Since the beginning of 2017, it's been a wild, but mostly profitable, ride for cryptocurrencies and investors. Last year, the combined market cap of digital currencies soared more than 3,300% to $613 billion, which wound up leaving the broad-based S&P 500 in the dust. Of course, this year has been a bit different, with a one-month peak-to-trough correction in cryptocurrencies briefly erasing more than $550 billion in value.
Despite this volatility, interest in cryptocurrencies remains high. There's a lot of excitement surrounding blockchain technology and what it could do for the financial-services industry, as well as for virtual currencies like bitcoin and Litecoin, which are trying to snag as many new merchants as possible to replace cash as the primary means of buying goods and services. Blockchain is the digital, distributed, and decentralized ledger underpinning most cryptocurrencies that's responsible for logging all transactions. It's believed that blockchain could expedite the time it takes to complete transactions, while also lowering transaction fees.
Cryptocurrency mining is usually a profitable venture
People are also excited about the chance to profit from currency mining. A cryptocurrency miner is nothing more than an individual or company with high-powered computers that's looking to be the first to solve complex mathematical equations. These equations are part of the encryption that protects transactions on a cryptocurrency's digital ledger. The first miner to solve these equations, and in the process validate a block of transactions, which will be added to the growing blockchain, receives what's known as a "block reward." This highly electricity-intensive process rewards the first individual or company to solve a block of equations with cryptocurrency tokens.
Though not all digital currencies are mined -- some digital currencies use the proof-of-stake model, which randomly chooses who gets to validate blocks based on their ownership in a cryptocurrency -- those who've focused on cryptocurrency mining have often found it to be quite profitable. For instance, even after a nearly 60% swoon in its price, bitcoin mining still comes with a better than $3,500-per-coin margin in the United States, based on its average electricity-based mining cost of $4,758 per coin.
Graphics card developers' sales are surging
Of course, bitcoin is itself a special case. Whereas graphics cards were used to mine bitcoin tokens in the earlier days of its existence, special ASIC (application-specific integrated circuit) chips are required to mine bitcoin today. That's not the case for most of the other minable cryptocurrencies, with high-powered graphics cards more than doing the trick. And it's a big reason graphics-card developers NVIDIA (NVDA 0.67%) and Advanced Micro Devices (AMD 1.51%), more commonly known as AMD, have seen their sales and share prices skyrocket.
Within the past two weeks, both NVIDIA and AMD reported exceptionally strong year-on-year sales growth, some of which was clearly driven by graphics card sales for mining purposes. NVIDIA wound up reporting $2.91 billion in fourth-quarter sales, up 34% from the prior-year period, while AMD's total sales of $1.48 billion were also up 34% year over year.
Just how much of these sales are a result of demand for NVIDIA's GeForce and AMD's Radeon graphics cards? That's impossible to tell, because neither company breaks down that data, nor are they exactly sure how many of their retail-level purchases are for mining. However, during NVIDIA's fourth-quarter and year-end conference call, it was noted, "While the overall contribution of cryptocurrency to our business remains difficult to quantify, we believe it was a higher percentage of revenue than the prior quarter." The same is probably true for AMD as well.
A cryptocurrency mining conundrum for NVIDIA and AMD
On paper, this rapid growth in sales looks great, and shareholders who've held on to their NVIDIA and AMD shares for a minimum of two or three years have probably seen their initial investment double many times over. But this boon in graphics card sales brings with it a major conundrum for both companies.
You see, NVIDIA and AMD -- especially NVIDIA, given its long-standing focus on graphics cards -- develop their respective GeForce and Radeon graphics cards for the gaming community. Meanwhile, sales made to the cryptocurrency mining community are merely seen as icing on the cake. Lately, however, those sales to the mining community have begun to majorly disrupt the gaming market by adversely influencing graphics card prices at the retail level. In many instances, graphics card prices, even on cards that were introduced a year ago or longer, have doubled or tripled in price above the MSRP at the retail level.
How's this possible? To begin with, supply and demand always play a role in determining prices. With demand for graphics cards high, and supply running short, prices have naturally trended higher. Though both companies have stated their intent to boost production in the coming months, AMD has struggled with GDDR5 and HBM2 memory shortages, which have constrained its ability to scale.
The other issue here is there are opportunistic buyers out there scooping up whatever graphics cards they can get their hands on, and then using the lack of supply to reap rewards by doubling or tripling prices. Such tactics have forced retailers to bundle graphics cards with electronic purchases, or to limit the number of graphics cards that consumers can buy. Thus far, it's had little impact on pricing.
This is the conundrum for NVIDIA and AMD. They could:
- Continue to reap the rewards of cryptocurrency demand, see sales flourish, and risk completely ticking off their core base of gamers with ever-higher graphics-card prices that are growing beyond their control; or
- Consider banning graphics card sales to cryptocurrency miners, or design a graphics card solely for the purposes of mining, but not gaming, and risk losing this rapidly growing source of revenue.
Keep in mind that the health of the cryptocurrency market is also likely to play into NVIDIA's and AMD's sales growth prospects. The aforementioned 67% swoon in cryptocurrency market cap from peak to trough may have caused a hiccup in sales, but we just won't know for a few more months until both companies report their first-quarter operating results.
So, what are the leading graphics card designers to do about cryptocurrency miners and opportunistic buyers reaping rewards at the possible cost of core gaming customers? Your move, NVIDIA and AMD.