolia just to make about $250,000 in daily revenue, or $91 million annually. Why would a big chipmaker compete head-on here? At $6 billion globally, Bitcoin mining revenues aren't worth the bet yet.
Bitcoin rival Ethereum is a slightly different story, and has buoyed sales recently at AMD and NVIDIA. Its algorithm is different to Bitcoin's and works better for miners wielding the kind of graphics cards, called GPUs, sold by the listed chipmakers than for those with specialized chipsets. Its price spike in May gave miners the chance to lock in profits quicker, and GPUs flew off the shelves.
Still, that demand surge might not last. The economics of Ethereum mining are getting harder, like Bitcoin's. And its developers are mulling a radical overhaul, which would make mining less about who has the most powerful processor and more about who has the biggest pile of existing tokens. Morgan Stanley analysts estimate that AMD's GPU revenue will fall to $1.2 billion next year from an estimated $1.5 billion in 2017, as Ethereum-linked sales tail off. The bubble may deflate.
With AMD trading at 100 times this year's earnings, according to Bloomberg data, and NVIDIA at about 50 times, any tail off in crypto demand might hurt. Some of the inflation in the shares is to do with heightened expectations around eSports and data centers too, but it's tough to square the giddy valuations with future growth. Peer NXP trades at 18 times and is more exposed to the well-established but technically promising autos sector.
Investors looking for stock-market exposure to crypto will probably need to use more direct options such as Riot Blockchain Inc., a tiny digital currency company, or even Square Inc., which is letting some of its app users buy Bitcoin.
For the chipmakers, there's still a hope that crypto's complex rules could be altered for the better. One new Bitcoin spin-off, "Bitcoin Gold," wants to be an algorithm that will benefit bedroom miners over the Bitmains of the world. But the higher Bitcoin goes, the stronger its "no change" defenders become.
Elaine He contributed a graphic on this piece.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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