Can Bitcoin And Ether Prices Materially Affect NVDA And AMD Stocks?

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Includes: AMD, NVDA
by: Rihard Jarc

Summary

Lately, there has been a lot of reporting in the media linking NVDA and AMD to cryptocurrencies. Is there a material correlation between these two stocks and the price movement.

Calculations show that in 2017 there is no significant price correlation between AMD’s stock and Bitcoin. The same holds true when comparing AMD and Ether.

NVDA investors, however, need to pay more attention to this metric in the future, since the correlation with Bitcoin and Ether is very strong.

By now most of you probably know what cryptocurrencies are. This year, their prices have been soaring to say the least. The most popular cryptocurrencies nowadays are Bitcoin and Ether. I am not going to describe the specifics of cryptocurrencies, but rather show you how much of the "cryptocurrency effect" there is in the prices of two specific stocks, Advanced Micro Devices (AMD) and Nvidia (NVDA). It is important for investor to be aware of it, because it could strongly impact the future behaviour of these two stocks.

AMD and NVDA both produce graphic cards that are broadly used for gaming purposes. Lately, however, they have been sold like hotcakes for the purposes of crypto mining. Cryptocurrency mining is a process of acquiring cryptocurrencies like Bitcoin or Ether. To put it simply, for mining cryptocurrencies yourself you need a computer, internet, electricity and a good graphic card. Consequently, you need an NVDA or an AMD graphic card.

The total market capitalization of cryptocurrencies has grown substantially in 2017. It now stands at more than $100 billion. For comparison, that is just a little more than the joined market capitalization of NVDA and AMD, which stands at around $98 billion.

Total market capitalization of cryptocurrencies:

Source: coinmarketcap.com

The stocks of both companies have been soaring as well. The reports have been stating that this is partly due to the soaring of the cryptocurrency prices. Therefore, let’s have a closer look at the comparison between prices of these two stocks and the prices of Bitcoin and Ether.

Firstly, let me state that in this article I am not going to assess, how the sales of graphic cards to the crypto mining community are affecting the fundamentals of the companies. Instead, I will present how much the price fluctuations of these crypto assets affect the price fluctuations of NVDA and AMD stock.

For a better understanding, a correlation value of 1 represents a perfect positive correlation (moving in sync) and a correlation of -1 represents a perfect negative correlation. Because the prices of cryptocurrencies started soaring in 2017, I divided the calculation periods in two segments. The 1st period shows the correlation from 30.6.2016 until the end of 2016 and the 2nd period shows the correlation from the beginning of 2017 until 30.6.2017.

Advanced Micro Devices (AMD)

Let’s have a look at AMD stock performance and the performance of the most popular cryptocurrencies, Bitcoin and Ether. From the reports, one would presume that there would be some noticeable correlation between the stock performance of AMD and the prices of Bitcoin or Ether. When looking at the actual results that is not however the case.

AMD/Bitcoin

Correlation

30.6.2016 – the end of 2016

0.755

Beginning of 2017 – 30.6.2017

-0.115

Source: own calculations

The correlation between AMD and Bitcoin in the 1st period is 0.75. Such a figure represents a relatively strong correlation. Nonetheless, if we look at the correlation between AMD and Bitcoin in the 2nd period the value is -0.115. That shows a very small negative correlation between these two assets. Thus, from the results the correlation between AMD and Bitcoin stopped at the beginning of 2017, when AMD ceased to follow the rapid growth of Bitcoin.

AMD/Ether

Correlation

From 30.6 - end 2016

-0.763

Start 2017 - till 30.6.2017

-0.09

Source: own calculations

If we compare that with AMD’s correlation to Ether, it shows a completely different picture. The correlation in the 1st period was -0.763, which is a high negative correlation. Ether’s price in 2016 was still a single digit number, especially in the second half of the year when it was not performing well at all. The correlation in 2017 changed to -0.09. This means that the correlation in this period was almost non-existent. When observing each asset individually, we can see that the main reason for this was an immense increase in Ether’s price by more than a factor of 30 in 2017 (moving from $8-10$ to more than $300). Yet, the price of AMD stayed more or less flat in the same period.

Summary for AMD

It is true that a lot of demand for AMD’s graphic cards is currently coming from the crypto mining community. Nevertheless, if we look at the correlation data we can say that specifically for 2017 there is no firm price performance correlation when comparing AMD to Bitcoin or Ether.

We can conclude that AMD investors, who are thinking that Bitcoin and Ether are in a bubbly territory, can be a bit calmer. Even if there is a bubble in the crypto space and it bursts, according to the correlation AMD’s stock would not follow the potential steep downward move. For those investors, who want to own AMD for the sole purpose of obtaining direct exposure to the crypto space this is probably not the best idea when looking at the correlation.

Nvidia

If we now look at the same situation for NVDA we can detect a different pattern. The correlation between NVDA and Bitcoin in the 1st period stood at 0.834, which is a higher value than for AMD and shows a stronger bond between these assets. Even more interesting is the correlation in 2017. It stands at a whooping 0.911. That is definitely a big difference when comparing it to AMD. Such a strong correlation could be a big surprise for NVDA’s investors.

NVDA/Bitcoin

Correlation

From 30.6 - end 2016

0.834

Start 2017 - till 30.6.2017

0.911

Source: own calculations

The correlation with Ether shows a similar picture in the 1st period, where it stood at -0.769. However, a noticeable difference is shown in 2017. The correlation in 2017 between NVDA and Ether stands at 0.904, comparable with the NVDA/Bitcoin correlation.

NVDA/Ether

Correlation

From 30.6 - end 2016

-0.769

Start 2017 - till 30.6.2017

0.904

Source: own calculations

Summary for NVDA

This correlation values, especially the ones in 2017, show a strong tie between the performance of NVDA and these two cryptocurrencies. Investors should thus take into account the correlation when investing in NVDA. If the prices of Bitcoin or Ether falls sharply NVDA could follow as well. So, if you are an investor or thinking of investing in NVDA you should probably keep an eye on the prices of cryptocurrencies.

Then again, for investors, who are bullish on cryptocurrencies, this could represent an interesting alternative, of course, depending on the correlations staying at these levels in the future.

Conclusion

We cannot deny the effects of higher Bitcoin and Ether prices on increased interest in mining these currencies. Consequently, there is an increased demand for AMD’s and NVDA’s graphic cards. On one hand, this segment represents only a fraction of the revenues these two companies make, so looking from the fundamental perspective it is not so meaningful. However, on the other hand, correlation numbers show that in some cases this is substantially affecting the stock prices.

More importantly, due to the big rally these stocks have had in the last months, one needs to be aware of the potential »crypto currency effect« in them.

In conclusion NVDA’s investors need to be prepared for a potential volatile ride, while AMD’s can be calmer.

But as we all know current stock prices can on the short horizon tell one thing and fundamentals another. Investors, keep that in mind!

Calculations: The correlation is calculated using the Pearson product-moment correlation coefficient.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.