Graphics cards from AMD (NASDAQ:AMD) and NVIDIA (NASDAQ:NVDA) are increasingly being used to accelerate computationally intensive calculations, in some cases offering a substantial performance boost compared to CPUs. While scientific simulations have been the main application thus far, the rapid emergence of cryptocurrencies, such as Bitcoin and Litecoin, appear to be driving increased sales of AMD's high-end GPUs. But this demand is likely not sustainable, and lack of availability may push gamers to buy NVIDIA cards instead.
Why do cryptocurrencies need GPUs?
Cryptocurrencies like Bitcoin all work in essentially the same way. A digital coin can only be produced when a computer does a certain amount of work, typically a series of complicated calculations. The result of this calculation can be easily checked to ensure that the work was done, and a digital coin is created and dispensed to the person who ran the calculations. There is a fixed maximum number of digital coins that can exist, and systems like Bitcoin are set up to make it more difficult and time-consuming to create coins as the number of coins increases. We'll gloss over some intricacies here, but this is essentially how cryptocurrencies function.
In the early days of Bitcoin, a simple desktop computer could easily generate coins. But as the difficulty of the calculations rose, GPUs began to be used to greatly speed up the process. Eventually, the cost to power a CPU outweighed the value of the Bitcoins being produced, and GPUs became the norm. As Bitcoins grew in popularity and value, specialized hardware designed specifically to "mine" Bitcoins was created, proving to be far more efficient than GPU solutions. This has greatly reduced the practicality of using GPUs to produce Bitcoins.
However, there are alternative cryptocurrencies that are at the stage where a GPU, or a set of GPUs, can generate substantial profits for the miner. Litecoin, which was created in 2011, has started to gain some mainstream attention as an alternative to Bitcoin, and many who had originally mined Bitcoin have shifted to Litecoin instead. Litecoin is specifically designed to be mined with consumer-grade hardware, and the recent explosion of interest has reportedly created a shortage of certain graphics cards. The design of Litecoin requires substantial amounts of memory, meaning that only high-end graphics cards can be used effectively.
AMD is winning the battle for cryptocurrency mining...
It turns out that graphics hardware from AMD is significantly more efficient at mining cryptocurrencies than hardware from NVIDIA. AMD's most recent high-end cards, the 280X and 290X, are currently almost completely sold out on Newegg, and this is being attributed to miners of Litecoin and other alternative cryptocurrencies snatching them up.
Performance of graphics cards for mining is measured in millions of hashes per second, where a hash is the type of operation needed to be done to create a coin. AMD's highest-end card, the 290X, can do about 990 MH/s, whereas NVIDIA's highest-end card, the GTX Titan, can only do 485 MH/s. This discrepancy has caused those mining cryptocurrencies to overwhelming choose AMD cards over NVIDIA.
...but it's a battle not worth winning
AMD may end up selling more high-end cards than NVIDIA in the near term due to Litecoin mining demand. But if the cryptocurrency gains the kind of acceptance that Bitcoin has achieved, then specialized mining hardware will inevitably make GPUs obsolete for the purpose. That's exactly what happened with Bitcoin, and it's exactly what will happen to any cryptocurrency that goes mainstream.
What this means is that this increased demand is not sustainable for AMD, and any benefits will likely be short-lived. In the long term, the fact that AMD's high-end cards are in short supply may actually be a negative for the company. Since the 280X and 290X are being bought out by Litecoin miners, gamers looking to buy the card may not be able to find available inventory, turning to NVIDIA products instead. So even though AMD will sell more graphics cards in the short term, NVIDIA may eventually gain share of the gaming GPU market.
The bottom line
AMD has struck short-term gold as Litecoin mining takes off, but the success of the cryptocurrency entails the eventual obsoletion of graphics cards as a viable mining method. This demand isn't sustainable, and NVIDIA could pick up share of the gaming market as AMD sells out of its high-end cards. This certainly isn't a reason to invest in AMD. In fact, it may be a reason to avoid it.
Editor's Note: The original version used incorrect performance figures for graphics cards, this version has been corrected.