Bitcoin: The 21st Century’s Gold Rush Nvidia, Amd Offer Slightly Less Risk

During the gold rushes of the 1800s, thousands of prospectors descended on California, Nevada and the Yukon. While some fortunes were made, those who profited most handsomely were the merchants selling picks, shovels and other provisions to the miners.

This century’s gold rush is called Bitcoin, an electronic platform whose digital currency called bitcoins (lower case) now sell for US$4,700 each, quintupling in price from less than US$1,000 at the beginning of the year. The rush has enriched today’s version of the nineteenth-century merchant: computer graphics card makers. Bitcoin's price often swings 5% to 7% in a day, and a 15% change over a few days is not unusual.

Bitcoin, invented in 2009 by an individual or group called Satoshi Nakamoto — no one knows Satoshi’s real identity — is an electronic cash system that allows buyers and sellers to pay each other for goods and services directly without the need for a “trusted third party” such as a government, bank or credit card company. That means there are no intermediaries taking fees for every transaction or tracking buyers’ shopping preferences, and no governments to impose taxes or otherwise collect personal information, making electronic currency systems such as Bitcoin especially popular with criminals and conspiracy theorists. Buyers and sellers may be anonymous, yet each transaction is confirmed by thousands of computers around the world in what’s known as a distributed network, visible to everyone, so no one can spend coins they don’t have. The global limit of supply will be reached when there are 21 million bitcoins, as explained on the site Bitcoin Wiki (en.bitcoin.it).

Bitcoin was the first digital currency and is still the largest, with a market capitalization of US$76-billion, based on about 16.5 million bitcoins in circulation. Its next-largest competitor is Ethereum, invented by a former Bitcoin programmer. Ethereum’s digital coins, called ether, have skyrocketed even more than bitcoins and now sell for about US$386 each. They were trading for less than US$20 earlier this year. There are dozens of other digital currencies and a new one launches every day. (Avoid investing in Initial Coin Offerings (ICOs), however, as Fortune magazine reports about 10% of these are fake websites that simply take your money.)

Speculators interested in profiting from the digital gold rush behind cyber currencies can set up an account with say, Coinbase, the largest Bitcoin broker, download an encrypted digital wallet and pay a 4% fee to buy electronic currencies, and wait for the price to rise. You can pay using bank transfers, credit cards and Walmart or Amazon gift cards. There are even ABMs where you can buy bitcoins for cash.

The risks of owning digital currencies are huge, however. There are dozens of fake electronic currency exchanges and brokerages eager to take your credit card and banking information, and even reputable exchanges are regularly looted by computer hackers who successfully break the codes and make off with customers’ digital money. Finally, if you have managed not to lose your crypto currency and want to use it to buy goods or services, good luck. Bitcoin is eagerly accepted by computer hackers, drug dealers, money launderers and other criminals, but only about 100 legitimate retailers recognize the currency. Even fewer accept the smaller crypto currencies and unless transaction speeds improve dramatically, this is unlikely to change.

If buying electronic currencies seems too risky, you can “mine” them yourself by using a computer to add new transaction blocks to a public ledger called a blockchain, visible to everyone on the network. The mining process requires computers to perform millions of complex mathematical calculations, and once this “proof of work” is done, the computer is rewarded with a new unit of a cyber currency. Those who mine digital currencies as a hobby either buy or assemble mining rigs, usually metal frames that hold a dozen or so graphics processing units (GPUs) and plenty of cooling fans. The fans are essential since the mining process, which runs full-speed 24 hours a day, will overheat most computer components. More sophisticated professional currency miners use dozens of computers in a climate-controlled warehouse, preferably with access to cheap electricity.

If you don’t want to buy the digital currencies or turn your home into a round-the-clock data centre, you can try to find the necessary parts, assemble a mining rig and sell it on eBay.

Figures from nowinstock.net show that it’s nearly impossible to find the necessary GPUs at retailer BestBuy, Newegg and Amazon, as miners of digital currencies, largely those mining Ethereum, have cleared out the entire stock. Alternatively, you can invest in Advanced Micro Devices (AMD/NYSE) and Nvidia Corp. (NVDA/NASDAQ), whose shares have climbed along with the soaring demand for their graphics cards.

Advanced Micro Devices

Advanced Micro, based in Sunnyvale, California, makes GPUs, semiconductors, microprocessors, chipsets and components for video game consoles. Crypto currency miners have exhausted the global supply of the company’s Radeon RX 570 and 589 video cards, and a new card released in late August, the Vega 56, was sold out in minutes, the CoinDesk website said.

At a current price of about US$13, AMD’s shares are up more than 75% over the past year, but investors hoping to capitalize on the buy high, sell higher idea should be prepared for a wild ride. The stock is extremely volatile, with a beta of 2.7, which implies that its share price swings will be 2.7 times wider than that of the market. Over the past year, AMD’s shares have see-sawed between a low of US$5.66 and a high of US$15.65.

Are AMD’s shares overvalued? The stock trades at just 2.8 times sales per share, about the same P/S ratio as Intel Corp.’s, less than Microsoft Corp., Texas Instruments and much lower than rival Nvidia Corp. That’s where the good news ends, however. Owning shares in AMD is less risky than buying cyber currency, but the stock has little appeal to those who look for solid fundamentals such as, say, earnings.

Despite investor enthusiasm over its recent GPU sales, AMD has a long tradition of losing money. The company suffered a net loss of US$497-million or minus US60¢ per share last year which was actually an improvement over 2015, when net losses were US$660-million (-US84¢). In 2014, AMD lost US$403 million, up from a loss of only US$83-million in 2013, while 2012 was a relative disaster, when the company lost US$1.18-billion.

Based on last year’s figures, AMD’s profit margin was minus 11.4% and its operating margin was -10.3%, while total debt was a worrisome 43.2% of total equity.

In July, AMD reported strong results for its second quarter, with revenue of US$1.22-billion, operating income of US$25-million and a net loss of only $16-million or -US2¢ per share.

Most of the 31 stock market analysts who follow AMD see the stock as a hold, figures from Marketwatch.com show. Among the analysts, several warn that AMD’s relatively strong earnings in the second quarter of its fiscal 2017 year were driven by crypto currency mining sales, which many analysts regard as a fad.

Not surprisingly, AMD is popular with short sellers —those who bet against a company by borrowing its shares and selling them, in hopes the share price falls before they have to cover the sale by buying them back. The Wall Street Journal’s Market Data Centre list of the largest short positions shows that as of mid-August these pessimists had sold short about 148 million AMD shares, the second-largest short position among all Nasdaq-listed stocks.

Ironically, a huge short position in a stock can be source of support for the price, as the short sellers will have to buy back the shares at some point. Aside from riding the digital currency fad, this may be the only reason to buy AMD.

Nvidia Corp.

Nvidia, based in Santa Clara, California, makes and sells computer video game graphics, as well as computer components used in artificial intelligence, robots, drones and self-driving cars. The company’s revenue and earnings have been climbing steadily in every department, and while its graphics cards are used by cyber currency miners, this part of its business is relatively tiny.

Nvidia’s GTX series of graphics cards is so popular with crypto currency miners the company’s online store lists it as out of stock, despite limiting sales to two per customer. There are, however, more than 500 listed for sale on eBay.

You could buy a Nvidia share for less than US$100 until mid-May, when the shares jumped above US$130; they closed recently at US$165, giving the company a market capitalization of US$99-billion. Nvidia’s shareholders are just as optimistic as AMD’s, but the share price is not nearly as volatile, with a beta of just 1.24. And unlike AMD, Nvidia has earnings. At US$165, Nvidia trades at 47.4 times earnings, making it relatively cheap compared to Amazon.com Inc., which has a P/E of 244, but more expensive than Alphabet Inc. (34), Microsoft Corp. (27) and Intel Corp. (13). Nvidia has paid a dividend since 2012, increasing it in 2013, 2015 and twice in 2016. The dividend of US14¢ yields a paltry 0.34%, but it’s still a dividend.

In the second quarter of its fiscal 2018 year, ended July 30, earnings were US$2.23-billion, up 56% from US$1.43-billion in the same quarter a year ago, and up 15% for the previous quarter.

Per-share GAAP earnings for the quarter were US92¢ per share, up 124% from the US41¢ in the same quarter of the previous year, and up 16% from the US79¢ recorded in the previous quarter.

Conclusion

The prices of Bitcoin, Ethereum and other cyber currencies have skyrocketed over the past few months, attracting the attention of fraudsters and computer hackers bent on defrauding and robbing those who hold digital currency. This criminal risk, when added to market risk, makes it safer to invest in companies that benefit from the trend without depending on it. If you must speculate in the cyber currency market, consider taking a small position in Nvidia Corp., which has a much more solid balance sheet than its rival AMD.

Richard Morrison, CIM, is a former editor and investment columnist at the Financial Post. richarddmorrison@yahoo.ca