Remember the spring of 2021, when crypto miners who were buying Nvidia's gaming graphics cards caused a serious shortage for gamers? The crypto bull market was at its peak, mining profits were high, driving demand for Nvidia's graphic processing units that could do fast computational work.
The company even brought out special mining cards to address the demand and to protect its gaming cards for, well, gamers.
But miners found a way to continue to use the regular GPUs. Prices of GPUs skyrocketed, making mining more expensive than it already was. Nvidia's GeForce RTX series, which still has the highest rating for its mining profitability in the crypto community, commanded a premium price.
Nvidia's Gaming Revenue, Crypto Mining, Stock Price
Gaming revenue for the quarter ended May 2, 2021, was up 106% from the previous year. NVDA shares doubled, reaching an all-time-high 346.47 in November.
That situation has made a 360% turnaround. In the quarter ended May 1, the company said revenue from its crypto mining processors (CMP) had come down to "nominal" numbers.
Late Wednesday, Nvidia reported a 44% sequential decline in gaming revenue for the second quarter. Total revenue of $6.7 billion was much lower than the company's lowered guidance of $8.1 billion. The company also lowered its fiscal third-quarter estimates to $5.9 billion, 17% lower than the same quarter last year.
Gaming is still the company's biggest revenue segment. Whether the decline in Nvidia's gaming revenue was due to a decline in gaming or crypto mining will remain unknown since gaming cards were frequently repurposed for mining, despite the company's attempts to stop it.
Even today, the powerful GeForce RTX series is one of the best mining GPUs there is. It is also one of the best gaming graphic cards.
Earlier, Nvidia acknowledged that crypto prices drove the demand and therefore the price of Nvidia's GPUs. Since demand for GPUs from miners followed crypto price action in the past, the recent crypto crash likely resulted in the drastically diminished GPU demand.
Gaming Cards Not As Attractive For Emerging Crypto Protocols
But is the lower GPU demand from miners caused by the crash in crypto markets? Or is it because of a more permanent shift in the crypto-verse? If the former, then Nvidia's volatility will continue to mirror cryptos. In that case, the heyday of high GPU average selling price and soaring stock price may return for Nvidia.
However, two events would make the crypto exodus from GPU wars more permanent, both of which have to do with what is happening to the second largest blockchain, Ethereum, and its native coin, ETH.
Ethereum has been fighting two battles: First, rising transaction fees have made it less competitive even as its network exploded. Second, because it has been following the proof-of-work protocol to validate and complete a block, mining expenses have been high.
Ethereum's community is finally fixing both and this would mean that GPUs will no longer be highly sought after.
Ethereum's London upgrade, or the Ethereum Improvement Proposal (EIP-1559), came into effect on Aug. 5 and replaced the earlier auction system. Earlier, users had to bid for the fees they would pay for a transaction and this made fees unpredictable and frequently costly.
Users now will pay a flat fee that is determined by the network with the option to pay more (like a tip) if the network is congested. It will also burn the ETH paid as a flat fee, leaving the extra ETH paid as a tip alone for miners. In short, Ethereum will become less attractive to miners.
The bigger tectonic shift, however, is happening in September. The Ethereum Merge will bring a new validation protocol that does not even need mining: proof-of-stake. GPU demand was based on the older protocol, called proof-of-work, which required miners to solve puzzles to validate a transaction. Proof-of-stake requires validators to wager their coins to get a chance to validate and earn rewards.
Protocols Indicate Shift Away From Mining
Other protocols such as those of Solana and Algorand also indicate a shift away from mining. Solana's proof-of-history uses the blockchain's time stamp, and Algorand's pure proof-of-work allows validators to stake fewer coins.
Many of these changes are being tested and several are evolving. Others are under wraps. But except for Bitcoin, they show where crypto is headed, and it is not toward mining.
Crypto demand for Nvidia's GPUs may never be as high as it has been in the past. In its earnings conference call, the company said that normalized revenue from its biggest business segment will remain high due to higher average selling price (ASP) of graphic cards, despite the crypto exodus.
It also mentioned growing demand for Cloud GPUs in data centers, and for its advanced RTX technology with its AI powered 3D graphics that will evolve with the Metaverse. Demand from autonomous driving cars was also mentioned. Crypto mining was not mentioned as part of its larger plans.
But if the crypto mining gold rush is over, ASPs are likely to return to average levels as ordinary gamers look for just an immersive gaming experience. Without miners' rewards, there is no pot of gold at the end of the gaming rainbow.
