Cryptocurrency Mining and GPU manufacturers

Background of Cryptocurrency mining and GPU manufacturers

Darren Lim, SUNY Buffalo Economics
[email protected]

Cryptocurrencies have surged in value over the past year, with holders making returns multiple times their original investment. With blockchain being the system that maintains the integrity of cryptocurrencies, and such blockchains require massive amounts of computing power to support the amount of transactions which are occurring daily, which currently runs at 7,791 quadrillion hashes per second at the time of writing. One of the biggest beneficiaries of the crypto boom are Graphics Processing Unit (GPU) manufacturers; namely AMD and Nvidia as GPUs have proven to be an efficient means of providing computing power to the blockchain. As such, the share prices of these two companies have surged in the past two years; currently trading at around 8-10 times the price compared to two years ago. Hash rates (the amount of computing power in the blockchain) has continued to grow alongside growing cryptocurrency prices, fueling GPU demand.

Crypto mining, while a major factor behind the surge in GPU share prices, is not the only reason behind the increase. Emerging industries such as artificial intelligence demand large amounts of computing power, best provided by GPUs. Such developments have increased the growth potential of GPU companies and such expectations have probably have already been priced in.

Hence, the rise of cryptocurrency has led to massive increases over the last one to two 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 the cryptocurrencies themselves is uncertain and due to the emergence of other industries that have similar demands for computing power.

Background of Cryptocurrency Mining

Much attention has been given to cryptocurrency recently, given its unprecedented surges in value in a small period of time. Looking at the two largest cryptocurrencies in the market, Bitcoin and Ethereum, it has made massive leaps in value within the past year on a scale that is unseen in conventional securities. From January 1st to the time of writing (November 24th, 2017), the price of bitcoin has increased from $997.69 to $8,201.46; an 822% increase in value. Ethereum has made even greater leaps, going from $8.38 in January 5th to $442.73 on November 24th, a 5,283% increase in value in 11 months. The market capitalizations for Bitcoin and Ethereum are $138 billion and $40 billion respectively at the time of writing; a combined total of $178 billion for just these two coins, with an estimated market cap of $250 billion for the entire cryptocurrency market.

The backbone of cryptocurrency systems is the “Blockchain”: a decentralized public ledger system that provides an indelible record of every single transaction that has occurred within the cryptocurrency, this is secured via encryption and this protects the cryptocurrency from any attempt at counterfeiting. However, massive amounts of computing power is needed to maintain the Blockchain system. As of November 24th, the bitcoin blockchain alone runs at 7,791 petahashes per second, or 7,791 quadrillion hashes per second. This amount of data is needed to send out and verify every single transaction.

Against a backdrop of improved computing performance, the market for high performance desktop PCs have declined, with sales figures in continuous decline since 2011 when it peaked at 365 million units, by comparison 269.7 million PCs were sold in 2016; a decline of 95.3 million units or 26.11% in 5 years (Hruska, 2017). Eclipsing the traditional PC market are increased sales in other areas such as mobile devices (smartphones and tablets) and laptops which have benefited from technological improvements via improved performance and battery life. While the PC market has been sustained in part by enthusiasts, it has not been enough to keep it growing.

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