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Cryptocurrencies Plunge: Is the Party Over for GPU Makers?

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Bitcoin plunged more than 6% on Apr 9, falling below the $7,000 mark. Such a dip has been attributed to selling and fears related to tax-filing even as the deadline to file taxes is fast approaching. Also, the cryptocurrency has witnessed a decline of more than 27% in the last one-month period.

Bitcoin started off 2018, trading above $14,000 only to tank more than 52% to its current levels. In fact, according to Coinmarketcap, the virtual currency market as a whole has given up more than 50% of its market capitalization since the beginning of 2018.

Further, Ethereum dipped to $391 to end the session on Monday after trading at $429.25 for most of the session. The virtual coin is battling hard to move above the $400 level since Monday. Markets for all major cryptocurrencies have tanked of late. Analysts believe that sell-offs related to tax-filing and SEC’s crackdown on digital currencies have pushed the entire cryptocurrency market lower.

Throughout 2017, graphics processing unit (GPU) makers capitalized on demand created by an acute paucity of high-end graphic cards and the need for GPUs to mine faster. However, the tables have now turned and the recent weakness in the crypto market is reflecting on shares of such companies. So have cryptos lost their sheen? Let’s have a look.

Cryptocurrencies Fizzle Due to Tax-Filing Woes

Head of research at Fundstrat Global Advisors, Thomas Lee stated in a report on Apr 5 that households in the United States owe approximately $25 billion in capital gains taxes on their holdings of different virtual currencies. This is expected to result in massive selling of various cryptocurrencies and in turn a huge influx of U.S. dollars. All of this is expected to happen before the Apr 17 tax-filing deadline.

Bitcoin, in particular, has declined more than 50% in the first quarter of 2018 and analysts blame it on “regulatory uncertainty.” The report also stated that on average investors realized a massive $1.04 trillion in capital gains from cryptcurrencies as well as stocks in 2017. This has been the most in terms of amount since investors gained about $924 million in 2007.

Analysts have also estimated that despite the recent dip in cryptocurency prices, investors in the United States may still have tax obligations on capital gains. This is becasue of the huge gains in 2017 on the back of a stupendous cryptocurrency rally.

Are Cryptos Set for a Decline?

The going has been tough for the cryptocurrency market in the recent times. The plunge and the associated volatility have been attributed to a number of factors such as China’s ban on Bitcoin trade, even as a number of other countries have tightened regulations. These have affected not only Bitcoin but also other cryptocurrencies like Ethereum, Ripple, Litecoin and many more.

The situation worsened after the world’s two largest online ad companies — Alphabet (GOOGL - Free Report) and Facebook (FB - Free Report) — announced that cryptocurrency ads were banned on their platforms.

How a Crypto Revolution Sparked GPU Demand?

The cryptocurrency boom had created an acute shortage of high-end graphics cards. Such an event led to financial windfalls for GPU makers such as Advanced Micro Devices, Inc. (AMD - Free Report) and Nvidia Corporation (NVDA - Free Report) . Moreover, mining virtual coins require a huge amount of computing capability, which only GPUs can provide. This is what actually boosted revenues of GPU makers.

As a matter of fact, NVDA reported revenues of $2.9 billion in the fourth quarter of 2017, primarily on the back of high demand for GPUs and other mining-related revenues, which increased steadily in the last quarter of 2017. Similarly, AMD reported stupendous earnings in the last three months of 2017, rising high on increased demand for GPUs.

However, manufacturers of semiconductor products, memory solutions, including manufacturing memory chips used in the mining rigs as well as advanced hardware to smoothly run parallel processing have faced pressure from the decline of the cryptocurrency market. Such companies include the likes of Intel Corporation (INTC - Free Report) and Micron Technology, Inc. (MU - Free Report) . You can see the complete list of today’s Zacks #1 Rank stocks here.

GPU Demand to Suffer as Cryptocurrencies Plunge?

The recent weakness in this market also points to the fact that cryptocurrency mining demand has declined of late. This negatively impacts the GPU market. Also, the recent volatility in Ethereum has also weighed on the prospects of GPU, CPU and chip makers. Companies such as Advanced Micro Devices and Nvidia that make chips and power cryptocurrency mining have felt the pressure emanating from such weaknesses.

Further, over-dependence of GPU makers on cryptocurrency-powered demand leads to increased susceptibility to a complete crash when miners become wary of low returns amid rising prices of electric power.

Many analysts have issued warnings regarding virtual coins. SEC is wary about its extreme price volatility in cryptocurrencies and liquidity in bitcoin-related funds. Several central banks have issued warnings against it.

China had also put an embargo on all domestic cryptocurrency exchanges from dealing with the renminbi last year. The Chinese government also clamped down on initial coin offerings (ICO). This year, China plans to carry out of rectifications in crypto regulations.

The Reserve Bank of Australia sees it as "speculative mania" and finds bitcoin more popular in the illegal economy, not among consumers. The governor of the Reserve Bank of New Zealand called it a "classic case" of a bubble.

However, Cboe Global Markets, the first to bring about bitcoin futures, wants the SEC to permit cryptocurrency exchange-traded funds. After this, the Securities and Exchange Commission (SEC) said that it is mulling over a rule change that would allow bitcoin ETFs to be listed on exchanges.

To Conclude

Going by the recent trends, it would not be wrong to say that the digital currency market would fizzle out soon. Moreover, the rally that the space witnessed in 2017 was rather sentimental and thus momentary. In fact, the gains enjoyed last year might be one of the reasons why cryptocurrencies could witness steep declines in the near future.

Also, crackdowns by various governments across the globe have made it virtually impossible for digital coins to be traded legally. Moreover, with rising costs associated to mining at a time when cryptocurrency prices have steeply fallen, virtual coins are increasingly losing their sheen. Such a decline cannot be called a correction and a rebound in prices is not likely anytime soon.

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