In this post, we take a look at the correlation between prices of major cryptocurrencies and the stocks of Nvidia (ticker: NVDA) and AMD (ticker: AMD). Milton reads thousands of financial news articles every day and observes a high co-occurrence of the mention of cryptocurrencies with the stocks of Nvidia (ticker: NVDA) and AMD (ticker: AMD), the manufacturers of the top two brands of graphics processing units or "GPUs" used to mine cryptocurrencies. In light of the recent sharp declines in cryptocurrency prices along with the stocks of Nvidia and AMD, we run a correlation over multiple time frames to determine the stock prices of Nvidia and AMD do not have a statistically significant correlation to the prices of the top 3 cryptocurrencies (Bitcoin, Ethereum, Ripple), as measured by market cap.
Introduction: Milton Bullish on Nvidia and AMD
Milton's AI ingests lots of different types of data such as: text based documents (news, company filings, transcripts) processed by our natural language processing capabilities and a variety of quantitative inputs (company fundamentals, macroeconomic statistics, alternative data). Analyzing all of this data allows us to deliver interesting market and stock insights to you, as well as ancillary benefits such as sentiment-driven news and Milton’s AI-powered views on over 1,000 stocks.
Currently, Milton is focused on US equity markets and we have not dedicated time to analyzing cryptocurrencies. However, Milton has been bullish on the stocks of Nvidia and AMD over the past two years, the manufacturers of top two brands of graphics processing units or "GPUs" used to mine cryptocurrencies. We highlight this below using Milton's Score for both stocks using Milton's Smart Watchlist.
Milton's Score for Nvidia
Milton's Score for AMD
Nvidia and AMD Stocks Have Hit A Rough Patch
Despite being big winners over the past 2 years (Nvidia stock +85% over 2 years and AMD stock +150% over 2 years), both stocks have declined significantly from recent highs. For Nvidia, after peaking at nearly $290 per share in September 2018, the stock has declined nearly -44% in recent months and is among the market's biggest losers since the stock market peaked on September 20, 2018 (measured by the S&P 500 index).
Nvidia Stock Price Over Past 1 Year
AMD has fared better in 2018, and while the stock is down nearly -35% from its September 2018 high, the stock has still nearly doubled the beginning of 2018. Milton has been bullish on both stocks over the past 24 months (see above) and continues to believe these stocks will outperform peers over the next 12 months.
AMD Stock Price Over Past 1 Year
Cryptocurrencies Have Had an Awful 2018
After peaking at a total market capitalization of nearly $800 billion in January 2018, cryptocurrencies have had an awful 2018. The aggregate market cap of all cryptocurrencies has declined nearly 90% from January 2018, both including and excluding Bitcoin. We compiled this data from CoinMarketCap. This impacts Nvidia and AMD as the profitability of mining cryptocurrencies declines as the price declines. The acquisition cost of GPUs and cost of energy makes mining cryptocurrency less profitable at lower prices. This is akin to any mining process - whether it is oil or gold, the break-even price of the asset needs to be high enough to justify the cost of extracting the underlying asset. The same principle holds true for cryptocurrency mining. Below, we highlight the total market cap of cryptocurrencies year-to-date 2018.
Total Market Cap of Cryptocurrencies Peaked at $800 billion in January 2018
Milton Observes High Co-occurrence of Cryptocurrency Terms with Nvidia and AMD
Nvidia and AMD manufacture GPUs that are used to mine cryptocurrencies. If you’re curious about how cryptocurrencies are mined, read here to learn more about the process. When Milton read and analyzed articles every week, there was a high co-occurrence of cryptocurrency related terms with the stocks of AMD and Nvidia. Specifically, in the financial news that Milton has read, it has noticed that key cryptocurrency terminology is frequently found in articles about Nvidia and AMD, more so than with other companies.
We created a simple index comparing the frequency of times a financial article mentions a term related to cryptocurrency - e.g., terms such as "crypto", "Bitcoin", "Ethereum", "Ripple", "Bitcoin Cash", with the frequency the article is tagged with a particular stock. By indexing the co-occurrence of cryptocurrency-related terms with a mention of an average stock in the S&P 500 to 1.0 in the chart below, we highlight the increased co-occurrence of that same term with the stocks of Nvidia and AMD. As you can see, the frequency of mentions for a term related to cryptocurrency for Nvidia and AMD is nearly 2 to 2.5x that of an average stock. Therefore, if cryptocurrency is mentioned in a financial news article, there is a much higher likelihood that Nvidia and AMD are mentioned in that same article versus any other company.
Shouldn't a Crypto Implosion Impact Nvidia and AMD?
As we've highlighted, Nvidia and AMD manufacture GPUs used to mine cryptocurrencies and cryptocurrencies have declined in price throughout 2018, as have Nvida and AMD stock prices more recently. Based on the evidence presented so far, we wanted to find out if there was a discernible correlation between cryptocurrency prices and Nvida and AMD stock prices. Furthermore, our hypothesis was supported by Nvidia management's recent commentary on their Q3 2018 earnings call on November 15, 2018. During this call, management highlighted a "crypto hangover" as demand for chips related to crypto mining has dried up. For reference, Nvidia last reported that sales related to cryptocurrency mining accounted for 9% of total company sales, as of Q1 2018.
We ran a multitude of correlations across the daily, weekly, and monthly returns of Bitcoin, Ethereum, and Ripple - the three largest cryptocurrencies by market cap - against the stock prices of Nvidia and AMD. To make it more interesting, we ran staggered correlations to see if there was a delayed impact from the decline in cryptocurrencies to the stocks of Nvidia and AMD. Our full results are below.
The bottom line: we were not able to find a statistically significant correlation between the prices of key cryptocurrencies and the stock prices of Nvidia and AMD. We show the correlation coefficient for the time periods measured below.
Correlation Coefficients for Stock Prices of Nvidia/AMD Versus Major Cryptocurrency Prices
Nvidia and AMD benefitted from the explosive growth in cryptocurrency markets by virtue of sales of high-power GPUs. However, an investor looking to profit from the stocks of Nvidia and AMD, based on the short-term trends of cryptocurrency prices, may have a difficult time finding a correlation that leads to a profitable investment strategy.
Remember to build your Milton Smart Watchlist here. It's totally free and takes less than one minute.
Apteo, the company behind Milton, is made up of curious data scientists, engineers, and financial analysts based in the Flatiron neighborhood in New York City. We have a passion for technology and investing, and we strongly believe that investing is one of the most reliable and effective ways to build long-term wealth. We build AI tools to help informed investors make better decisions.
Apteo, Inc. is not an investment advisor and makes no representation or recommendation regarding investment in any fund or investment vehicle.
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