While surging demand is rarely a bad thing, in the past this particular trend has heralded a crash – when the market price of digital currencies soars, miners tend to move on from graphics cards to pricier custom chips optimised for the algorithm they target. That has left graphics-card makers with a drop in demand even more sudden than the initial surge – and a glut of unsold inventory made worse by a flood of used cards into the second-hand market as miners dumped them.

In November 2018, having just witnessed such a reaction, Nvidia had to cut its annual sales forecast to US$2.7 billion, falling US$700 million shy of analysts’ estimates. That disappointment caused investors to dump the stock, resulting in a loss of 20 per cent of its price in two trading days.

To hedge against another round of this boom and bust, Nvidia has limited the so-called hash rate on its newest graphics chips and some existing products, a change that makes them inefficient for cryptocurrency mining.

Importantly, that limitation has no impact on the chips’ ability to make the video gaming world more realistic in a way that players will pay heavily for. The problem for the most valuable US chip maker is the difficulty in knowing exactly how many graphics cards it is selling to gamers – a more consistent market with foreseeable surges in demand around gift-giving seasons and marquee game releases – and how many wind up in the hands of cryptocurrency miners. Often, those groups overlap.

‘A thing of the past’: China’s fading place in global bitcoin mining

Instead of buying finished personal computers, cryptocurrency miners build a processing infrastructure more akin to a data centre or a supercomputer: lots of task-specific components strung together into a unified system. A cryptocurrency farm is essentially the biggest accumulation of processors that the miner can assemble to generate tokens. One graphics card is good. Many graphics cards are better.

Jon Peddie Research, which specialises in tracking the graphics card market, estimates that about 25 per cent of the add-in graphics cards – those built on their own circuit board and offering more power than embedded graphics – that were shipped in the first quarter of 2021 went to cryptocurrency miners or people looking to resell them for a profit. That is about 700,000 cards, for a total value of US$500 million, the research firm said.

Nvidia’s GeForce RTX 3080 graphics card first went on sale last September at US$699. In May, that product was going for US$2,582 and is currently selling for a premium of 139 per cent over the launch price, according to StockX, an online marketplace that tracks the prices of consumer goods.

“The worry from here would be that things could be too good given the pesky crypto environment,” Stacy Rasgon, an analyst at Sanford C Bernstein, wrote in a research note. “It is admittedly likely true that at least some gaming business is currently being driven by crypto, which has the potential to bring back some unpleasant investor memories.”

Rasgon said he thinks the risk this time is more manageable and less likely to yield an unpleasant shock. Nvidia has taken some steps to silo its markets.

Chief among them is the introduction of crypto-mining processors, or CMPs, which Nvidia has created exclusively for miners. A US$400 million chunk of second-quarter revenue will come from them, according to the company’s projections. These processors cannot be used in computers for gaming or any other conventional graphics-related tasks, Nvidia’s Huang said in an interview. That cuts off the possibility of them flooding the secondary market later when miners decide to dump them in bulk as they upgrade to faster hardware.

“With CMP we learned to move faster,” Huang said. He indicated that he has inoculated Nvidia from the worst of any potential crash caused by crypto-mining graphics card use and disposal.

Huang said he thinks cryptocurrency mining will continue and that the currencies are here to stay. He told reporters at the Computex show this month that he is hoping that digital currency markets have reached the size that will make the special-purpose chips a worthwhile investment.

China’s cryptocurrency crackdown intensifies as Sichuan orders a stop to mining operations

Nvidia’s ideal position is one where it benefits from the cryptocurrency boom without jeopardising its core market. It is a lucrative prospect if the company strikes the right balance, since the CMPs are made from the rejects from its graphics card production.

Chips deemed unfit to sell to gamers because of some fabrication or functional flaw would usually be discarded, but because they do not need their full capabilities to be useful for cryptocurrency mining, the company can repurpose them. It is a bit of added operational efficiency that is desperately needed at a time when the entire chip industry struggles to secure production capacity.

Scale is key to Huang’s optimism about Nvidia getting things right this time. The company’s 2021 revenue will be more than double its 2018 total of US$11.95 billion, according to analysts’ estimates. Its video gaming business alone is now bigger than the whole company in 2018. It has successfully grown its data centre business, with those chips providing 36 per cent of its revenue in the most recent quarter. Nvidia is now bigger and more diversified, and is taking pre-emptive measures to avoid another cryptocurrency collapse.

Still, just like the volatile price of cryptocurrencies and the unpredictable new uses that they are put to, fluctuations in the chip industry in recent times have grown bigger and more difficult to predict.