TOKYO -- The growth of cryptocurrency mining has brightened the prospects for the chip industry, lifting sector shares, but the volatile nature of digital currencies is keeping some investors on the sidelines.
Chips are susceptible to wild price swings. Now the increasing demand for their use in machines for mining -- the work of verifying digital currency transactions for rewards of bitcoin and other cryptocurrencies -- has made it even trickier to predict the outlook for chip prices.
Following a strong surge last year, chip-related stocks came under selling pressure for profit-taking after the market's drop in February. But investors are "buying them back" of late, said Takeshi Kamoshita, fund manager at Asset Management One.
While the benchmark Nikkei Stock Average slipped less than a tenth of a percent Monday to close at 22,467.16, some chip-related stocks gained ground, with test equipment maker Advantest climbing 3% and chip inspection device company Lasertec rising 1%.
Chip stocks not only continue to enjoy strong demand from data centers, they are also getting a boost from a rebound in cryptocurrency prices and growing demand for mining.
The high level of interest among market pros in mining was on display last month when some 200 tech-focused fund managers and analysts descended on a conference room at SMBC Nikko Securities. Their eyes were glued to a disassembled cryptocurrency mining machine developed by China-based Bitmain. The Beijing company offers piles of cash and takes away a ton of chips, according to the description by SMBC Nikko's Ryosuke Katsura.
Miners work to solve cryptographic puzzles by repeating large amounts of computations. Bitmain has bought huge volumes of application-specific integrated circuits and graphics-processing units, which are necessary for calculations, thus driving up chip prices.
Cryptocurrency mining work is growing worldwide despite a drop in the bitcoin price. The break-even point for bitcoin mining is between $2,000 and $3,000, according to an industry estimate. Even though it tumbled at one point, the digital currency -- now in the $9,000 range -- still generates an ample return on mining costs.
Investors are betting on strong demand. Rheos Capital Works has raised its stake in Nippon Chemi-Con, a vendor of aluminum electrolytic capacitors used in such applications as mining machines, to 9.77% from the previous 8.54%.
Others remain cautious. "I'm not a fan of chip stocks, susceptible to wild price swings in cryptocurrencies," said Keita Kubota, investment manager at Aberdeen Standard Investments.
Tokyo Electron now has a forward price-to-earnings ratio of 12.7, below the 13.08 for the Nikkei Stock Average components. Besides the cryptocurrency price instability, "there is serious concern that the U.S.-China trade dispute will deal a blow to exports of chip-related companies," said Yasuo Sakuma at Libra Investments.