The financial media has gone into full Bitcoin frenzy and Nvidia Corporation (NASDAQ:NVDA), which remains at the center of the cryptocurrency arms race. What does it all mean for NVDA stock? Everywhere you turn, people are making new predictions, seeming more outlandish than the last.
One analyst says that it’s going to hit $40,000 – no, make that, $100,000 next year. The next minute, someone fires back that Bitcoins are tulips and set to crash. Regardless, as any historian would tell you, in a gold rush, you make money selling the shovels rather than digging for treasure itself.
Bitcoin Reaches New Heights
Last week saw Bitcoin reach new levels of success. The cryptocurrency topped $10,000, and it didn’t stop there. It almost doubled in the space of a few days, hitting $19,000 on some exchanges. Prices have been volatile since then, but Bitcoin has largely managed to hold onto its gains.
That comes even after CBOE Holdings (NASDAQ:CBOE) launched exchange-traded futures contracts for Bitcoin on Sunday. Many analysts had expected Bitcoin prices to drop off sharply once futures trading became available.
In theory, the ease of shorting Bitcoin would allow institutions to sell into the currency’s huge rally. In practice, however, Bitcoin continues to trade higher despite the launch of the futures market.
NVDA Stock: Its Evolving Position Within Crypto
In the past, NVDA, along with chief rivals such as Advanced Micro Devices, Inc. (NASDAQ:AMD) provided the primary firepower for mining Bitcoins. Miners would purchase high-powered graphics cards from NVDA and start earning their loot.
However, Bitcoin reached the so-called crossover point where it no longer became economical to mine using graphics cards. Bitcoin’s soaring price has led to an abundance of miners competing to obtain the new supply of Bitcoins.
Nowadays, the mining collectives generally use more specialized ASIC equipment which was designed specifically for the task of solving the puzzles needed to earn coins.
But don’t panic, this still helps NVDA stock. While Nvidia’s graphics cards are no longer profitable for Bitcoin mining, they are still useful for mining Ethereum and most other of the less valuable cryptocurrencies. As long as difficulty on these other coins remains lower, graphics cards will still be able to achieve a profit even after the cost of electricity.
Bitcoin Is The Star, but It’s Hardly the Only Relevant Factor
As of this writing, the total market cap for all cryptocurrencies is $440 billion. Bitcoin dominates the lion’s share of that figure, with its sum at $275 billion. Ethereum is next up at $45 billion, Bitcoin Cash at $23 billion and so on down. For now, the market cap of coins that can be profitably mined with Nvidia’s GUI cards is $165 billion.
That’s a larger sum than the entire crypto market cap just months ago. In theory, Ethereum is about to cross over to the point where only ASIC mining will earn a net return after electricity costs, thus taking away another mining option for Nvidia cards.
However, that would still leave more than $100 billion in mineable cryptocurrencies for GUI cards to go after. Anyone declaring that NVDA stock is set to fall sharply due to falling demand in this area is making a mistake.
How Bitcoin’s Rally Helps NVDA Stock
You might be saying, “But if no one is mining for Bitcoin with Nvidia equipment anymore, who cares if NVDA stock goes up?” That is a reasonable question. However, it’s important to remember that the whole crypto-universe revolves around Bitcoin and Ethereum.
The less glamorous coins, in particular, usually trade in relation to the price of the major coins, rather than dollars. So if someone mining a minor coin with an Nvidia card wants to cash out, they’ll trade their alternative cryptocurrency for Bitcoin and then sell the Bitcoin for cash.
Given this chain of events, a higher Bitcoin price makes the whole universe more compelling for mining, and thus lifts demand for Nvidia cards, and in turn, the NVDA stock price. The opposite effect is also true, a crash in Bitcoin prices would crush interest in mining most of the other coins as well.
Can Nvidia Please Two Markets?
Earlier this year, as Bitcoin started ramping up from the $1,000 level into uncharted territory, Nvidia and AMD ran into a problem. They didn’t have enough cards on hand to meet demand. Mining operations were buying up all the fresh inventory of high-end cards leaving Nvidia unable to satisfy all its customers.
This demand failure disappointed its gaming enthusiasts. Prices spiked up and backlash built with it. Heading into the pivotal holiday season, Nvidia appears to have produced sufficient inventory to serve both miners and gamers. However the sudden explosion in Bitcoin prices will undoubtedly cause another wave of consumer interest in GUIs.
This is the sort of NVDA news that you want to hear. The key, however, will be finding the right balance. Make too much inventory and you risk Bitcoin prices falling and getting stuck with a large supply of unneeded cards.
On the other hand, a repeat of this spring, with too little inventory, leaves a ton of money on the table and angers your core gaming customers who will still be around for years to come, regardless of whatever may happen with crypto.
All in all though, it’s a great problem to have. Nvidia is in a powerful position as Bitcoin continues to rally, and NVDA stock is a significantly safer way to playing the mania than actually buying Bitcoin or other cryptocurrencies.
At the time of this writing, the author held no position in any of the aforementioned securities. You can reach him on Twitter at @irbezek.