It seems to me, that many traders all over the world have been carried away by the stellar performances of many cryptocurrencies in the last one year. However, a careful look at this market will reveal that not everyone is actually profiting from buying and selling cryptocurrencies. Some smart investors have avoided the trading aspect of the business to focus on the companies behind the business: the blockchain technology companies, mining companies, the cybersecurity companies and programmers/developers. The number of companies that support the cryptocurrency value chain is rising by the day, and some of these companies have tapped into a new way of raising money: the crowd-funded Initial Coin Offerings (ICOs). We decided to take a look at some of these companies and found that there is a budding opportunity for savvy investors looking at long term profits and not the short-term wild swings seen on cryptocurrency exchanges.
Current Situation with Cryptocurrency Development
When Bitcoin and Litecoin hit the markets nearly 10 years ago, there was only one way to get hold of them, and that was to “mine” them. Cryptocurrency mining is a process where the miner must convert a particular hash of a block that contains randomized data into an integer; a number that is deemed less than a particular numerical value. Locating an integer that fits this description is not easy to do and it gets more complex as the price of the cryptocurrency increases. However, if the miner succeeds in finding this magic number, a new block will be added to the ledger and the miner will be allowed to add any cryptocurrency generated (usually Bitcoin) to his or her wallet. The transactions so generated are known as the coinbase.
Any solutions to the complex mathematical equations generated via the mining process will be added to a new block of transactions. They serve as proof that an entity has spent some time working on it after the previous block updates are seen. These two factors ensure that there is validity of the transaction, and enables the entire network to validate the transaction order. Since it is possible for everyone on the network to verify this level of computation, it makes the process trustworthy. All parties on the network must agree to the transaction for it to be recognized as valid. This is what provides the peer-to-peer check on the system that eliminates fraud.
If mining was the key to addition of Bitcoin, why is everyone no longer doing it? The best way to describe the current issues with mining is to equate it with mining for spot metal such as gold, or even energy commodities such as crude oil. The initial deposits are relatively easy to get, but as these become exhausted, it gets harder to reach the deep-seated deposits. At this stage, it would require faster and more complex equipment to get to these deposits, which of course makes the entire process more expensive.
This is what has become of cryptocurrency mining. It has become more time and energy consuming to solve the required mathematical equations that would lead to the generation of a cryptocurrency, so much so that it is no longer profitable to mine cryptocurrencies.
During the early days, everyone was so consumed with the mining process. These days, everyone seems to be obsessed with trading of cryptocurrencies and very few people have ever bothered to invest in the companies behind the mining and blockchain technology. Two companies which are major players in the manufacture of technology that supports the cryptocurrency market include Nvidia and AMD. There are a few other startups in this field that have had successful ICOs, and which look good for investment purposes. But what is in these companies for investors?
Investing in shares of Nvidia and AMD
The astronomical jump in the value of Ethereum in 2017 (close to 3,000%) has led to a surge in Ethereum mining. This has also made it increasingly difficult to mine Ethereum with time. Therefore, cryptocurrency miners are searching hard for Graphics Processing Units (GPUs or graphics cards) that are more powerful and make it easier to keep mining Ethereum. This is where GPU companies AMD and Nvidia are making a killing.
Cryptocurrency miners use graphics cards made by companies such as AMD and Nvidia to “mine” new coins. These crypto coins can then be held for future appreciation and sold, or can be traded on exchanges for profit. AMD’s graphics cards seem to deliver better performance for mining cryptocurrencies and independent sources such as Jon Peddies second quarter report indicate that AMD has successfully captured the market share from Nvidia.
Advanced Micro Devices Inc. (AMD)
AMD manufactures graphic cards (GPU) for cryptocurrency mining. In early August 2017, the company announced that it was releasing a new software package for cryptocurrency miners. Initially designed for the gaming market, AMD’s graphic cards are experiencing a heavy surge in demand. At its earnings call in July 2017, AMD announced that sales of its graphics cards had soared 51%. These sales served to boost the company’s earnings, beating Wall Street expectations. AMD’s Q2 earnings took the company’s one-year profits up by 102%, trumping the S&P500’s average return of 14%. In response to the earnings announcement, AMD’s shares climbed 10% in after-hours trading, and added another 9% in the trading day after. The upward trajectory of this company’s share price can be seen on the chart below.
1-year chart showing share price of Advanced Micro Devices Inc. (AMD). Source: Nasdaq
In June, the company had made a pronouncement that it was seeing great demand from cryptocurrency miners for its graphics cards. With the price of Ethereum predicted to continue its advance in 2017, market watchers expect the share price of AMD to continue to follow that of Ethereum to the upside.
Just like AMD, Nvidia has been positively impacted by Ethereum’s price surge, which has sparked a huge demand for GPUs for mining activity. Even though Nvidia only controls about 25% of the graphics card market, it is still getting positive vibes on its revenues as well as its share price.
The CEO of Nvidia was quoted as saying that Cryptocurrencies are here to stay. In response to this, the company announced recently that it was going to start the manufacture of dedicated graphics cards to be used exclusively for cryptocurrency mining.
Cryptocurrency business has been good to this 24-year old company, which initially manufactured graphics cards for the gaming market. Second quarter earnings for Nvidia were stellar, with the company’s earnings jumping 56 percent when compared with the previous year’s figures. The GPU division alone brought in $1.9 billion in the second quarter. As cryptocurrency miners seek faster and more powerful cards to enable them add new transaction blocks to the blockchain for a reward of minted coins, the company looks set to continue its upward trajectory in terms of bringing value to investors.
Other profitable companies
Apart from AMD and Nvidia, there are other companies that look set to benefit from the cryptocurrency boom. Two companies that make this list are Intel and Micron.
It is well known that computer processors and microchips are a part and parcel of the equipment used to mine cryptocurrencies. A complete mining unit is composed of graphics cards, power supply, memory, a processor, cabling and a fan (for cooling). On Amazon, this can be assembled at a cost of between $2,400 and $3,800. One of such units is the Antminer S9. This device sells for just under $2,800 and is estimated to have the capacity to mine 0.29 Bitcoin per month. At present price levels, you need to mine Bitcoin with this device for just 2 months to be able to break even, and this is without factoring in cost of power. In order to setup a complete mining unit, traders can choose to procure one or simply to assemble the units themselves by sourcing the component parts.
Now that we have an idea of the companies that make up the component parts of a mining rig, we can as well be sure that the shares of the companies behind the manufacture of these parts may be worth investing in. But what companies are behind the component parts of mining units?
Intel is well known for making microprocessors for computing units. Therefore, it is expected that the surge in cryptocurrency mining should have the potential to increase demand for Intel’s micro-processing units. It was recently in the news that Intel is working with Microsoft to bring blockchain technology into the workplace via a tech framework to be known as Coco. The aim of Coco is to promote the adoption of blockchain technology by everyday businesses so as to allow for speedy transactions.
The purpose of this new Coco Framework is to speed up the adoption of blockchain technology by companies operating in financial services, healthcare, retail, supply chain and logistics. This technology would be much faster than existing blockchain frameworks, enabling up to 1,600 transactions per second. It is also touted to be a much more secure blockchain technology.
While Intel’s shares only gained a modest 17% in the last year, it would be interesting to see what the introduction of Coco would do to its revenue base.
Micron Technology Inc.
Micron Technology is a company based in Idaho. It is the largest maker of computer memory chips in the US. These memory chips are an integral component of mining units. This company should therefore be in line to benefit from the surge in demand for cryptocurrency mining units. To buttress this fact, the numbers reveal that shares of Micron Technology have risen by about 50% in 2017, and also showed a 100% appreciation in the last one year.
Macron Technology Inc’s 1-year share price. Source: Nasdaq
The steady uptrend in the share price of Macron Technology Inc can clearly be seen on this chart above.
ICOs are Initial Coin Offerings. This is a process where crowdfunding techniques are used to raise money for companies investing in the cryptocurrency space. Cryptocurrency tokens are sold for cash on crowdfunding platforms, as opposed to ownership of shares.
Autonomous NEXT, a financial analytics company, estimates that about $1.86billion has been raised in 92 ICOs in 2017 alone. Several companies have had wildly successful ICOs. Some of these include:
- com, which raised $33m on the Ethereum network.
- Bancor Foundation, which raised $150m worth of Ether in 3 hours.
- Tezos, a blockchain startup in Switzerland $232m and is now intending to start its own VC fund.
So investing in company ICOs is another channel of investing in the cryptocurrency network without the level of risk associated with the actual trading of cryptocurrencies.
I hope that throughout this article I have served to expose the underlying opportunities that exist in the investment of money into shares and ICOs of companies operating in the cryptocurrency space. The actual business of cryptocurrency trading is risky and not suitable for all investors. For these investors, seeking out companies involved in the cryptocurrency market whose products are in demand may be a less-risky alternative. Companies such as Intel, AMD, Nvidia and Micron Technology have been showcased here.
There are yet several others that show promise. Investors can continue to visit my blog for more information on these companies.