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The cryptocurrency movement and its impact on our economy are not well understood due to the technical background required to fully understand it. The boom of cryptocurrencies has fueled the growth in companies like NVDA, AMD, OTC:SSNLF, OTC:HXSCL, and MU. While investors were initially cautious about this source of revenue, they are now too comfortable with this highly volatile industry.
In the month of July, the release of Bitmain's Antminer E3 poses a risk to both AMD and NVDA's cryptocurrency revenue source. If it delivers what it promises, not only will AMD and NVDA be losing future cryptocurrency related GPU sales, they will have to deal with cryptocurrency miners unloading their graphics cards into the secondary market. Which would be catastrophic.
On March 26, analyst from Susquehanna, Christopher Rolland, downgraded AMD and Nvidia based on the new Ethereum ASICs.
This article runs you through the basics of the cryptocurrency ecosystem and what it impacts. Which in turn will give you insight on how to trade the release of Bitmain's Antminer E3, AMD, NVDA, and their supply chain.
What is the appeal of cryptocurrencies?
Cryptocurrencies allow users to make secure, irreversible payments without intermediaries by means of cryptography, an intersection of mathematics and computer science used to securely transfer information. The appeal of cryptocurrencies are:
1. The lack of a central authority (decentralization), users who interact with the cryptocurrency with their private keys are able to make and receive payments with absolute authority. Payments cannot be blocked or reversed and funds cannot be frozen. Payments are processed real time and recorded on the blockchain with transparency.
2. The defined supply. Upon the creation of the cryptocurrency and the blockchain, the supply, distribution of the initial coins, and the distribution of new coins in the future (mining rewards) are defined mathematically and cannot be changed. For example, bitcoin's controlled supply is as follows:
Bitcoin has a maximum supply of 21 million bitcoins. At the time of writing, we are at block #526442, and approximately 85% of all bitcoins have been distributed. At this current block, bitcoin inflation is approximately 4%.
|Date reached|| |
|Reward Era||BTC/block||Year (estimate)||End BTC % of Limit|
Miner's rewards is comprised of the block reward and transaction fees. Bitcoin block rewards will eventually converge to 0, therefore bitcoin inflation will converge to 0. The scarcity aspect creates value, and many people see bitcoin as a store of value due to this defined scarcity aspect.
What is cryptocurrency mining?
Cryptocurrency mining is the process in which transactions for various cryptocurrencies, such as bitcoin and Ethereum, is confirmed and added to the public distributed ledger (Blockchain). Cryptocurrency miners are responsible for ensuring authentic transactions. The mining process involves competing with other miners to solve complicated math problems with hash functions associated with a block containing transaction data. The problems are hard to solve but easy to check. The first miner to solve the problem is rewarded with the cryptocurrency of the network that they are mining for (block reward + transaction fees). Such a system is called Proof of Work (PoW). The block rewards and transaction fees are incentives for miners to secure the network.
Cryptocurrency mining evolution
Mining cryptocurrencies is processing power intensive. Whoever has the most processing power can solve the math problems the fastest to obtain the block reward. Early bitcoin mining started with CPU mining, mining bitcoins with the processor that we have in the typical computer, designed by AMD and Intel. This later evolved to GPU mining, mining with graphics cards designed by AMD and NVIDIA. GPU mining is substantially more efficient than CPU mining. A GPU is capable of executing more than 800 times more instructions per clock than a CPU. After GPU mining came FPGAs (Field Programmable Gate Array) and ASICs (Application Specific Integrated Circuit). FPGAs can be programmed to do calculations very efficiently and ASICs, like the name suggests, are circuits manufactured for a certain purpose. In this case, ASICs are designed to mine cryptocurrencies. For bitcoin, ASIC mining is the only viable way to mine profitably.
The leading cryptocurrency ASICs manufacturer is Bitmain Technologies Ltd. Due to the practices and actions of the company in the cryptocurrency space, ASICs have a bad name in the cryptocurrency community. Members of the cryptocurrency mining community have come forward with proof, which suggests that Bitmain sells its old and used ASICs.
Algorithms such as Ethash, which is the hashing algorithm that Ethereum uses, are designed to be ASIC-resistant. Ethereum is still profitable through GPU mining.
Why do we care about cryptocurrency mining?
The network hash rate hit an all-time high of 42,980,660 TH/s on 6/5/2018.
Taking a modest estimate of the value of the amount of hardware behind the bitcoin network, we will use the most efficient ASIC miner, Bitmain's Antminer S9 (14 TH/s), which retails $837 and is capable of paying for itself in a year if you have $.10 /KWh electricity and the network hash rate/bitcoin price remains constant. 42,980,660 TH/s means 3,070,047 Antminer S9s or $2.57 billion worth of hardware dedicated to securing the bitcoin network. Note this is excluding the power supply which costs approximately $150.
Below is a chart of the Ethereum network hash rate over time. ETH-USD
The Ethereum network hash rate hit an all-time high of 278875.4553 GH/s, which was recorded on Saturday, May 12, 2018. With the Antminer E3 posed to enter the consumer market in July 2018, the hash rate behind Ethereum is likely still mostly GPU-powered. However, it's rumored that Bitmain mines with their new technologies before releasing it to the public.
An optimal Ethereum rig consists of between 8 and 13 RX580s/570s, manufactured by AMD. 13 GPUs per rig is possible by new mining motherboards. However, the majority of mining rigs still run graphics cards in the high single digits. We will use 8 for our calculation.
Approximately cost for a 8x RX580 rig is $2800, which hashes approximately 232 MH/s. This conservatively estimates $3.365 billion behind the Ethereum network, with NVIDIA, AMD and their supply chain being the primary benefactors.
Year-to-date 2018, the Ethereum network hash rate increased by 105,566 GH/s, which roughly translates to $1.27 billion in GPU and related sales.
What do ASIC Sales impact?
For bitcoin and ASICs, I refer to Jimmy Song's Bitmain profitability analysis.
Bitmain uses TSMC's 16nm process to build its bitcoin ASICs. Cost per wafer of 16nm process is around $4000 for the manufacturer. With a gross margin of 45%, Song assumes $8000 cost per wafer for Bitmain.
If you know the die-size of the chip, you can figure out exactly how many chips you can print per wafer. The Bitmain BM1387 chip is somewhere below 20 mm² in die size, and though it isn’t published, looks to be 3mm x 4mm by measuring the inside.
We can plug in these numbers to a die-per-wafer calculator and get 5158 chips per wafer (we’re using the 300mm/12" wafers as is industry standard). Each S9 miner uses 189 such chips, so each wafer can make enough chips for a little over 27 S9's. Each wafer costs around $8000, so the chips for each S9 costs roughly $300.
The rest of the parts are fairly standard and my semiconductor friends tell me it’s probably not more than $200 in bulk (power supply, heat sinks, controller, PCB, etc), we can estimate the cost of production of the S9 to be roughly $500.
With $300 cost per chip for Bitmain, we can expect TSM to profit $150 from each Antminer S9 sold, ~50% profit margin. This is a helpful statistic since we can track the bitcoin network hash rate real time. A diligent analyst can conduct the same analysis above for the whole suite of Bitmain ASICs and back into the TSM profits from ASICs real time. Perhaps this is an article for the future.
What do GPU Sales impact?
- NVIDIA GTX 1060 3GB / 6GB GDDR5
- NVIDIA GTX 1070 8GB GDDR5
- AMD RX570/580 4GB / 8GB GDDR5
The biggest producers of DRAM are OTC:SSNLF, OTC:HXSCL, and MU. The cryptocurrency boom along with growth in data centers have led to a worldwide DRAM shortage. We can expect the DRAM shortage to continue if there is any meaningful uptick in miner activity, since capacity expansion takes years.
With limited sources for gaining insight on DRAM pricing, we look to the end markets.
In mid-2016 you can get 16GB of DDR4-3000 for $70. Today, the same ram would cost you more than double that.
The Ethereum ASIC Bitmain's Antminer E3 is rumored to use DDR3 memory to meet the memory requirement for Ethereum's Ethash algorithm.
Antminer E3 vs. AMD and Nvidia
AMD and NVDA are benefiting from the cryptocurrency trend. Institutional investors were initially cautious at any sort of outperformance attributed to cryptocurrency mining to avoid an AMD 2013 style cryptocurrency bust scenario. But now, it seems like investors are too bullish and comfortable with the cryptocurrency-powered revenue.
The Antminer E3 promises 2.5x efficiency over traditional GPU mining and can potentially put this revenue source to rest. The E3 promises 180 MH/s for $800 (first batch). Versus the efficient 8x RX580 setup at 232 MH/s for $2800, this is 2.72 times more efficient. If we compare it to the 13x RX580 setup at 377 MH/s for $4300, it is still 2.57x more efficient. If it delivers what it promises, there will no reason for miners to buy GPUs to mine Ethereum.
Moreover, the bigger long-term risk is that Bitmain will be able to produce so many of these ASICs that GPU mining becomes no longer profitable. At that point, miners will take their GPUs to the secondary market, nearly $3.365 billion worth of it.
We can take comfort in the fact that the E3 was priced at $800 only for the first batch. The second and third batches had it priced at $1800 + $150 power supply, which is only a modest improvement above traditional GPU mining. However, the threat is still very real since Bitmain likely did not sell its first batch at a loss. If it is capable of making the E3 at a cost of lower than $800, then there is a risk that Bitmain mass-produces these ASICs for its own use to make GPU mining unprofitable for everyone else, which will result in the same doomsday scenario for GPU mining outlined above.
Looking at cryptocompare's user ratings for Bitmain, there is a trend. User gbattaglia summarizes the community consensus for Bitmain's ASIC strategy well.
They are in the middle of what seems like their exit strategy... they are selling all of their old stock and most of it will show no ROI at all. The new V9 is a rebranded S7 which will earn about $0.25 to -$0.98 per day after power usage. The D3 which they no longer sell after they flooded the market makes a little bit more than these "new" models they are selling. The "new' T9+ is a slower version of the T9 which uses the same amount of power. That will net you about $3-$4 per day and they are charging $2k for the unit. There is no way you could possible ROI on anything they are selling.
If Bitmain has equipment that is profitable, it will mine with it until it isn't. It will then sell it to you at a high price and wait months to deliver it. The release of the Antminer E3 for Ethereum and the Antminer X3 for Cryptonight / Monero is suspicious for this exact reason. Why is Bitmain selling the equipment when it's still profitable for it to mine it itself?
What to watch in July and rest of 2018
The impact of cryptocurrencies outlined in this article is first and foremost dependent on the price of the assets, bitcoin and Ethereum, which you should follow closely.
Fundamental Catalysts for bullish price movements:
- The entrance of reputable custodians in the cryptocurrency space. There are virtually no reliable/reputable custodians for cryptocurrencies.
- The entrance of reputable insurers for cryptocurrencies. There are virtually no reliable/reputable insurers for the loss/hack of cryptocurrencies.
- The approval of exchange traded products for cryptocurrencies similar to OTCQX:GBTC. GBTC currently trades at a 67% premium to its underlying assets.
The entrance of reputable custodians and insurers will legitimize cryptocurrencies and will allow traditional funds to hold these assets. The approval of new exchange traded products will do the same.
The performance of Bitmain's Antminer E3 is the next big catalyst. If the product is delivered and works as marketed, AMD will be a good short. The impact of this on DRAM producers is mixed as the Antminer E3 will still absorb DRAM supply (although lower quality DRAM).
However, if we find that Bitmain continues its practice of selling unprofitable ASICs and does not deliver the Antminer E3 specifications as promised, I recommend being long AMD/NVDA and DRAM producers given favorable cryptocurrency price trends.
Will Bitmain deliver on the Antminer E3? Let me know what you think.
Disclosure: I am/we are long SOXL.
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.