Trends of hashrates going forward
Darren Lim, SUNY Buffalo Economics
For simplicity, I’ll be only covering the trends of Bitcoin, noting that most alternate cryptocurrencies (most notably Ethereum) would be following broadly similar trends in hashrate and prices.
Accompanying the massive increase in the sales of GPUs, is the increase in total hashrate for cryptocurrency mining. From 2016 to November 2017, the computing power used for the bitcoin blockchain has grown from under 1 million TH/s (Terahashes per second) to a current peak of about 10-12 million TH/s with fluctuations (from Graph 2). This increase in computing power is partially attributed to the large scale purchase and use of off the shelf GPUs, which Nvidia retains a dominant market share. It is also explained by the use of ASICs, whose manufacturers do not release revenue figures to the public and hence making it impossible to accurately determine how many are in use. Even if ASICs are much more efficient, they are also in extremely short supply with newer models often requiring preorder; hence GPUs are an effective and available tool for mining, driving their demand and sales.
Reasons for Increased Hashrates
Driving the increased hashrate is the increased prices of cryptocurrency, mainly bitcoin. Simply put, this creates a cycle where increased bitcoin prices creates greater returns for miners who sell their cryptocurrency for fiat money (usually US dollars). This induces new miners to join in the mining in hopes of gaining a positive return, and existing miners to reinvest their earnings in more powerful hardware, or greater quantities of, to generate greater returns.
As the amount of bitcoin generated is constant, the increased total computing power in the blockchain system causes an increase in the difficulty level, reducing the reward that each miner gets. If a miner receives 1 bitcoin a day when the hashrate is 1m TH/s, at 2m TH/s the miner will only receive half of that, as the difficulty has doubled due to the system having double the computing power, and the miner’s relative share has halved. When the difficulty level increases, miners will be forced to reinvest even more in hardware to keep the amount of bitcoins generated constant; with a dramatic increase in bitcoin prices, it has given miners a greater ability to invest in new hardware which includes in significant portions, GPUs. This growth in cryptocurrency prices would have induced people to invest money in the market, many for speculative purposes. Regardless, this growth will fuel the cycle for increasing powerful hardware, driving up the hashrate at an exponential rate and fueling even greater demand for GPUs.
Possible Caveats to the Cryptocurrency-GPU Manufacturer Relationship
Growth in cryptocurrency, and the mining activity associated with it, while a major factor, is probably not the only reason for the increased sales of GPU manufacturers and its associated share price growth.
Firstly, growth in emerging industries such as distributed computing, data centers and artificial intelligence (such as deep learning or machine learning) necessitate massive amounts of processing power; with GPUs being the most important as each one has thousands of cores necessary for parallelized workloads. CPUs on the other hand, usually has 2-8 cores and ill-suited for the needs for such industries (Savov, 2017). As a consequence, the demand and use for GPUs has skyrocketed alongside its use for crypto mining. With such hype in conventional markets such as artificial intelligence (in addition to cryptocurrency), potential growth in the two GPU companies (Nvidia and AMD) has expanded and these expectations would be priced in within the share price.
Secondly, with these increased expectations it is possible, even probable that speculation has set in for the GPU stocks; therefore weakening the relationship between the companies share prices and GPU sales (a proxy for cryptocurrency mining). This especially rings true for Nvidia, whose P/E ratio currently stands at 83.63 times earnings, well above the average of 18-22 times (NASDAQ, 2017). With P/E ratios for Nvidia expected to fall going forward, it is too early to say whether this is due to decreased stock prices or increased earnings, or a combination of both. For AMD, the P/E ratio is not even calculated as EPS has remained negative; despite this AMD shares have grown in value. This could also be a result of speculation, as share prices go up in spite of fundamentals showing that AMD is making losses, and hence prices should be going down.
On November 28th 2017, Vijay Rakesh, an analyst at Mizuho Securities sent a note to clients stating its confidence in the Blockchain technology, while stating that “crypto-mining will be a much less meaningful market for AMD/NVDA in 2018”. Following Rakesh’s note, AMD stocks went down 3.55% and Nvidia stocks went down 1.61% by market close on November 28th (Archer, 2017). While this is a single incident, it shows that movements in the cryptocurrency market, and especially mining, does have an impact on the share prices of GPU manufacturers.
With the advent of cryptocurrency, the associated ‘mining’ activity required to support the blockchain systems of such cryptocurrencies have driven up demand for Graphics Processing Units (GPUs) which are powerful enough for the computing requirements for cryptocurrencies. Under such increased demand, the share prices of GPU companies has increased. The further increase of the prices of cryptocurrency, driven in part via speculation, has led to further increases in demand for GPUs for mining, in hopes for monetary gain. This cycle of increased demand has led to further increases in the stock prices for GPU manufacturers (namely Nvidia and AMD).
While the short term increase of GPU manufacturers’ share prices can be attributed in a major part to the effects of the cryptocurrency boom, the long term link between the two sectors is less clear. For one, the future of cryptocurrency itself is uncertain, with various entities such as bitcoin possessing more characteristics of an asset in a speculative bubble rather than of money. What is clear, is that if the cryptocurrency market were to go bust, share prices of GPU manufacturers will take an immediate hit as crypto miners currently constitute a major part of their customer base, and a collapse in the crypto market would probably precipitate an exit of such miners from the market.
In the long term however, the link between cryptocurrency and GPU manufacturers is more tenuous. With emerging industries such as artificial intelligence requiring massive amounts of computing power, it is expected that demand for GPUs in the long term would come from such industries. Such expected future demand (along with current demand) has probably been priced into the GPU manufacturers’ share prices, which are currently trading around 8-10 times above prices two years ago.
In conclusion, the rise of cryptocurrency and its associated mining activity has led to massive increases over the last 1-2 years in the stock price of the two GPU manufacturers in the market: AMD and Nvidia due to higher demand. The longer term relationship between cryptocurrency and GPU stocks are however, less clear as the future of cryptocurrency itself is uncertain and the emergence of other industries that have similar demands for computing power.
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Read the earlier parts here