Short supply of semiconductors will make it difficult for Bitcoin infrastructure to scale to meet demand

Cryptocurrency is understood as natively digital: everything happens virtually, never interacting with the physical world. Now, a semiconductor shortage is undermining that narrative. Bitcoin’s infrastructure is tangible hardware: miners, wallets, modems, switches, and it all depends on semiconductors currently badly affected by a global supply shortage.

Scaling Bitcoin depends on physical production capacities. As it becomes more globalized, the demand for all things Bitcoin has increased, whether that be merchandise, computer parts or purpose-built goods like hardware wallets and cold storage plates. When global supply chains falter, as they have for the past two years, every aspect of Bitcoin’s presence in the physical world is affected.

Hardware wallets are now in greater demand than ever before, a trend that’s only expected to grow in the time between now and the predicted end of the shortage in 2023. With year-long lead times on critical electronic components, the challenge now is to plan for ever-growing interest in self-custody and be ready to provide new users with access to security even as chips and other goods are hit by further supply disruption.

What’s happening with chips?

Semiconductor supply has been strained for two years now, a knock-on effect of a workforce hit by a global pandemic. As a highly centralized industry, there are only three producers of advanced semiconductors in the world. The largest, TSMC, expects a phenomenal 24% increase in revenue this year after raising prices to offset supply chain disruption and increased demand.

As a result of the shortage, many consumer industries are badly affected. Car makers have been forced to halt operations, while phone manufacturers — the biggest consumers of semiconductors — are struggling to secure as much production capacity for themselves as possible.

There are several aspects causing the supply issues, but ultimately it is due to a ripple effect from the total economic shutdown early in the pandemic, and rapid shifts in demand caused by fear and uncertainty. The wait time for delivery of an order of semiconductor chips is now around one year and, with the freight and shipping industries having troubles of their own, supply will be slow to return to its old pace.

There’s no easy fix for the supply shortage. Chip foundries require large capital investments and take time to plan and build. While new production plants are set to be built in the coming years, the shortage is expected to rectify itself before they can be built, as orders become more predictable and the backlog starts to clear out.

Semiconductors power the crypto industry

The chip shortage was to be expected. Demand is skyrocketing as we become more dependent on technology. Crypto is a particularly extreme case, with mining becoming more popular both on GPUs and ASICs, more people running dedicated nodes and switching to hardware wallets, and the exponential scaling of a new technology coming to the world.

Crypto depends on semiconductors in many aspects. Without access to hardware, network growth would begin to stagnate, and more people would be at risk of losing access to their coins. While there’s no need to panic just yet, it does serve as a warning not to take it for granted that the critical infrastructure needed to scale bitcoin will always be available.

How the shortage affects hardware wallets

The exceptional circumstances of the last two years have already led to disruptions as couriers were hit by significant delays. Wait times for hardware wallets saw an increase earlier this year, and it’s expected that the current industry conditions could lead to another period with longer delivery estimates.

For those considering a hardware wallet to protect their coins, it may make sense to make their order sooner to ensure that the delivery is not affected by further disruptions. Trezor is committed to providing everyone with access to security and will adapt to the developing situation to ensure hardware wallets continue to be widely available.

Hardware wallet chips

Trezor was designed to be truly open source, so that anyone could build it themselves with off-the-shelf parts. This means that the chips used are easy to source and, usually, in plenty supply.

From the Trezor GitHub repository, one can download the schematics for both the Trezor Model One and Trezor Model T hardware wallet. Take a peek at this diagram:

The image above is a snippet from the Trezor Model T schematics. Shown here is the specific model number and architecture of the STM32F4 microcontroller chip, which can be sourced from standard electronics distributors across the world.

The benefit to using an off-the-shelf chip is that anyone with an electronics background can build a Trezor of their own, keeping access to security open.

Cheap as chips?

Chip production has long followed a trend known as Moore’s Law, where double the amount of transistors can be produced every two years. This means that prices should fall over time, but if you’ve been following the recent news cycles, that is not the case: average component costs are up 15% in 2021, reflecting the strain on supply chains and production.

As shown in the chart above, the price of semiconductors has shown a continued decline with occasional upward spikes. The price touched a local bottom toward the end of 2020, before beginning an upward climb which continues today. While we can expect a return to the downward trend, the coming months and years are uncertain and hardware manufacturers will need to weather the storm.

Price is not the only factor that affects the chip market. In a hyperconnected digital world, demand for chips increases each year, while only a few companies produce them. This means that long lead times are common, so orders must be placed far in advance. Shortages of raw materials and other supply chain issues has led lead times to grow longer still, meaning production must be planned years in the future.

With the bitcoin market having a dramatic year, the explosive increase in demand for hardware wallets is difficult to predict, so manufacturers can not rely on previous sales results to predict demand. To avoid a lack of supply, companies like Trezor need to make much larger orders to cover expected sales more than a year from today.

Does the chip shortage affect Tropic Square?

According to current forecasts the supply shortage should not have any significant impact on Tropic Square’s plans for the auditable secure chip, TASSIC. The deficit is predicted to last up to several years. The transparent security chip is still in early development and the supply of engineering samples will be sufficient to keep the project moving forward.

As Tropic Square grows closer to producing the chip, supply of necessary components can be expected to improve. Demand for a transparent secure chip is expected to be significant but the production is highly centralized, leaving the hardware industry with little option but to plan carefully for the coming years. New initiatives to bring more chipmaking to Europe may prove beneficial to Tropic Square in the long run.

Preorders for TASSIC will open next year and Tropic Square will begin to work closely with companies interested in implementing transparent secure elements into their products. As in consumer markets, making these plans ahead of time will be crucial should the supply chain slump lasts longer. Interested parties can contact Tropic Square directly.

Low time preference thinking

Innovation happens fast. In just over a decade Bitcoin has reached a trillion-dollar valuation. But the steps to get there have been taken slowly, after long discussions among network participants. Bitcoin development is so conservative because the network must remain robust and decentralized.

A short supply of semiconductors increases the lead time on orders and the crypto hardware industry will need to plan ahead to cope with ever higher demand. Miners who benefited from a discount on ASICs during the recent China ban will be particularly pleased as delays and price hikes follow a shortage of high-quality chips. Plan now so you can afford to be patient later.

The electronics industry provides fundamental infrastructure to the crypto industry. A shortfall in production is a bottleneck but it is not expected to last. Make sure you have the necessary infrastructure in place to secure your coins and stack consistently over the coming months.

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