What's the Deal With GPUs?
Will all the GPUs Nvidia has sold over the last couple of years it is worth asking if they will be used.
GPUs went from niche chips for gamers and animators to some of the most important industrial products for the American economy. Is the graphics processor unit the bricks with which the future is going to be built, or is it an anomaly which will correct itself? With Ed Zitron estimating that hundreds of billions of dollars worth of GPUs are in warehouses rather than data centres, it is worth asking what is going on with GPUs.
Some companies like CoreWeave use GPUs as collateral for their financing, which creates the risk of a collapsing GPU market. What happens if CoreWeave defaults and the bank takes the collateral to sell on the open market, suddenly the price of Blackwell GPUs drop, which could mean that other data centre companies need to put up more collateral. In a way, this is reminiscent of the housing crash in 2008. Each individual loan was more or less defendable but because the all the loans shared the same collateral – houses –the collateral which was supposed to guarantee some safety for the banks in case of a default loses its power.
Furthermore, if someone can buy a data centre’s worth of Blackwell GPUs for cents on the dollar, what’s to stop them from starting a data centre which would cost significantly less to run than CoreWeave’s data centres, which has required a lot of borrowed capital to start. Maybe this new data centre company will keep their prices at the same level as CoreWeave and have better margins, or maybe they undercut established actors in pursuit of market share. Perhaps that means that the prophesied Dot Com crash scenario of cheap and plentiful AI comes to pass, but before then it means that the AI data centre industry is built on unsteady foundations.
Given that data centres don’t seem to be very good businesses, CoreWeave lost 49 million dollars on revenues of more than two and a half billion dollars, it seems unwise to lend to them, especially with low quality collateral. The fact that CoreWeave isn’t making a lot of money indicates that the warehouses of GPUs are not economically useful. This is worrying for Nvidia, as their extreme valuation and high profitability rests on selling huge volumes of GPUs. Like any industrial undertaking there are fixed costs in chip manufacturing (even if Nvidia outsources that function) which means that lower volumes sold decreases profitability non-linearly.
The AI bubble then has myriad ways of bursting as the AI labs like OpenAI and Anthropic are bad businesses, the neocloud data centres are bad businesses, and Nvidia has oversold chips which makes it unlikely that it will continue to achieve its current level of profits. Like termites or cancer, if caught early this could have been managed, but every day it is allowed to continue makes the eventual crash marginally worse, and as we see with GPU collateralised loans, it creates new avenues for people to build on this wobbly foundation. Every new AI-first business which gets a loan, every vibe-coded software project, every gas turbine and electrical substation installed to service AI data centres creates more wasted time, money, and effort if things go they way I and more and more people seem to expect.
If AI turns out to be a bad business, is there anything we can expect to gain from the massive oversupply of GPUs? Yes, the 2030’s might well be the golden age of animated movies if cheap and powerful GPUs are plentiful.
If you liked this post you can read a previous post about drones here or the rest of my writings here. I also have a section for longer reads I call essays here, I particularly recommend my series called The Bird & The Technoking exploring Elon Musk's takeover of Twitter, and its political and cultural implications. It'd mean a lot to me if you recommended the blog to a friend or coworker. Come back next Monday for a new post!
I've always been interested in politics, economics, and the interplay between. The blog is a place for me to explore different ideas and concepts relating to economics or politics, be that national or international. The goal for the blog is to make you think; to provide new perspectives.
Written by Karl Johansson
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Cover photo by Sergei Starostin from Pexels, edited by Karl Johansson
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