TSMC’s Crypto Customers
An Analysis
Author’s Note: If you want to watch the video, you can do so here:
Since Coinbase recently has had its direct listing, I figured that this would be a fun newsletter to send out.
Taiwan’s crypto space is growing faster than other areas of its startup market. To me, this feels a little like speculation and excess money sloshing around the economy, but it is hard to deny that if you were to go to a university job fair you will find more than a few startups doing some form of blockchain. I wish there would be more SaaS startups out there, but I can get why such companies might be rare outside of the West.
I don’t think I am qualified to write in depth about Taiwan’s crypto startups, but I am interested in it so if any of you guys see anything authoritative feel free to reply to this email and pass it along to me.
TSMC is a fun company to research and hopefully I can continue to do more of them. If you want to support the channel, I recommend you check out the Patreon. I am moving the Newsletter to a weekly cadence, partly because so much of my recent writing has not been made public yet. It is available to Early Access Tiers until it finally comes up on the release schedule.
I remember being in Taipei throughout 2017 when Bitcoin was going nuts. Tech people in the community were buzzing about this new crypto thing on the horizon.
For what it is worth, Taiwan has a pretty developed crypto and blockchain industry. That includes blockchain companies, Bitcoin exchanges, and more. I remember being at a tech talk featuring the founders of CryptoKitties. A truly fascinating little thing and the large room was absolutely packed. I never thought that ordinary Taiwanese people would care so much about this.
But Taiwan's electronics industry has a larger stake in the cryptocurrency world beyond its blockchain startups. For this short little video, I want to talk about the influence that crypto has had on TSMC, the biggest foundry in the world.
An explainer on Bitcoin and cryptocurrencies in general is outside the scope of this video. You can go to Wikipedia or Vox or something if you want to start or need a refresher. Furthermore, I will mostly be focusing on Bitcoin and to a lesser extent Ethereum. No Dogecoin or Monero here.
Mining Bitcoin
Let us begin with a brief overview of crypto mining and the hardware used. Cryptocurrency as traditionally defined are not issued or controlled by entities like governments or central banks. Rather, they are created from scratch with a process called mining.
Mining is a critical step in the cryptocurrency process. It enables a transaction to take place and for all parties to verify its existence and security. It is called "mining" because like its real world counterpart, the work requires effort and harkens back to the old times when money depended on how much gold we could haul out of the ground.
Transactions in cryptocurrency need to be acknowledged and confirmed by the network. The transaction's "block" provides some variables that the miners' computers can turn into a math problem. The miners use unique functions to try and create a solution to the problem. The first miner to solve the "block" - as in to create a solution that meets the network's arbitrary objective - successfully mines the block and is rewarded bitcoin.
The solutions are computationally expensive and that is the point. As more blocks are mined, a difficulty factor is added on with the goal of making the job harder or easier. Generally speaking, the more computing power in the Bitcoin mining network, the harder the problems get.
The Stages of Crypto Hardware
As the first and biggest cryptocurrency, Bitcoin mining has had many years to progress through distinct stages of hardware usage.
When Bitcoin was first created in 2009, the difficulty factor was low enough that simple desktop CPUs could be economically used for mining. This stage did not last for very long, about a year. The reason for this is because your average desktop CPUs only have a few cores, which means that they can only solve few problems at a time.
Starting in 2010, people began using GPUs to mine Bitcoin. GPUs are specifically built to handle geometric calculations for visual effects or 3D graphics, but their high-core count also makes them more suited than CPUs for crypto mining. As compared to the CPUs' 4-8 cores, GPUs have about 20-30.
The GPU phase lasted for 3 years. For Bitcoin this phase ended for several reasons. GPUs are extremely energy intensive, you can only attach a few to a single motherboard, and come to think of it, you really just need the GPU right? Over time, these disadvantages made GPU mining less economical.
Starting in 2013, Bitcoin mining ascended beyond the GPU phase into a world of even more specialized hardware. The first type was the FPGA, Field Programmable Gate Array rigs. These are special processors that can be reprogrammed in real time to adapt to changes in the algorithm.
FPGAs represented a big, near exponential step up in processing power. But this gain in power is balanced by significant ownership costs and difficulty of access. You cannot easily stroll into a Best Buy and buy a FPGA for your mining rig.
But miners are always pushing the boundaries in crypto hardware and soon after FPGAs came ASICs. ASIC stands for Application-Specific Integrated Circuit and the term can be used for any IC that is specially designed for performing a particular task.
Whereas general desktop CPUs can be quite versatile, a Jack of Many Trades that does none of them well, an ASIC is a cheetah that does nothing but mine crypto. As there are significant costs for designing and creating such ridiculously optimized hardware, ASICs are mostly just for Bitcoin.
Rise of the ASICs
As the combined hash calculations done throughout the entire Bitcoin network exceeds 25 quintillion hashes per second, ASICs are now the dominant hardware in the mining space. Nothing else can compete.
Butterfly Labs was the first company to release an ASIC product back in 2012. They took $250,000 in preorder for three lines of mining rigs. The chip behind that rig was a 65-nm GlobalFoundries die. The company struggled to fulfill demand as the foundry encountered repeated delays. In addition, the chip ended up using more power than first claimed.
Butterfly's success launched a thriving ecosystem of mining hardware startups. Names like ASICMiner and Avalon. There are over 37 known efforts and lines of mining hardware. Many of those companies have folded however as the industry consolidated. The story of the mining hardware industry is fascinating and worth checking out.
Today, the dominant maker of Bitcoin mining ASICs is Bitmain. Founded in 2013, Bitmain Technologies' first product was the BM138, made on a 55nm TSMC process. 55nm was a relatively mature node, but the vendor's products rapidly ascended the node ladder towards the latest, bleeding-edge nodes.
Bitmain's latest hardware products combine fully custom implementations and cutting edge nodes like 20nm and 16nm. They run on ultra-low voltages with some 16nm ICs being some 8,000 times more energy efficient than GPUs.
TSMC's Crypto Revenue
Throughout 2017 into 2018, Bitcoin experienced what can only be described as a bubble. The price broke through a thousand and then quickly hit $5,000, then $10,000, and peaked at $20,000. Many other altcoins also began gaining traction at the same time. Names like Ethereum and Dogecoin and Litecoin.
Many crypto mining hardware companies were booming at the time, but none more than Bitmain. TSMC began to sell them a lot of bitcoin mining chips. Enough to start making a significant impact on this centi-billion dollar foundry's overall P&L.
According to Bitmain's IPO prospectus, the company spent an estimated $570 million in the second half of 2017. And then another $873 million in the first half of 2018. TSMC made some $17 billion throughout that first half of 2018. So Bitmain by itself, out of the hundreds of customers that TSMC services, represented nearly 5% of TSMC's revenue.
TSMC also has another, smaller stake in crypto mining and that is in GPUs sold to mine Ethereum. Ethereum's design is ASIC-resistant so commercially sold GPUs are used to mine Ether. You can literally calculate your return on investment based on the Ether price.
Many of TSMC's biggest customers also make GPUs. AMD and Nvidia come first to mind. But much of this GPU demand is spread out amongst other foundries like Samsung and GlobalFoundries. So this revenue effect for TSMC is less pronounced.
Thus, cryptocurrency (which TSMC places in its High Performance Computing division) began popping up in the TSMC earnings transcripts as analysts tried to gauge the industry's revenue impact. But in the 4Q 2017 transcript, senior management drew a cautious line on the future of cryptocurrency revenue:
We have sized 2018 cryptocurrency mining demand carefully. Since it is still in its early stage of development, it is difficult for us to forecast its demand too far into the future with accuracy. However, as long as the cryptocurrency miners can derive positive returns, demand for TSMC wafers will continue.
Whenever analysts asked for anything more than that though, management deferred to say more than that. Basically it seems like they were skeptical about the sustainability of the revenue. Bitmain pre-pays TSMC for its product about 3 months before delivery so there are no long term contracts. If the Bitcoin price were to fall then crypto revenue for wafers can dry up extremely quickly.
Of course, they were right to be cautious and not grow capacity for Bitmain and the GPU market because the Bitcoin and crypto bubble eventually popped in early 2018 and entered a rough bear market.
Other than Bitmain, I don't know of any other significant TSMC mining hardware customers with the possible exception of Hangzhou-based Canaan which is a third of the size.
Conclusion
Despite some troubles after the Bitcoin bubble popping in 2018, Bitmain appears to be still in TSMC's good graces. Bitmain and Canaan popped up in media reports talking about future 5nm customers going into 2021. And TSMC's revenue from High Performance Computing segment, which includes GPUs and ASICs, is up 39% in 2020 from the prior year. Though as you know, that includes a hodge-podge of other things.
But I get the sense that TSMC values these crypto customers a bit more than your standard fabless chip maker. Bitmain to TSMC might be more like an Apple-style of customer. My thinking as to why this might be is that Bitmain might resell hardware, but they are also using it to mine Bitcoin on their own. Bitmain, like Apple, derives value from an entire ecosystem.
So they are more resistant to rising chip wafer prices than someone who resells chips to vendors, because for those guys a rise in wafer price directly impacts their margins. And they are very much willing to go to the leading node for it, which is why we keep seeing these guys pop up alongside TSMC’s other close customers whenever we talk about the next hot process like 7 or 5nm. Just a theory.
Anyway since the start of the pandemic, we have been in the midst of another sustained rise in the price of Bitcoin and cryptocurrency. Times are good in the crypto world once more. Over in the US, you have a bunch of corporate companies adopting Bitcoin for their own use and financial treasuries. You have services like Cash App and PayPal bringing crypto to the masses.
Here in Taiwan, this new price trend lacks the exuberance and bubble-ish optimism of 2017. It has sort of went under the radar. Even in the TSMC transcript, the mentions of crypto are rare as compared to mentions about gaming consoles and especially automative. But if TSMC sales to companies like Bitmain and Canaan take about 3 months to show up on the P&L, then we should start seeing their impact within the first or second quarter of 2021.
But outside of the impact on the Taiwanese electronics industry, it is interesting to see all the blockchain startups recruiting at the college campuses here and demonstrating their own chain's uses at tech fairs. It makes me wonder what such technology holds for the country's technology future.