Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Can NVIDIA and AMD Keep Riding the Cryptocurrency Wave?

By Harsh Chauhan - Jan 19, 2018 at 6:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Cryptocurrency mining could continue being a catalyst for GPU sales despite certain concerns.

The cryptocurrency market gained a lot of momentum last year thanks to the rapidly rising value of bitcoin, Ethereum, and other cryptocurrencies. Last year's massive gains have boosted investors' appetite for digital currencies, but cryptocurrency investments (or rather, speculation) might not be for everyone given the massive volatility and the inherent risks.

But there are safer and less volatile ways to take advantage of this rapid growth: through graphics processing unit (GPU) manufacturers Advanced Micro Devices ( AMD 0.27% ) and NVIDIA ( NVDA -1.85% ).

A hand holding a lit-up bitcoin symbol.

Image Source: Getty Images.

Miners need GPUs

Digital currencies such as bitcoin are based on blockchain technology, which is a decentralized ledger recording financial transactions without the need for financial intermediaries like banks. So, if you buy or sell any of the several cryptocurrencies available on the market, they will be recorded in a blockchain.

This makes cryptocurrencies immune to cyberattacks as there is no centralized database, while the absence of an intermediary should lead to faster settlements and lower transaction fees. But the verification of these blockchain transactions is done by cryptocurrency miners, who have very powerful computers capable of verifying and logging the digital currency transactions.

This is where GPUs come into play, as they provide the required computing power to mine the cryptocurrencies. Not surprisingly, both NVIDIA and AMD have seen a surge in GPU sales because of cryptocurrency mining.

In the second and third quarters of the current fiscal year, cryptocurrency mining contributed $220 million to NVIDIA's total revenue, amounting to 4.5% of the top line. By comparison, AMD is said to generate 10% of its total revenue from cryptocurrency mining, according to some estimates. But investors shouldn't forget that these are still the early days, and the rise of additional cryptocurrencies could give a boost to cryptocurrency mining.

Looking past the bearish argument

However, bears could argue that the use of GPUs for this application could decline along with a drop in the payoff from cryptocurrency mining, as well as with a potential change in mining technology that could eliminate the need for graphics cards. This bearish theory has gained ground ever since NVIDIA and AMD saw a cooldown in cryptocurrency-related GPU sales earlier as 2017 progressed.

In fact, NVIDIA's cryptocurrency-related revenue fell by half from the second quarter to the third quarter. Meanwhile, AMD CEO Lisa Su forecast "some leveling off" in cryptocurrency demand back in October 2017. And we'll have to see how the latest crash in cryptocurrency values plays out. 

But it is the shift in mining technology that posts a more serious, long-term challenge for GPUs in cryptocurrency mining. Ethereum, the second-most-valuable cryptocurrency in terms of market capitalization at the time of this writing, is reportedly going to change its mining model within the next year or so.

Ethereum's new model is aimed at reducing the amount of electricity and computing power required for mining, allowing users with less powerful computers to mine the currency, as it eliminates the need for GPUs.

Under the new system, miners wouldn't need to invest in equipment like GPUs, but they would have to commit money to the Ethereum platform and follow certain rules to earn payouts. The mining would happen virtually, possibly in the cloud with application-specific integrated circuits (ASICs) instead of GPUs.

But AMD and NVIDIA investors shouldn't miss the fact that Ethereum's mining switch was pushed back in 2017 for at least a year or two. Critics of the system believe that the Ethereum network won't be able to implement this experimental mining model completely, and instead will move to a hybrid model where mining takes place on two different algorithms.

Additionally, Ethereum isn't the only cryptocurrency on the market. So, it is too early to be spooked by the prospect of just one of the many minable digital currencies in the space moving to a different mining technology.

AMD and NVIDIA are hedging their bets given the massive volatility. AMD, for example, doesn't count cryptocurrency mining as a long-term growth driver, though this was one of the biggest factors behind its impressive quarterly performances last year. NVIDIA has a different approach, admitting that cryptocurrency mining will be a contributor to its business, and saying it will address this market based on how it pans out.

Investors hoping to ride cryptocurrency from a distance will be watching how things turn out for these two companies.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Advanced Micro Devices, Inc. Stock Quote
Advanced Micro Devices, Inc.
AMD
$145.24 (0.27%) $0.39
NVIDIA Corporation Stock Quote
NVIDIA Corporation
NVDA
$318.26 (-1.85%) $-6.01

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
652%
 
S&P 500 Returns
142%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/08/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.