Will NVIDIA's and AMD's Cryptocurrency Mining Businesses Take a Hit?

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Cryptocurrency mining has turned out to be a big catalyst for both NVIDIA (NASDAQ: NVDA) and Advanced Micro Devices (NASDAQ: AMD). There's been a shortage of graphics cards in the market as miners have lapped up the chips to mine for cryptocurrency, leading to a massive spike in GPU (graphics processing unit) prices.

By some estimates, miners bought 3 million GPUs last year worth $776 million, and AMD was apparently the bigger winner. But at the same time, NVIDIA benefited from the jump in GPU prices as gamers had to pay a premium to lay their hands on their favorite graphics card. But it looks like NVIDIA'a and AMD's crypto-driven gains could hit a roadblock thanks to a recent development out of China.

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A dedicated cryptocurrency mining chip

Wall Street analyst firm Susquehanna recently found out that Bitmain, which makes cryptocurrency mining hardware, has developed an application-specific integrated circuit (ASIC) that will be specifically used for Ethereum mining. Analyst Christopher Rolland believes that this new chip could hit the market in the second quarter of 2018, and could spell trouble for the GPU specialists as it is compatible with Ethash, an algorithm that's used for mining Ethereum as well as other cryptocurrencies.

Currently, the Ethash algorithm used to mine Ethereum requires a lot of memory, making GPUs the only profitable way to mine cryptocurrencies. Bitmain's ASIC chip has been solely designed for cryptocurrency mining, so it is expected to be more efficient at this task as compared to GPUs, which that are usually meant for gaming or data center purposes.

Susquehanna suspects that Bitmain could become the biggest vendor of cryptocurrency-focused ASIC chips, but says at least three other companies could be joining the fray.

Moreover, as the Ethash mining algorithm is used by other cryptocurrencies, it could be adopted by more miners once the chip hits the market. In fact, it is estimated that mining-focused ASICs could be 50 times faster than traditional GPUs.

Last year, Bitmain reportedly made between $3 billion and $4 billion in operating profit, according to analysts at Bernstein, which was at least identical to NVIDIA's $3 billion operating profit. So, NVIDIA and AMD are going up against a big fish in the cryptocurrency market, but which one of the two is better-placed to face the challenge? Let's find out.

Impact on AMD and NVIDIA

Rolland reportedly estimates that Ethereum mining accounts for 20% of AMD's total sales and 10% of NVIDIA's top line.

Cryptocurrency-driven demand was one of the biggest reasons behind a substantial increase in AMD's GPU market share during last quarter of 2017. The company tried to make the most of the cryptocurrency market by releasing specialized GPU drivers for mining purposes. What's more, AMD intends to boost the production of graphics cards to meet an anticipated increase in demand from miners.

As a result, AMD was able to steal a march over NVIDIA's GPUs despite having an arguably inferior product line-up. So, cryptocurrency mining has played a key role in AMD's growth over the past year and any weakness on this front could be bad news for investors. NVIDIA, on the other hand, could easily get over any loss in crypto-related sales thanks to fast-growing end markets such as gaming and data centers.

For instance, the company's gaming revenue had shot up 29% year over year in the most recent quarter, while data center revenue more than doubled. These two businesses together supply 80% of NVIDIA's total revenue, and their fast pace of growth means that the company is well-placed to overcome the challenge posed by Bitmain's new chip.

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Harsh Chauhan has no position in any cryptocurrencies or stocks mentioned. The Motley Fool has no position in any cryptocurrencies mentioned. The Motley Fool owns shares of and recommends Nvidia. The Motley Fool has a disclosure policy.