Crypto – The Merge pt. III

Unprofitable miners are getting ready to dump their equipment.

• Crypto miners that were rendered homeless by the Merge are struggling to find economic uses for their equipment meaning that they are very likely to sell up and leave the industry.
• On Thursday, September 15^th, the mechanism by which the Ethereum blockchain is managed changed from computers solving complex problems (proof of work) to token owners pledging their tokens as collateral to guarantee transactions (proof of stake).
• The main result of this is that the energy consumption of Ethereum fell from being equivalent to all of Chile to almost zero but it also meant that those that were doing the calculations were out of a job.
• To date, these calculations were carried out by miners using graphics cards which are ideally suited to this task but there is now around $10bn of equipment now looking for something to do.
• There are other coins that can be mined such as Ravencoin and Ergo but those that have tried have quickly found that the venture is loss-making just on the cost of electricity alone.
• It should be possible to eke out a small margin in territories where the cost of electricity is lower but even then, the margin is likely to be mere cents on the dollar
• Furthermore, this is before one takes into account the cost of the equipment which I suspect will push almost all of the miners into loss-making territory even where energy is cheaper.
• Finally, a significant slice of the equipment has been financed through borrowing and now that revenues have collapsed, these miners are likely to be forced sellers.
• Some miners are holding on in the hope that the crypto market turns around meaning that they can become profitable again but at least half have already switched off their equipment.
• This gives weight to my view that around $3bn – $5bn of graphics cards are about to hit the 2^nd hand market which is going to depress the price of graphics cards substantially.
• It is already possible to find high-end Nvidia cards on Amazon selling at a price that is 60% below where it was just 12 months ago.
• This is bad news for AMD and especially Nvidia but the ramifications for Nvidia are far less than for the miners as its Cuda core still remains ideal for graphics for gaming, AI in the datacentre, the Metaverse as well as a number of other areas.
• I can see another couple more bad quarters for Nvidia as gaming performs worse than expected as gamers will be required to absorb graphics cards being sold by obsolete miners into the second-hand market.
• It is important to note that as of FQ2 2023, the data centre is twice the size of the gaming segment meaning that its ability to hurt Nvidia’s overall performance has already been significantly curtailed.
• I still remain extremely cautious on cryptocurrency which shows no real sign of emerging from its current deep freeze and in semiconductors I continue to prefer the cheaper, more defensive end of the sector.
• Qualcomm, MediaTek and TSMC all offer good growth at valuations which are much cheaper than AMD or Nvidia.
• I would like to own Nvidia one day, but I suspect that the crypto crunch may give me the opportunity to buy it at levels below even here.