NVIDIA (NASDAQ: NVDA) recently announced a fashionable brand-new item: a cryptocurrency mining processor (CMP). These chips are specifically created for mining Ethereum (CRYPTO: ETH), and the first shipments are expected to release later this month.

This move has several huge implications for NVIDIA’s business. Here’s what investors need to know.

What does it imply to mine Ethereum?

Every time somebody sends or gets an Ethereum token, a deal takes place. And these transactions are processed in batches referred to as blocks. For instance, if I buy an Ethereum token right now, that deal will be organized together with other deals up until a block is formed, at which point that obstruct can be mined. Particularly, miners utilize powerful computer systems to find the cryptographic hash (i.e. solve the math problem) that verifies the block.

Image source: Getty Images. As soon as the block is confirmed, it is added to the chain of all previous blocks in the Ethereum network — that’s where the term blockchain stems. While blockchain technology has applications beyond cryptocurrency, it was very first created by the unknown creator of Bitcoin (CRYPTO: BTC). And since a cryptocurrency’s blockchain consists of a record of all previous deals, it is the equivalent of a dispersed journal.

Simply put, blockchain innovation eliminates the requirement for a central banking authority. Miners unlock additional Ethereum during the processing of the block (it sort of serves as settlement for their computational efforts), which suggests no bank requires to provide the currency. Similarly, after solving the block’s cryptographic hash, all other computer systems on the Ethereum network must confirm the service. If authorized, the block is added to the blockchain, making all deals part of the permanent record. In other words, there is no need for a reserve bank to serve as a record keeper.

How does NVIDIA benefit?

In order to mine Ethereum, miners require effective hardware. Not surprisingly, NVIDIA’s graphics processing systems (GPUs)– which are best-in-class options for compute-intense tasks like data analytics and artificial intelligence– are likewise great at mining cryptocurrency.

NVIDIA’s brand-new cryptocurrency mining processor is particularly designed for the Ethereum network. In spite of being the second-largest cryptocurrency, the worth of an Ethereum token has surged over 1,660% in the past year, outpacing Bitcoin’s 1,171% gains. Additionally, mining Ethereum is far more rewarding than mining Bitcoin given that there are more tokens offered to be mined, which implies there need to be lots of need for NVIDIA’s new product.

The other benefits

When NVIDIA announced the CMP, it also suggested that its latest gaming graphics cards– the GeForce RTX 3060– are capable of determining the Ethereum mining algorithm. To guarantee that gaming GPUs wind up in the hands of gamers (not crypto miners), the RTX 3060 is configured to restrict calculating power when utilized to mine Ethereum.

This will function as a deterrent to crypto miners, and it should assist the company solve the present shortage of gaming GPUs. However there is still another advantage.

Investors might remember NVIDIA’s dismal monetary performance in financial 2019. As need from cryptocurrency miners evaporated, excess channel stock resulted in decreased GPU shipments, which caused a 24% drop in earnings in Q4 2019.

At the time, CFO Colette Kress said: “Crypto mining demand and its after-effects have distorted the quarter-to-quarter trends in the video gaming organization and obscured its hidden pattern.” Simply put, NVIDIA misjudged the portion of need originating from the crypto neighborhood, and the business was captured flat-footed when that need was greatly minimized when the rate of Bitcoin fell considerably.

That’s the other advantage of NVIDIA’s brand-new CMP. By introducing a processor dedicated to cryptocurrency mining, while all at once hindering miners from utilizing gaming GPUs, NVIDIA will have the ability to much better measure the portion of need coming from the crypto community. This should assist the company much better handle need and avoid a repeat of the stock snafus from a couple of years back.

This article represents the viewpoint of the writer, who may disagree with the “official” suggestion position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis– even among our own– helps us all think critically about investing and make decisions that assist us end up being smarter, better, and richer.