Today I’m going to largely hand this blog to the excellent James Butterfill at ETF Securities. He’s written a very readable blog for the London based asset manager looking at the relationship between graphic GPU cards and the rise of crypto currencies. It’s a great read and if you want to avoid my initial rambling commentary you can see the original blog  here at https://etfsecuritiesblog.com/2017/07/12/cryptocurrencies-are-the-new-gold-rush/

For the record, I’m not remotely convinced by any of the current crypto currencies. A few years back I considered putting a bit of money into Bitcoins but when the whole complicated mechanism by which they are held was explained to me (especially the digital wallets bit to protect against theft), I thought “bugger that, it all sounds too complicated”.

The more I looked into it, the more I became convinced that the whole crypto revolution was just another example of a cunning Ponzi scheme enacted by what I like to call the Libertarian Fanboys.

Now as a nerd myself I see many of these tendencies tendency in the mirror daily. The pathology consists of the following:

1. A heavy libertarian streak which is largely built on the assumption that your parents are jerks and that thus society is overly authoritarian. Thus, we should all be allowed to play games for as long as they like despite what Dad says. As these fan boys get older, they transfer this mentality into libertarian politics. They assume that the system is broken and that we need some Chomskyite Reset which frees us from the authoritarian and corrupt global system (although of course, Chomsky is obviously well to the left of Stalin and Trotsky) and allows us to be true to our inner spirit.
2. This libertarian fan boy crowd also assume that the world will, by default, prefer technology based solutions because they are self-evidently right. Which they are most of the time except when Grandma gets involved.
3. These fan boys also watch too many dystopian movies which assume that everything is corrupt, that we’ll part of some Matrix like delusion and that we’re all cruising for a bruising. Modern civilisation cannot be trusted and must change radically soon or the Zombies will make an appearance and then we’ll have no choice. Cue some singularity moment involving transhumanism
4. Crypto currencies fit into this pattern as an IT fuelled, kick against the system. It also allows the Fanboys to bamboozle their parents who have absolutely no understanding of what all these digital coins and tokens are. “Darling can I use them down the off license?”. But what makes it all even sweeter is that if all the fan boys can plunge into a big momentum trade, enough of them will make a large lump of money – which will help pay for the rental deposit on their next tiny flat.

Crypto currencies are a wonderful carry trade until they’re revealed for the fraud many of them are. I wish all the promoters enormous luck and maybe something genuinely transformational will appear very soon. If it does I’ll be sure to invest in it. Until then, I’ll just watch as everyone gets in on  the game. A few weeks ago for instance social trading platform eToro announced what I thought was a smart move for amateurs like me – invest in a copy fund which tracks these crypto currencies. I’ve also heard rumours that fintech digital challenger Revolut will soon offer a transfer service into cryptos, which would be fantastic news as the app is a joy to use.

Anyway enough from me, now over to James Butterfill at ETFS on why the crypto craze is pushing up graphics card prices – and why the shovel manufacturers of crypto might be the better bet.

Cryptocurrency miners are a fickle group, flipping from one currency to the next depending on their ability to mine it cost effectively. Mining has been proving lucrative for them, but as a consequence prices of tools used in mining cryptocurrencies are soaring, similar to the gold rush seen in the 19th century.

During the California Gold Rush the tools used to mine rocketed in price. The gold pans needed typically cost US$0.20 prior to the rush in 1848 but then rose sharply within a few years to US$8.00. Given that an unskilled labourer’s salary was typically US$0.90 per day during that period this was a substantial investment.

News of the stratospheric rise in prices of popular cryptocurrencies such as Bitcoin and Ethereum has prompted some large investors to develop mining server farms with significant processing power. It is a simple investment; once the mining infrastructure (a powerful processor to solve the algorithmic mining process) is setup and is autonomous, there is very little else to do other than worry about the fluctuating price and your breakeven point.

Cryptocurrency mining can be loosely divided into two main costs, the upfront costs of the hardware and the ongoing cost of power consumption. At current Ethereum prices, when taking into account volatility, it is possible for an investor to breakeven in less than 6 months depending on power costs. Consequently, these server farms are often in locations where power costs are low, improving the breakeven point.

The total mining infrstructure available for Ethereum is quantified by the hashrate (H/s) per second, defined as the speed at which a process is completed in the currencies’ code. In July 2015, this hashrate was 24GH/s, this July it has risen to an astonishing 65,577GH/s according to Etherscan.io. Clearly, there has been considerable growth in the Ethereum mining infrastructure.

This rise in popularity of Ethereum has also led to hobbyists building mining infrstructure using gaming graphics cards (GPUs). Hobbyist miners are building rigs often with up to 6 GPUs (much more than the single GPU needed for gaming) and consequently certain GPUs are rising rapidly in price and becoming scarce. The miners favour those graphic cards that have a high hashrate while being economic on electricity, this has led to a few very specific cards beings used.

It is normal for computer hardware prices to decline overtime as new models make them obsolete. This has not been the case for the Radeon RX480 GPU, which has risen 82% in recent months, and now superseded by the newer RX570 model, which has since risen 83% over the last month. In stark contrast to the GeForce GTX 1050 GPU prices, which is not popular amongst miners and subsequently barely risen over the same time period.

Both these GPUs are extremely popular due to their high hashrate and power efficiency versus price and are currently very difficult to source on the open market.

It has become increasingly difficult to mine bitcoin due to the demanding processor power required, particularly for the hobbyist. This pushed many miners to switch to Ethereum creating significant volatility in both currencies, but it is now becoming increasingly difficult to mine Ethereum too.

We may find these hobbyists switching to a new cryptocurrency that requires less processor power to mine. This fickleness from miners is likely to exacerbate cryptocurrency volatility. Furthermore, it is becoming evident that GPUs are the gold pans of today, a boon for chipmakers.