Welcome to the latest edition of the FT’s Cryptofinance newsletter. In this week’s issue, we delve into the challenges faced by the bitcoin mining industry.
Nvidia’s consistent high earnings have brought great joy to its investors and Wall Street analysts. Not to mention the relief felt by the company’s management who no longer have to discuss the annoying topic of cryptocurrency. The world of digital assets and global chip manufacturing collide in the realm of cryptocurrency mining, an essential process for tokens like bitcoin. Miners play a vital role in verifying new blocks of payments on blockchains and act as the market guarantor, ensuring the reliability of transactions without the need for intermediaries like banks. In return, miners are financially rewarded with new coins. Their computers run continuously, powered by specialized graphics processing units (GPUs) capable of handling high volumes of calculations. It just so happened that Nvidia’s chips were perfectly suited for this task, resulting in a surge in demand from crypto miners in 2017.
However, these customers proved to be somewhat of a nuisance for Nvidia, although they were not the only chipmaker facing this problem. Last year, Nvidia reached a settlement with the Securities and Exchange Commission, paying a penalty of $5.5 million for failing to adequately disclose the impact of crypto mining on its gaming business in the 2018 fiscal year. By May 2021, Nvidia had adjusted the output of some graphics cards to ensure they would be used by gamers rather than crypto enthusiasts jumping on the latest trend. According to Chris Meserole, director of the Artificial Intelligence and Emerging Technology Initiative at the US think-tank Brookings Institution, Nvidia had initially designed its high-end GPUs for AI training and its low-end ones for gamers. Both markets were considered more stable and reliable long-term compared to crypto. However, when the price of ethereum skyrocketed, the demand for Nvidia’s chips overshadowed the needs of their long-term customers. While the short-term profits were welcomed, strategically it created a few headaches for the company.
Although Nvidia has clearly moved on from the crypto world, the industry itself is still holding on to the fading bond they once shared. As the price of bitcoin soared in 2020 and 2021, companies invested heavily in mining equipment, often financed by debt. However, the subsequent crash in the price of bitcoin and rising energy costs reduced overall profitability. Additionally, the blockchain’s transition to a greener system in 2022 left many miners with obsolete graphics cards adapted for mining ethereum. Some miners tried to align themselves with the cloud computing trend, getting paid by authorities not to mine bitcoin, which turned out to be more profitable. Now, AI is offering a potential solution for these miners. Nvidia is experiencing an overwhelming demand for its chips due to the shift in priorities of crypto mining companies that have pivoted to servicing the AI market. The rebranding of mining companies, such as HIVE Blockchain Technologies and Riot Blockchain, reflects this transition. However, repurposing GPUs designed for crypto mining is not a simple task.
Reducing excess capacity in the market is likely to have a ripple effect on bitcoin. Mining the flagship token has become increasingly difficult and expensive, as indicated by the rising cost of mining and the increasing amount of computing power required. This could push the mining business further into the hands of a handful of wealthy individuals who can afford to buy GPUs in bulk. Competition for the latest tools is expected to intensify, particularly if the seller doubts the value of the buyer’s endeavors.
We would love to hear your thoughts on Nvidia’s results and the sluggish crypto mining market. Feel free to email me at [email protected].
Weekly highlights:
FTX, the collapsed crypto exchange, plans to appoint Galaxy Digital, an investment giant led by US billionaire Mike Novogratz, to help manage and sell the company’s digital tokens. This move aims to ensure that creditors are fully compensated. Galaxy Digital was selected for its extensive experience in digital asset management and trading. It is worth noting that Galaxy had exposure of nearly $77 million to FTX just two days before the exchange filed for bankruptcy.
Once again, central bankers have voiced their concerns about the risks associated with crypto assets. The Consultative Group of Directors of Financial Stability, which includes central bank representatives from various countries, including the US, Argentina, and Brazil, stated that crypto has amplified financial risks in less developed countries instead of reducing them. For more details, you can read my colleague Laura Noonan’s article on this.
Soundbite of the week: A chilling reminder for crypto’s privacy advocates
Tornado Cash, the crypto mixing service that allegedly laundered over $7 billion in three years and aided North Korean hackers in evading sanctions, faced charges from US federal prosecutors this week. Roman Storm and Roman Semenov were charged with operating the service. This case serves as a reminder that money laundering through cryptocurrency transactions is illegal and will be prosecuted.
Data mining: The rise of AI in crypto
Anything labeled “AI” tends to generate interest, and the same goes for alternative crypto tokens linked to AI projects. These coins are the only cryptocurrency group delivering positive returns this month, whereas exchange tokens and decentralized finance tokens are suffering from downward trends. This doesn’t come as a surprise, considering the total value locked in decentralized finance projects has plummeted from nearly $180 billion to below $40 billion.
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