The popularity of mining Bitcoin and other cryptocurrencies has increased attention on the shortage of semiconductors, which are used in the computers that mine cryptocurrency. While chip stocks have surged higher as prices have risen for this critical tech component, cryptocurrency mining may not hold as much influence over the chip sector as many people might assume.
What's driving the chip shortage?
There are several factors that have led to the current chip shortage. For instance, demand surged as more office workers switched to remote work in 2020 due to COVID-19, and snowstorms in Texas and fires in Japan and Taiwan shuttered production at many fabrication facilities earlier this year.
When it comes to the impact of cryptocurrency miners on demand, the evidence is not so dramatic. For instance, Taiwan Semiconductor (TSMC), which makes the chips designed by AMD and NVIDIA that often go into mining systems, is looking at cryptocurrency accounting for only about 1% of revenue this year, according to an estimate from Bernstein as reported by The Wall Street Journal. This compares to approximately 10% of its revenue in 2018.
Chipmakers have been burned before
Investors may recall that the chip supply glut in 2018 occurred because of a crash in cryptocurrency prices. Bitcoin fell from the $19,000 range in December 2017 to as low as $3,200 one year later. This crash abruptly ground cryptocurrency mining to a halt. For the chip industry, this meant that a business segment disappeared overnight, leading to an oversupply of available semiconductors.
Consequently, attitudes toward cryptocurreny in the chip industry have changed dramatically compared with 2017. TSMC made only scant mention of cryptocurrency in its Q1 2021 earnings call. Additionally, NVIDIA has explicitly limited mining functionality on its GeForce RTX 3060 GPUs, which it says are designed for gaming. Now, embedded software detects algorithms used in Ethereum mining and reduces the efficiency of those algorithms by 50%. "...we're taking an important step to help ensure GeForce GPUs end up in the hands of gamers," the company said in a press release.
However, NVIDIA designed a new cryptocurrency GPU specifically for mining purposes.
Meanwhile, AMD has not attempted to follow NVIDIA's lead on limiting cryptocurrency mining activity on its GPUs but notes that it gets only "negligible" revenue from cryptocurrency mining.
Are chip stocks a buy based on cryptocurrency?
Given AMD's comment on the level of revenue coming from mining and the third-party estimate of how much it will play into TSMC's revenue, investors should consider excluding cryptocurrency from the investment cases for semiconductor stocks. Also, other than NVIDIA's mining system, the industry has done little to openly promote a cryptocurrency-based segment and investors weighing chip stocks should look at the other industries creating demand.