Cryptocurrency may not be the answer for AMD and Intel

There has been a lot of talk about how cryptocurrency mining will help AMD and Intel immensely, with some proof of this already happening with GPU prices jumping across the board (as this author noted) . Since cryptocurrency generally has a strong bullish sentiment from the investing community, I want to write this article to urge some caution and warn of some short-term issues. While cryptocurrency is currently acting as a price driver for these stocks, in the future it could as easily drop the price as well since both stocks are now linked with crypto (maybe best noted by them being added to the new Amplify blockchain ETF).  

First, a quick description about why GPU prices are rising due to cryptocurrency mining. Many cryptocurrency mining algorithms, which are used to validate transactions between users to add them to the blockchain, depend on a concept known as Proof-of-Work (POW). These algorithms have been created to solve cryptographic problems, with the first one to solve the problem taking all the reward for doing so (here’s an article that explains all this). Thus, how fast you can solve a block is essential to the whole reward of mining and to get faster you need a better GPU. While GPUs aren’t commonly used for Bitcoin, they are for Ethereum and this coin seems to be what is bringing in the masses to buy the GPUs. 

Note: if you are wondering why old GPUs are being sold that are inferior to the hashing power of newer GPUs, it’s because many people nowadays lend their hashing power to mining pools who then pay you based on how much power you contributed. Many people buying these GPUs will have to enter a mining pool to remain competitive. 

So what’s wrong with mining Ethereum to get some coins and make back your investment and then some on your new GPU? Simply that Ethereum is switching to Proof-of-Stake, where there is no guarantee of a reward for mining. Indeed, with this switch mining power won’t even matter anymore, and many believe that any hashing power beyond that of a raspberry pi is unneeded. While this makes it cheaper for people to mine, no need to buy powerful GPUs and thus cheaper electricity costs, it creates an issue for AMD and Intel that their GPUs are unnecessary for miners. How powerful your GPU is doesn’t matter anyone, but rather all that does is how much Ethereum you own. 

The second downward catalyst would be a correction in the cryptocurrency market. Right now, the electricity costs are expensive to run a GPU full-time and are only kept afloat by the high prices crypto is currently enjoying (note that I am aware there has been a correction lately that has dropped Bitcoin around 50% and Ethereum around 30%). Falling Crypto prices could make mining more and more undesirable, especially when taking into account the capital investment of the GPU unit. Here’s an article from last summer about how the Ethereum crash from ~$400 to ~$150 caused a spike in GPU listings on 3rd party websites; this could happen again if Ethereum enters an extended bear market. 

It’s also worth noting that the prices rising for these GPU units are mostly from third-party websites and it seems unlikely that AMD and Intel is enjoying the benefits of any of this price appreciation, but rather just from selling higher volume to retailers. This doesn’t represent as pure an EBITDA as price does, but depending on how profitable mining is, the companies could increase the prices of their new lines of GPUs. 

Finally, there are two caveats to the problems I discussed. The first is simply that after Ethereum switches to Proof-of-Stake, users can take the hashing power of their GPUs and apply them to various other coins that use POW. While the existence of other coins that can be mined with Intel and AMD GPUs do exist, they are not nearly as established as Ethereum and for many it will be an investment in the future potential of the coin; indeed, these coins might not even have veritable mining pools like Ethereum does. Secondly, injecting more hashrate into the network of a coin commonly causes a “difficulty spike”, meaning it will take longer to solve the cryptographic problems and will further decrease the profitability of these other coins. Simply put, a mass migration to another coin might not even make it monetarily worth mining due to the initial investment needed of miners. 

The other caveat, and probably more important, is how the companies will be taking their inclusion in the crypto mining and blockchain realm as a whole. If they decide to embrace it and release products with these services more in mind, it could prove extremely beneficial for them; hopefully they do this better than Kodak has. Our best indication of their sentiments should come from the earnings call. Intel had theirs last week and while they killed earnings, they did not really comment on crypto; however, we do know that Intel has embraced their connection to blockchain. AMD will be announcing earnings tomorrow after close and it will be interesting to see their comments on blockchain or if they can live up to Intel's earnings, as it seems the market is expecting from how the stock has performed recently.