As the price of bitcoin has surged, the hidden costs of the cryptocurrency boom are becoming clearer.
Awareness of the environmental consequences of using a vast array of computer equipment to produce bitcoins has been rising. Bill Gates has been among those to flag concerns, pointing out that so-called bitcoin mining uses more electricity per transaction than any other method known to mankind.
Much less discussed, and yet perhaps more immediate, is mining’s impact on costs of chips — which go into everything from smartphones and TVs to cars.
Bitcoin is created by bitcoin miners, who are issued with the cryptocurrency in return for completing massive volumes of computations to verify transactions. This requires a high energy input. But miners also require increasingly powerful computer equipment, or rigs, for the process.
How quickly bitcoins can be mined is directly correlated to how advanced chips inside the rigs are. As the price of bitcoin rises, so does the profitability of mining. The fixed costs of mining a single bitcoin stand at an average of $5,000. With bitcoin trading around $58,000, fat margins have pushed mining revenue to a record $1.4bn last month. As a result, miners are splurging on more and more computers and high-end chips.
The problem is that even without that growing demand from cryptocurrency miners, the semiconductor industry is struggling with a global shortage. The pandemic, snowstorms in Texas and fires have caused severe disruptions to production and supply chains.
“Added demand from cryptocurrency miners is coming when the chip industry is dealing with simultaneous crises — from supply constraints to a structural shortage of high-end chips,” says CW Chung, head of research at Nomura in Seoul. “The squeeze should last through the end of the year. ”
Shortages are affecting a broad range of industries. Automakers including Toyota and Volkswagen have slashed production of cars as a result. Smartphone makers are delaying launches of new models. A shortage of gaming chips has forced chipmaker Nvidia to programme a new chip to throttle mining efficiency by half when it detects it is being used to mine cryptocurrency.
TSMC and Samsung, the world’s largest chipmakers, make most of the chips used in cryptocurrency mining. The two are also the main supplier for the world’s tech groups such as Apple and Intel — which make up a much larger portion of chipmaker revenues than bitcoin miners. Even so, production capacity for chips has been diverted away from industries that need a continuous supply.
Besides specialised chips, miners are snapping up more computers and servers — which is pushing up demand for traditional Dram chips used in PCs. It does not help that the second quarter is traditionally the peak season for chips used in servers, crucial to the businesses of big tech groups like Google and Facebook.
All that has played a part in pushing prices of Dram chips up over 60 per cent in the past three months. While those have boosted chipmaker profits, the shortfall has wreaked havoc on the sector's previously predictable price cycle. Chip prices had been expected to fall last year. Now, another 20 per cent rise in consumer chip prices is expected from the second quarter as the shortage intensifies.
“Cryptocurrency industry demand can have a significant influence on the chip market — during the last bitcoin rally, they were a tenth of TSMC's entire sales,” says Chung.
Structural changes are making the situation worse. Smartphone and game console makers have changed purchasing habits, stockpiling months’ worth of chips ahead of a prolonged period of high prices. An engineer shortage cannot be ruled out either. Taiwanese prosecutors have accused Beijing-based Bitmain Technologies, the world’s largest crypto-mining equipment maker, of allegedly poaching more than 100 local engineers.
Critically, chips are one of the most expensive components of consumer electronics devices such as smartphones and PCs. Increased supply to bring down prices will not be fast in coming. The process of sourcing raw materials and producing chips, which used to take at least three months, is getting longer. Building capacity takes years. There are few other suppliers that can produce at scale.
What then? Previous patterns of behaviour show that bitcoin mining stops being profitable for most miners when the price of bitcoin falls below $3,800. At current levels, that is a long way away.