Wednesday, March 24, 2021

Bitcoin Mining Boom Adds to Chip Price Inflation

As semiconductor chip prices soar in the face of mad Federal Reserve money printing and tight chip supplies, this report comes in via June Yoon at The Financial Times:

[B]itcoin 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 problem is that even without that growing demand from cryptocurrency miners, the semiconductor industry is struggling with a global shortage...

“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...

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...

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...

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.

The price inflation that is about to hit the consumer sector is going to be really something.

Keep in mind that the current advance in cryptocurrency prices wouldn't be occurring without the recent massive money printing by the Federal Reserve. The money just wouldn't be around to push crypto prices higher if it wasn't for the Fed. And this price rise is providing crypto miners with the opportunity to bid materials, including chips, away from the consumer sector. 


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