Chris Middleton explains why gamblers’ rush to stockpile GPUs to mine cryptocurrencies and run blockchains is creating distortions in the real world. At the centre of the storm is gaming hardware giant, NVIDIA.
The connection between blockchain and cryptocurrencies on the one hand, and computer gaming hardware on the other, might not be obvious. Nor the connection with AI, drones, robotics, and the IoT. But a big clue as to why they are all deeply connected can be found in NVIDIA’s recent financials.
Earlier this month, the Santa Clara, CA-based graphics hardware company reported annual revenues of $9.71 billion, a year-on-year increase of 41 per cent ($2.8 billion). Q4 revenue alone was up 34 per cent year on year, at $2.91 billion, with gross margins of 60 per cent, giving the company a record quarterly profit of over a billion dollars.
Within those Q4 figures, revenues from Graphics Processing Unit (GPU) sales were $2.46 billion, up by one-third on the same quarter last year. The message was clear: the GPU trade is booming, and this stands at the core of NVIDIA’s record-setting results.
For a company in the gaming, data centre, and (increasingly) AI business, that’s hardly surprising, and CFO Colette Kress was keen to credit gamers and the Christmas season for the figures. On the face of it, it seemed like a watertight explanation. But was it?
The GPU arms race
Two things are certain. One, retail GPU prices are going through the roof for high-end models, reversing the standard IT trend of commoditising over time. And two, NVIDIA is a stock market darling. Anyone investing on January 1 2016 would have seen the value of a single share rise from $30 to $246 today.
Which is where things get interesting: that growth curve is remarkably similar to the graph for the market capitalisation of the cryptocurrency sector in the same timeframe. It’s not a coincidence.
GPUs were designed to accelerate the creation of onscreen images. That’s a mathematically intensive, specialised task that runs better in dedicated, optimised hardware. But this high-speed number-crunching ability is why GPUs are now used to accelerate performance in many types of device and facility, including embedded systems, smartphones, and data centres, alongside PCs and gaming consoles.
It’s also why GPUs are increasingly important in IoT applications such as robotics, drones, and AI, where speed and responsiveness are crucial.
This explains why GPUs have become critical factors in another boom area: blockchain and cryptocurrency mining – the process of contributing a computer’s processing cycles to running distributed ledgers and cryptocurrency networks.
Hype-train jumpers have been stockpiling high-end GPUs, stripping the retail and B2B supply market of stocks in their quest to build high-speed domestic rigs to help run these networks. This has pushed prices through the roof for all GPU applications, depriving NVIDIA’s traditional customers of essential hardware. A form of hardware stock bubble, in fact.
In turn, this has created what some stock market analysts are calling a ticking timebomb for NVIDIA, which has gone out of its way to play down the impact of mining on its results.
In theory, the faster the processor, the better and more profitable the result from cracking the crypto code – although evidence suggests that those days may be passing.
Indeed, many now question why some part-time gamblers are mining cryptocurrencies for profit at home when the hardware and electricity costs alone are slashing their margins to the bone. Some wannabe crypto-miners may simply have bought themselves a room full of expensive, unopened gaming hardware.
Others may flock to the cloud and ride the fortunes of the crypto market from a safe distance by letting remote data centres handle the loads (aka cloud mining).
And that’s the time bomb for NVIDIA, claim some stock market watchers: a retail market starved of stock, a massive aftermarket of unused GPUs (that may one day be worthless), a wave of hype attracting gamblers and amateur number-crunchers, and a vendor whose own financials may, some analysts allege, be tied to the tracks of the cryptocurrency rollercoaster.
Internet of Business says
In a hyperconnected world, the creation of any new type of network – and networked behaviour – is freighted with risk. So it will be interesting to see what happens when NVIDIA releases its long-anticipated Turing GPU, which is designed specifically for currency mining applications.
But is the new hardware evidence of NVIDIA making a long-term bet on crypto? Or is it a hedge against its mainstream business, or even a safety valve to take the heat out of its own internal economy? Either way, NVIDIA’s other customers in the data centre, AI, robotics, and gaming sectors will be crossing their fingers and hoping that the GPU titan doesn’t crash.
But what’s the underlying lesson here, the hidden seam of code? It’s this: despite all the hype around blockchain and cryptocurrencies – and what some see as computers’ ability to conjure real money out of virtual air – there is always a cost in the physical world.
In other words, everything virtual needs to exist inside something physical, something that consumes power, which costs money to ship and build, and which is governed by the normal laws of physics.
Anything that happens in the virtual world has an effect in the physical world – and in this case, as the crypto market has increased in value, so has the cost of the hardware that runs it. That cost is in scarcity, electricity, heat, energy, carbon, human labour, manufacturing and supply chain processes, and shipping GPUs into gamblers’ living rooms in piles of unopened boxes.
Put another way, what’s the cost per watt of mining? Without that data, it’s impossible to calculate a fair value – or any meaningful value – for a cryptocurrency [thanks to Tom Hughes for that observation – CM].
Yes, blockchain will help to create a new data commons and a consent-based transaction system; yes, decentralised, personal ownership of data is a good thing; and yes, the emergence of cryptocurrencies may well constitute the beginnings of a new financial order. But this is the new relativity: the virtual and the physical worlds will always be equivalent – equal and opposite in reactive terms.
It’s just elementary physics; it’s mass and energy all over again. And without any insight into the real cost of processing blockchains and cryptocurrencies, it’s hope over gold.
The irony is that many wannabe crypto-miners would have done much better financially by buying shares in NVIDIA.