Bitcoin and Beanie Babies: Why Cryptocurrency Volatility Matters to the Semiconductor Industry

Bitcoin, a cryptocurrency built on blockchain, has become one of the hottest topics to hit the semiconductor news feeds and the conference circuit since the iPhone. Why? Because this code-based technology requires so much compute power to run complex mathematical equations that it gobbles up more energy than is required to fuel the entire country of Denmark.

In fact, a recent article in the Washington Post said the practice of bitcoin mining just about shut down Iceland’s power grid in February.

In December 2017, Bitcoin’s value skyrocketed, and it rapidly became a key driver for the semiconductor industry. Just last month TSMC reported record growth and credited orders for cryptocurrency mining chips, because of Bitcoin’s record high values in December.

In January, Bloomberg predicted Bitcoin would account for 10th of TSMCs total revenue for 2018, and will likewise impact companies like Nvidia and AMD. At SEMI’s ISS in January, and again at IMAPS Device Packaging Conference in March, bitcoin and blockchain were identified as key technologies to watch for the industry.

However, a few weeks ago, TSMC adjusted its expected growth for 2018 down to 10% because Bitcoin dropped in value as rapidly as it had climbed, according to Morgan Stanley analysts, who predict if the cryptocurrency doesn’t recoup its value, hardware and price will decline and impact wafer orders. This may be why presenters at last week’s TSMC Customer Symposium didn’t include cryptocurrency and blockchain as a significant driver for 2018, and instead focused on artificial intelligence and 5G.

Demystifying Cryptocurrency, Bitcoin, and Blockchain
The thing is, beyond adopting the buzzwords, few people – except perhaps the developers themselves – really grasp these technologies, and if they do, have a hard time explaining it in layman’s terms. But if we are going to stake our roadmaps on it, it’s important to understand some of the basics, and also its volatility.

Last Week Tonight’s Jon Oliver describes cryptocurrency as “everything you don’t understand about money combined with everything you don’t understand about computers.”  He is not wrong. In an attempt to demystify these enigmatic yet important industry drivers, I set out on a mission to learn as much as I could. Here are the basics:

As defined by John Pavlus, in his January article in Scientific American, cryptocurrency is “a form of digital currency that relies on the mathematics of cryptography to control how and when units of the currency are created and to ensure secure transfer of funds.”

Bitcoin was the first cryptocurrency, invented by someone (or a group of people, no one knows for sure) called Satoshi Nakamoto, who initially developed Bitcoin as a “peer-to-peer electronic cash system”. Think Napster, but for money.

Wikipedia defines blockchain as a continuously growing list of records that are linked and secured using cryptography. Each block typically contains a cryptographic hash of the previous block, a timestamp and transaction data, which makes it resistant to modification.

Still confused? To be honest, it wasn’t until I came upon this segment of Oliver’s show that I was able to grasp the concepts of cryptocurrency, bitcoin, and blockchain and how they are connected. Here’s my summary based on Oliver’s explanation (and some other more technical resources). But for the full experience (and if you’re ok with the occasional expletive) I encourage you to watch the whole segment.

What we need to know about Bitcoin
Bitcoin only exists as computer code and has no bank or government creating or controlling it. It has value because people basically agree it has value and should be treated as a speculative investment, rather than a currency. “Kind of like Beanie Babies in the ‘90s. They were worth lots of money because people were willing to pay lots of money,” he said.

In 2017, bitcoin rose from $1000/unit to $9000 by November to almost $20K by December. Since then it’s dropped by nearly half. However, people continue to invest in cryptocurrencies driven by fear of missing out (a condition commonly known as FOMO).  Furthermore, whether or not it takes off is irrelevant, because the most important thing about it is the blockchain its built on.

Why Bitcoin is Secure
Bitcoin is decentralized because it’s built on blockchain. So rather than verifying the transaction through a central location like a bank, blockchain creates a ledger for every transaction ever made and stores them across a vast number of computers, which has advantages of both speed and security.

Company or bank ledgers are stored in one location, making them hackable. Bitcoin ledgers reside on thousands of computers, making it almost impossible to hack. Therefore, blockchain improves security, efficiency, and trust.

Why is Investing in Cryptocurrency Risky?
There are now over 1500 cryptocurrencies because of open source blockchain architectures. Start-ups are using them to raise capital by selling coins as an alternative to issuing stock in what’s called initial coin offerings (ICOs). It’s difficult to tell which companies real, and which are scams that sell tokens with no services to follow. Many of these companies are now under investigation by the SEC.

Bitcoin itself is extremely volatile and insufficiently regulated. In some cases, governments are concerned about it being used for illegal purposes. Bitcoin was banned in China in 2013, and the country recently expanded efforts to block all cryptocurrency and ICO trading. Thailand, Pakistan and India and others followed suit.

Recent Bitcoin headlines highlight its volatility and speculative nature. In April, New York’s attorney general began investigating bitcoin exchanges. Time will tell its value: it could be worth nothing, or it could be worth billions and adopted as a new global currency.  Oliver’s words of warning: Bitcoin trading is basically gambling and should be treated as such.

How does this Impact the Semiconductor Industry?
Thousands of computers – called “nodes” – are connected across the globe to create the Bitcoin network. New blocks of bitcoin are “mined” by downloading the latest version of a blockchain’s transactions for verification, then using brute-force computation to search for solutions that solve a difficult mathematical puzzle. The first node to discover the solution adds the mined block to the chain, essentially claiming its financial value as payment

Jan Vardaman, Techsearch International, explained to me the importance of this to our industry: These so-called mining machines perform logic “number-crunching” at a rapid pace and require fast processor speeds. Initially, miners started out with CPUs but quickly turned to high powered graphics processor units (GPUs), and now application specific integrated circuits (ASICs) to ramp up the speed. This led to a shortage of GPUs and also contributed to the spike in TSMC wafer orders for ASICs chips.

These ASICs are designed with 171packages on the board comprising mainly small flip-chip BGA packages. Ideally, newer low-power ASIC designs that using bleeding-edge node technology will allow for the needed faster process speeds, explained Vardaman.

Graphics chip makers including AMD and NVIDIA benefited from the market growth for cryptocurrencies, such as Ethereum, last year. TSMC’s advanced node technology enabled it to fill the foundry with capacity, making up for some of the lower wafer demand from mobile communications. Additionally, the major outsourced semiconductor assembly and test service (OSATS) providers, including China’s domestic players, stand to profit from this. However, the volatility of the market is such that nobody is willing to invest in capacity. It’s too unpredictable.

Fortunately, beyond cryptocurrencies, there are many applications that will benefit from blockchain.  So while it’s probably best not to put all your eggs in that particular basket, it’s still an important area to watch. In the meantime, it looks like AI, 5G, and automotive electronics will keep things going. ~ FvT

For more technical reading on the topic, may I suggest the following articles: