One of the great debates for AMD and NVIDIA over the last year or so is how much of the growth they’ve been seeing is due to growing demand among Ethereum miners. The concern is that such demand is not sustainable, but so far, Ethereum mining demand has been a boon for GPU makers, not only inflating prices but also making it difficult for some buyers to get their hands on new GPUs. This could change though as the developers of Ethereum push forward on “Proof of Stake” mining.

Bernstein analysts compiled a lengthy report on cryptocurrency-related demand for semiconductors. While bitcoin miners use ASIC-based hardware, Ethereum mining utilizes GPUs, often by AMD or NVIDIA. Analysts who are bearish on the two chip makers have sounded the alarm repeatedly over crypto-related demand, warning that it isn’t sustainable, and Bernstein’s work quantifies just how much demand in this category might plunge this year.

The firm’s analysts estimate that demand for Ethereum mining GPUs could plunge as much as 30% year over year in 2018, and that assumes that both Ether prices and the margins currently enjoyed on the cryptocurrency hold steady. Of course, if Ether prices skyrocket even further, then demand for mining GPUs will likely soar even further as well.

According to Bernstein analysts the area to watch is something called “Proof of Stake,” which the Ethereum development team is working on. At this point, the cryptocurrency operates on “Proof of Work,” which means that miners must “perform a significant amount of computation to compete to be the first to find a legitimate new block and receive Ether as rewards. “Proof of Stake,” however, runs counter to this.

Rather than extreme amounts of computational “work,” “Proof of Stake” involves selecting the creator of a new block “via various combinations of random selection and wealth.” This is what is meant by the word “stake,” rather than a competition among miners all trying to crunch volumes of numbers to find new Ether blocks.

One of the big issues many have with cryptocurrency mining is the amount of electricity it consumes, but “Proof of Stake” doesn’t consume nearly as much. According to Bernstein analysts, many believe it is far more sustainable and environmentally friendly than the old “Proof of Work” model. It’s also more efficient, but it would be bad news for GPU makers such as AMD and NVIDIA because it would mean that demand for their products would plunge. Once Ethereum miners no longer need copious amounts of electricity and computing capability, they probably won’t be buying GPUs at the breakneck speed at which they’re gobbling them up now.

The Bernstein team uses Ethereum to estimate GPU demand for cryptocurrency mining, but they add that it’s difficult to estimate the demand because the Ethereum network’s difficult and hash requirement changes fast. It doesn’t help that Ether prices swing wildly as well, although they add that margins have surprisingly been steady since the beginning of the network, even as the other variables change. They believe the margins have held steady because miners are “adjusting their hash rate dynamically in order to make a reasonable economic return.”

The gross margin for Ethereum mining has been between 70% and 90% if factoring in only the cost of electricity. If including the price of GPUs amortized over two years, then the margin drops to between 30% and 70%. Assuming that Ether prices steady and miners keep adjusting their hash rate, the Bernstein team estimates a 19% increase in the hash rate from the end of last year to the end of this year. However, they add that this is based on installed hash power and wan that GPU demand could tumble 30% year over year, potentially posing a downside risk to the GPU supply chain. At first, this decline in Ethereum mining-related GPU demand won’t take a huge bite out of AMD’s and NVIDIA’s sales, however. They expect an impact of only about 1% to 2% for NVIDIA and 2% to 5% for AMD this year.

On the other hand, if Ether prices keep soaring, then GPU demand could surge, potentially offering 13% upside to NVIDIA’s revenues and 23% upside to AMD’s revenues this year.

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