Shocking revelation: Cryptocurrency miners shamelessly exploit Nvidia’s skyrocketing popularity – You won’t believe what they’re up to!

Hello and welcome to the latest edition of the FT’s Cryptofinance newsletter. This week we will take a look at the troubled bitcoin mining sector.

Nvidia’s repeated record earnings have delighted the chipmaker’s investors, Wall Street analysts, and no doubt the company’s management, if only because they don’t need to talk about the vexing cryptocurrency issue.

The worlds of digital assets and global chipmaking intersect in cryptocurrency mining, which plays a crucial role in the functioning of tokens like bitcoin.

For bitcoin and other tokens to work, miners are needed to verify new payment blocks on the blockchain. They effectively take on the role of market enforcer ensuring that deals are trusted in a system that bypasses third parties such as banks and exchanges. In return, the miners are financially rewarded with new coins.

Their computers run continuously and require specialized graphics processing units (GPUs), computer chips that can handle high volumes of calculations. It turned out that Nvidia’s chips were the most suitable product for the purpose and therefore the demand from hungry cryptocurrency miners has soared since 2017.

However, these customers were something of an inconvenience for Nvidia, although it was not the only chip maker to have this problem.

Nvidia last year expenses paid by the Securities and Exchange Commission, with a fine of $5.5 million, according to which the company had not adequately disclosed to investors the impact of cryptocurrency mining on its gaming activity in the financial year up to 2018.

And by May 2021 it was tweaking the output of some graphics cards to make sure they fell into the hands of gamers, rather than crypto bros jumping on the latest trend.

“Nvidia designed its high-end GPUs for AI training and its low-end GPUs for gamers, both of which are more stable and reliable long-term markets than cryptocurrencies,” Chris Meserole, director of Artificial Intelligence and Emerging Technology Initiative at the Brookings Me Institution, the US think tank said so.

“So when the price of Ethereum increased, the demand for [Nvidia’s] The fries sidelined many of the long-term customers he was trying to serve. Not that they hated short-term profits, but strategically that created some headaches,” Meserole added.

But the hype for AI chips has fundamentally changed the company’s relationship with cryptocurrencies. With Nvidia’s success skyrocketing, the company felt comfortable enough to speak its mind in March.

“I never believed it [crypto] it’s something that will do good for mankind,” Michael Kagan, chief technology officer at Nvidia, he told the Guardian.

“All this cryptographic stuff needed parallel processing and [Nvidia] it’s the best, so people just programmed it to use it for that purpose. They bought a lot of stuff, and then it finally collapsed, because it doesn’t bring anything useful to the company. Artificial intelligence yes”.

But while one half of the pair’s odd relationship has clearly moved on, the other is still holding on to the bond they once shared. As the price of bitcoin soared in 2020 and 2021, companies poured money into buying more mining equipment. Much of it has been financed by debt. Back then, interest rates were low and money and energy were cheap.

But the bitcoin price crash has reduced overall profitability, as have rising energy costs. And if two years ago you bought a bunch of graphics cards to mine the ether, that of the blockchain switch to a greener system in 2022 left you in the dust.

Searching for a believable story to tell, cryptocurrency miners have been talking about joining the cloud computing trend. With energy demand across economies ever more acute, some – perversely – have been paid by authorities NOT to mine bitcoin, and this has proven to be more profitable than actually mining it.

But now AI is potentially offering a helicopter from Saigon. Nvidia is still working hard to keep up with demand.

“The companies that have changed their priorities are not chip designers like Nvidia, but rather cryptocurrency mining companies that had bought a lot of chips for ethereum mining and now focused on serving the AI ​​market instead Meserole said.

A rebranding is also well under way. Mining companies such as HIVE Blockchain Technologies and Riot Blockchain have changed names to shed their blockchain baggage, becoming HIVE Digital Technologies and Riot Platforms, respectively.

Companies like Canada’s Hive have 38,000 GPU-based cards, so it wouldn’t be a surprise to see a couple bought out, especially since their stock prices are depressed. However, repurposing GPUs adapted for cryptocurrency mining is not straightforward.

But removing excess capacity from the market will likely have knock-on effects for Bitcoin. Bitcoin mining has become progressively more difficult as the cost of mining the industry-leading token has increased throughout the year because bitcoin’s hash rate, or the amount of computing power the network needs to process, increases. the transactions.

This risks pushing the mining of bitcoin and other tokens even further into the hands of a wealthy few who can buy GPUs in large quantities. The competition for the newer tools is likely to be tougher, especially if the vendor doesn’t really believe that what you’re doing has much value.

What do you think of Nvidia’s results and the lagging cryptocurrency mining market? As always, email me at scott.chipolina@ft.com.

Weekly Highlights:

• The collapsed cryptocurrency exchange FTX is planning to enlist the help of Galaxy Digital, the investment giant led by US billionaire Mike Novogratz. manage and sell the company’s digital tokens in an attempt to heal creditors. The investment group was selected for its “extensive experience in areas relevant to the management and trading of digital assets”. Reminder: Galaxy disclosed nearly $77 million exposure to FTX two days before the Bahamas-based exchange filed for bankruptcy in New York.

• For the 7,436th time, central bankers have warned of the risks associated with cryptocurrencies: The Advisory Group of Financial Stability Directors, which includes central bank representatives from countries including the United States, Argentina and Brazil, said the Cryptocurrencies have amplified rather than diminished financial assets. risks in less developed countries. My colleague Laura Noonan tells the story Here.

Message of the week: A chilling reminder to cryptocurrency privacy advocates

Remember Tornado Cash, the cryptocurrency mixing service allegedly laundered more than $7 billion in three years and helped North Korean hackers evade sanctions?

This week, US federal prosecutors indicted two in connection with running the service: Roman Storm and Roman Semenov. As I noted last yearwhen the grand decentralized vision of the crypto world meets the US sanctions regime, the US sanctions regime wins.

To speak about the allegations was the American lawyer Damian Williams She said:

“While publicly claiming to offer a technically sophisticated privacy service, Storm and Semenov actually knew they were helping hackers and scammers hide the fruits of their crimes. Today’s indictment reminds that money laundering through cryptocurrency transactions violates the law and those involved in such laundering will be prosecuted.”

Data mining: more and more enthusiasm for artificial intelligence is spreading in cryptocurrencies

Label anything as “AI” and it will pique interest, it seems. In the world of alternative crypto tokens that aren’t bitcoin or ether, coins linked to AI projects are the only basket of cryptocurrencies that has delivered positive returns so far this month.

Other baskets, including exchange tokens and decentralized finance tokens, are definitely trending in the wrong direction. This, of course, isn’t terribly surprising considering that the total value locked up in decentralized finance projects has fallen below $40 billion, a far cry from its peak of nearly $180 billion at the end of 2021.

FT Cryptofinance is edited by Philip Stafford. Please send any thoughts and feedback to criptofinanza@ft.com.