Nvidia’s woes crypto giveth and taketh away

Timing is everything in mining and production

Jon Peddie

As of now, the proof-of-work algorithm that Ethereum uses is called “ethash.” It was designed to require more memory to make it harder to mine using inexpensive ASICs, which in turn led to the gold-rush for the pickaxes needed for mining — AIBs. 

Nvidia and AMD both benefitted. However, the boom has run its course as custom ASICs are being developed for Ethereum mining at the same time as the value of cryptocurrency has declined. For now, cryptocurrency mining with GPUs is no longer profitable and AMD or Nvidia and they are having to adjust. Nvidia discussed the situation in their recent financial call. 

Back when demand for mining rigs based on GPUs seemed insatiable, Nvidia’s already popular GTX 1070 and GTX 1080 were sold out. Nvidia reacted and built more, a lot more. But between the time Nvidia committed to building more, buying wafers from TSMC, and memory from Samsung, the market dried up leaving Nvidia with a pile of inventory. 

As a result, Nvidia’s Q3 gross margins were below its outlook due to a $57 million charge for prior architecture components and chips following the sharp falloff in crypto demand for GPUs.

During the Q&A of Nvidia’s financial reporting to investors, Jensen Huang, Nvidia’s CEO, said, “we came into Q3 with excess channel inventory post the crypto hangover. We expected the pricing in the marketplace to decline and decline slower than we expected and — but while it was declining, we were expecting sales volume to grow, demand to grow and for pricing to be — for volume to be elastic with pricing.” As it turned out, said Jensen, the market adjustments the company hoped for took longer than expected: “… the pricing took longer than we expected, and the volume increase took longer than we expected.” 

Nvidia missed the mark investors set and had used as the basis to run up the PE and thus drive up the share price. They, in turn, punished Nvidia for missing the mark by selling off Nvidia shares and driving the price down over 15%. 

Investors too giveth and taketh.

Nvidia share price 5-days (source Google)


The other problem was Nintendo, the biggest consumer of Nvidia’s Tegra chips, also pulled back and Nvidia reported that their guidance for Q4 would be lower as a result. Nvidia's CFO Colette Kress said that the company expected “minimal sales” of Tegra SoCs in the quarter, blaming seasonality. Shares of Nintendo traded down 10% as Japanese traders digested the bad news from Nvidia — evidently, Nintendo didn’t share its forecast with its shareholders and they had to find out that bad news from you know Jensen Huang.

Nintendo share price 5-days (Source Google)


The folks who run the Ethereum ecosystem (empire) are moving from a proof-of-work hash to a proof-of-stake hash. As of now, the organization says they’re planning a “hard fork” codenamed Constantinople for January 2019, though they also caution that those plans are subject to change. Changes are being made to offset the big miners from dominating and controlling the market and make it more distributed among all users, each one having an equal stake and staking the same amount, or pure egalitarianism. Bottom line, when the new scheme GPUs for mining will be very expensive dull pickaxes.

This is just another cycle. Just as the run-up was a cycle, like it, this run-down too will pass. Nintendo will do something clever with the plumber and Zelda, and its fortunes will turn around. It’s likely Nintendo will stay with Nvidia and use the next-gen Tegra in the next gen Switch — why mess with a winning combination? Both companies are solid, and the share price has nothing to do with their technology, R&D investment, brand, or almost anything else except the senior managers' bonuses and stock options. They may have to hold off buying that new race car or fifth house.