All Financial Wisdom

The others that are profiting from Bitcoin and Ethereum (and not because they have invested)

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Cryptocurrency fever continues to infect more and more users, especially after continues to hit new records ,with Bitcoin and Ethereum exceeding $11,000 and $500 respectively.

There is a whole world of investors who are achieving amazing returns when buying and selling cryptocurrencies, but there are those who are making money without having invested directly in this market. It may be that the history of the gold rush is repeated: those who made the most money then were not the ones who sought gold.

Exchanges: I buy, you sell – Who Makes Money?

Cryptocurrency exchanges are probably the true winners of this global phenomenon. At the beginning of November 2017 it was revealed that Coinbase had grown by 100,000 users in a single day after the announcement of the financial giant CME, which was preparing to develop a futures market based on bitcoins before the end of the year.

That sparked renewed interest in buying bitcoin, the star cryptocurrency of the segment, and precisely what is the basis of the Coinbase business. The firm already has 13.3 million users, which is incredible if we take into account that Charles Schwab, the largest broker firm in the world, has 10.6 million users.

In fact only last week, Coinbase grew another 300,000 users, all of them infected by the almost unreal growth of the value of bitcoin. The company, which began operating in 2012, has had several rounds of investment in which it has “raised” a total of 217 million dollars.

The case of Coinbase is probably the best known in recent days, but certainly not the only one. Many other ‘exchanges’ have been emerging in recent years and months to take their piece of cake, such as Bitfinex, Bitstamp, BTC-e, Kraken, and Cryptsy.

There are also stock products derived from this phenomenon that certain companies such as Bitcoin Group SE have taken advantage of very well.

For each of these ‘exchanges, we talked about offers different services and guarantees that can range from certain security guarantees to the management of all types of cryptocurrency (‘altcoins’) beyond the more traditional, such as bitcoin, ether or litecoin .

These security guarantees, however, do not seem to be of much use – case in point – Bitfinex, whose managers store 99.5% of their resources in so-called “cold storage”, isolated storage systems that minimize risks in potential attacks on their systems. That, however, was not enough to prevent the theft in August 2016 of almost 120,000 bitcoins.

All of them, in addition, vary in key issues for users such as currency types (fiat money) accept (euros, dollars, etc.) and of course in the commission fees they charge.

It is from these commission fees that they obtain huge profits, and the lack of regulation in this regard and the appearance of all types of markets and proposals make it difficult to be clear about which ‘exchange’ offers more guarantees or better commissions.

These commissions depend on the rates for exchange trades, purchase and sale, or deposit and withdrawal of money, and comparisons between different services are difficult, although resources such as bitcoinwiki can help users have a somewhat stronger opinion about these options.

Miners: a volume business

Getting rich by mining bitcoin or other cryptocurrencies was feasible a few years ago, when both the difficulty and the cost of those operations were much more profitable. Nowadays, bitcoin mining has become an absolutely specialized area and there are real giants with data centers dedicated to this task.

The situation is different for the mining of other cryptocurrencies, and the best example is in ether, the cryptocurrency derived from the Ethereum platform. The mining of ethers had its particular high point in the first half of 2017, and that particular fever due to the mining of Ether had a singular effect: that of the graphics card market being collapsed, without sufficient units to respond to such demand.

That phenomenon would soon change: the difficulty of mining ether grew significantly (in mid-October it relaxed, of course), and that made the profitability of these operations questionable for individuals. In fact, practically no one ventures to mine on their own (mining pools), and those who assemble a machine dedicated to these tasks join a kind of “miners’ cooperative,” where everyone contributes in a distributed way, and then divide the benefits equally.

Who benefits from this activity? Well precisely those who manage these ‘pools’, who usually charge a commission each time one of the miners “affiliated with the cooperative” wants to send their income to their ether portfolio. That commission varies according to each pool, and also according to the amount that you want to transfer after mining days and days of ether. That same operation is analogous to that of mining in many other cryptocurrencies, and again converts these intermediaries who organize and distribute the work into beneficiaries of that structure.

AMD and NVIDIA

Those that also seemed to have managed to take advantage of this cryptocurrency mining fever were AMD and NVIDIA, whose graphic cards are used in the “extraction” of Ether.

In fact, a few months ago, there was a really unprecedented situation: there were no dedicated graphics cards from NVIDIA and AMD because they were all being purchased by those who sought to mine  cryptocurrencies. The most disadvantaged, of course, were video game fans, who found themselves having to wait for weeks or months to be able to access the graphics cards they were looking for, or who paid a significant premium in the resale market to buy such models.

It seemed that the impact of this very strong demand would even start a new business segment in which specialized motherboards and graphics cards dedicated entirely to the cryptocurrency mining would be the benefeciaries, but both AMD as NVIDIA stepped up to meet increased demand..

AMD’s CEO, Lisa Su, explained it at the last conference with investors to present the financial results for the third quarter of 2017. In said talk, she indicated that sales had indeed benefited from the interest in cryptocurrency mining, but she foresaw that “there will be a relegation of part of the demand in cryptocurrency,” indicating apparently that the relevance of this market is not as important as it might seem in view of events in recent months.

It’s the same thing that seems to have happened to NVIDIA, whose revenue from graphics cards dedicated to cryptocurrency mining is not significant. In fact, according to the company, that income has fallen by half, about $70 million, compared to the previous quarter in which they raised $150 million thanks to the interest in the mining of Ether and other cryptocurrencies.

Jensen Huang even indicated at the investor conference that “The Cryptocurrency market is small for us, but not zero, and I think they will be with us for some time.” Of course, the CEO of NVIDIA did boast that their GPUs “are the ideal platform for new emerging digital currencies.”

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