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AMD's GPUs Are Worth Their Weight In Litecoins

|Includes:Advanced Micro Devices, Inc. (AMD)

Not really, referring to my article's title. From my understanding, litecoins don't weigh very much.

To get this out of the way, I understand very little about bitcoins or litecoins, so I apologize in advance if I make any miners cringe with my wording in this article.

The one thing that I do understand, as do many other investors and techies, is that the value of both virtual currencies has seen a sharp rise recently.

A Quick History

Both bitcoins and litecoins are peer-to-peer digital currencies. Speculators do something known as "mining" in which they do not start hacking away at a fiber cable with a pickaxe in hopes of striking it rich.

Bitcoin.org defines the terms mining and hash as the following:

Bitcoin mining is the process of making computer hardware do mathematical calculations for the Bitcoin network to confirm transactions and increase security. As a reward for their services, Bitcoin miners can collect transaction fees for the transactions they confirm, along with newly created bitcoins. Mining is a specialized and competitive market where the rewards are divided up according to how much calculation is done. Not all Bitcoin users do Bitcoin mining, and it is not an easy way to make money.

The hash rate is the measuring unit of the processing power of the Bitcoin network. The Bitcoin network must make intensive mathematical operations for security purposes. When the network reached a hash rate of 10 Th/s, it meant it could make 10 trillion calculations per second.

Devices that can perform many calculations in parallel are much better at mining than stronger serial processors. Think GPUs.

Miners will setup somewhere in the spectrum from simple (single GPU to complex mining hardware (tons of GPUs or use of ASICs) in an attempt to increase the number of calculations that can be performed per second.

As bitcoins have increased in value, technology companies have created specialized devices known as ASICs (application specific integrated circuit). These ASICs are far more powerful and efficient than simple GPU mining setups.

A major difference between bitcoins and litecoins is the current value. Because bitcoins are very expensive, the market for bitcoins can support the use of these more expensive (specialized) ASICs. However, litecoins have recently started to increase in value, so as far as I know there are no/few ASICs available for mining litecoins, meaning mining via GPU is still a viable option.

Nvidia Vs. AMD

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Joel Hruska of ExtremeTech (and various other sites) has an extensive write-up regarding performance of Adavnced Micro Devices (NYSE:AMD) vs Nvidia (NASDAQ:NVDA) regarding coin mining performance and efficiency. Read his article to understand how big this gap is. As one example, let me point out that the GTX Titan is a $1000 video card, whereas 7790's can be found on sale for ~$100-$120. When Joel originally wrote his article, the 7790 was a $150 card, meaning the value proposition is significantly higher now.

In order for mining to be lucrative, the value of the coins mined must exceed the cost of gear plus electricity used to mine. AMD's cards seem to have an edge in overall performance and in power consumption vs calculations per second.

Note: Due to the recent interest in litecoins, I have used benchmark data from bitcoins as it is more illustrative, but from what I have read on various forums and data sources (I, II), it appears that AMD GPUs are still more efficient at mining litecoins as well, allowing parallels to be drawn.

Conclusion

I am not suggesting this will be a meaningful source of revenue for an extended period of time going forward, nor should this article be construed in anyway as a recommendation for/against mining virtual currency.

The importance of this I believe stems can be seen from comments made during the Q3 conference call:

Hi, David. This is Lisa. Let me take the Graphics question. So, first, we've talked about Graphics as a multi-quarter growth strategy for us in terms of market share and we are certainly seeing that we are executing on that path.

When we look at the third quarter relative to the fourth quarter and where we are going we have built a very strong product portfolio. We just announced our full lineup for the R7 and R9 Series and those were launched in September and shipping in October. So we did see a little bit of a transition at the end of the third quarter, but we do expect to gain share in the fourth quarter with our graphics business.

AMD's Q3 GPU revenues declined significantly, and AMD stated the cause as being the transition to new GPU products. Wedbush estimated that console revenues accounted for ~$400M, meaning traditional GPU sales would have dropped to ~$270M, which is a pretty substantial sequential decline.

However, this decline makes sense if the channel was being allowed to clear old inventory prior to the new GPUs shipping. Some tech sites harped on the fact that the majority of the R9 and R7 series graphics cards were nothing new as they used largely the same GPU chips as the 7000 series they were replacing, with the main exception being AMD's new Hawaii GPUs.

Well, it seems as if the community is disagreeing with the tech sites. The R9 280X, which is a refresh of the 7970 GPU, is largely out of stock at newegg, as well as the 7970 GPUs. Notice the number of out of stock GPUs based on GCN architecture?

The above screenshot is taken from CryptoCoinCharts in order to show how quickly the value of litecoins have exploded. Around November 15th or so is when the value seemed to begin the moonshot.

The reason I say that this should not be depended on as a stable growth driver going forward is based on the volatility of cryptocurrency. If the value of litecoins implodes, so does the added value to AMD GPU cards. Or if Nvidia tweaks its GPU architecture, but that would not be an overnight change by any means.

But for now, it seems that retailers are having little trouble moving AMD GPU inventory. I believe this will allow AMD to return closer to the historic $320M or so in GPU revenues during Q4.

Disclosure: I am long AMD.

Additional disclosure: I own both shares and options in AMD, and actively trade my position. I may add/liquidate or initiate a hedge at anytime.

Stocks: AMD