Dear Reader,
He just doesn’t get it.
Warren Buffett and his partner Charlie Munger were in rare form this past weekend at the annual Berkshire Hathaway meeting in Omaha, Nebraska. And their daggers were certainly out for bitcoin and cryptocurrencies in general.
The core of Buffett’s argument was along the lines of, “The one thing I’m pretty sure of is that it doesn’t produce anything.” In his mind, an asset that doesn’t produce anything isn’t worth anything.
In a sheer display of ignorance, he further elaborated his distaste for bitcoin. This is one for the history books:
Now if you told me you own all the bitcoin in the world and you offered it to me for $25, I wouldn’t take it because what would I do with it? I’d have to sell it back to you one way or another. It isn’t going to do anything.
That comment reminds me of the videos that perhaps some of us have seen in which someone is on the street holding a one-ounce gold coin and trying to get someone to buy it for $100… Yet the gold coin is worth $2,000.
If I could buy $2,000 of value for $100, I’d do that all day long. But almost no one takes the deal. The reason is that they simply don’t understand the underlying value of an ounce of gold.
The point, of course, is that turning down an offer like that is simply due to ignorance. Nothing more.
“All the bitcoin in the world” is now worth $750 billion. If we could buy $750 billion for just $25, I think we’d be all over that opportunity, right?
But money aside, let’s consider value and function.
Had I been at the annual meeting, I would have liked to ask Buffett, “If you could go back to 1995, and be able to own 1% of the value of the protocols upon which today’s internet was built for $25, would you have bought it?”
If his answer was “no,” it would have been a lie. Even Buffett now understands how indescribably valuable those protocols are. They have created trillions of dollars of value in companies that are built on top of those protocols.
In 2017, to his credit, Buffett admitted that he made a mistake missing out on high-tech stocks like Google, Apple, and Amazon. He couldn’t understand how they would make money and continue to make money over the long term. He further elaborated back then that he and his partner Charlie Munger “miss a lot of things, and we’ll keep doing it.”
What’s so odd about Buffett’s position is that he had admitted that he really doesn’t understand technology companies. And he avoided them for that reason.
That’s OK. Why not just let it rest until he finally understands the value?
If he understood that bitcoin is simply the monetization of a third generation of internet protocols, and protocols that can also be used for financial services, he might just be interested in owning the asset…
If only he understood that ethereum is a protocol that enables not only financial services, but also all forms of smart contracts that can be programmed for anything like a derivatives product, or the sale of a piece of property, or the transfer of a non-fungible token (NFT) from one person to another…
Or imagine if he understood that Ripple’s technology is a replacement for the slow, expensive, cumbersome, and not very secure SWIFT system for cross-border transactions between financial institutions…
Moreover, Ripple can enable currencies to be sent anywhere in the world between any two fiat currencies for a fraction of the cost, with settlement in just seconds… What’s that worth?
I have nothing but respect for what Buffett and Munger built with Berkshire Hathaway over decades. The investment returns over time have been extraordinary. And Berkshire Hathaway is a perfect example of how significantly consistent returns can compound over time.
But when it comes to technology, and in this case blockchain and cryptocurrencies, they should just say, “I really don’t understand it enough to have an opinion.”
Making sweeping comments that are simply unfounded, and obviously ridiculous, only stands to raise the question about whether or not it’s time for them to hang up their hats, or worse yet, if there is an ulterior motive to try and discredit digital assets.
Munger’s vitriol for bitcoin was even more emphatic. He said, “In my life, I try and avoid things that are stupid and evil and make me look bad in comparison to somebody else – and bitcoin does all three.”
Aside from getting a chuckle out of comments like these, from two of the greatest investors of all time, we can extract one key takeaway…
We’re still early. We’re still in the early days of employing blockchain technology and digital assets as the next generation of the internet and financial services, among many other things.
When people like Munger and Buffett finally “understand” the value and economics of these next-generation protocols and digital assets like bitcoin, then we’ll know that the industry has matured, and the biggest gains have been taken off the table.
Until then, we’ll make sure that we’re well-positioned in the most exciting companies and projects that are building these new protocols and layers enabling new products and services. And we’ll benefit from the new economic models that are more open and accessible to all, rather than to only a limited few….
And we’ll be very happy to capture the lion’s share of the gains and leave the scraps for the likes of Buffett and Munger. Rather than be stupid and evil, we’ll be the smart ones that will build something really spectacular. I just hope that they’re alive to see it.
Big moves are afoot at Circle… and they hint at a much bigger play coming down the pipe.
We have talked about Circle in The Bleeding Edge before. This is the company behind the U.S. Dollar Coin (USDC) – the second-largest U.S. dollar-backed stablecoin in the world.
In fact, USDC now has over $49 billion worth of stablecoins in circulation. As a reminder, these stablecoins are designed to always be worth approximately $1.
I consider USDC to be the premier stablecoin on the market. It’s all about transparency.
Circle has always been buttoned up about regulatory compliance. And the company is taking the next step by going public through Concord Acquisition, a special purpose acquisition corporation (SPAC).
For the sake of newer readers, SPACs are publicly traded “blank check” companies. Their sole purpose is to take private companies public via a reverse merger.
This is attractive to private companies because it eliminates the headaches and costs associated with the traditional initial public offering (IPO) process.
The reverse merger between Circle and Concord Acquisition should close later this year. But interestingly, Circle isn’t waiting around. The company just announced a $400 million funding round that will close this quarter.
BlackRock – the world’s largest asset manager – is leading the round. And brokerage giant Fidelity is also investing heavily.
What’s more, this deal came with some strings attached.
Circle is appointing BlackRock as its global liquidity provider. And going forward, BlackRock will have custody of Circle’s entire cash reserves. Right now that’s $49 billion, and it will increase proportionally to new USDC entering circulation.
And it even goes one step further.
Per the deal, BlackRock and Circle will look to “explore capital markets applications for USDC.”
A lot is going on here. And the fact that it’s all happening just months before Circle plans to go public is telling.
As regular readers know, I believe the Federal Reserve (Fed) is working furiously to roll out a central bank digital currency (CBDC) for the U.S. later this year. I would argue that it is under pressure to do so as China has been aggressively testing its own version of its digital renminbi.
This presents a threat that China might get a leg up on establishing a digital reserve currency which could theoretically disadvantage the importance of the U.S. dollar.
A U.S. CBDC would have a lot of the same functionality as cryptocurrencies like Bitcoin and Ethereum, except the Fed and the U.S. government would completely control it. In other words, it would be centralized, not decentralized. Thus, it would be completely under the control of the Fed.
So it looks to me like BlackRock’s investment in Circle is all about positioning itself to play a major role in the U.S. CBDC launch.
If BlackRock is building out the infrastructure to handle USDC, it will easily be able to support the official U.S. CBDC once it is ready. This would explain Fidelity’s interest in Circle as well.
So the pieces of the puzzle continue to fall into place.
“Fed Coin,” or whatever they call it, is coming. This also means that they will gradually phase out physical cash entirely. That’s how they will transition people into the new digital currency.
I’ve recorded a presentation to discuss this potential threat to our current monetary system… and how we can profit from it regardless of how we feel about the end of cash.
If you want to learn how to prepare, please go right here to watch.
An interesting artificial intelligence (AI) startup called Anthropic is making some big moves… And I don’t believe that this project is what it appears to be.
Anthropic is billed as an “AI safety” company. A brother and sister team who were previously researchers at OpenAI founded the company last year.
If we remember, OpenAI is the company behind text generator GPT-3 and image generator DALL-E.
Anthropic caught my eye last year with its first funding round. The company raised $124 million right out of the gate. This valued the company at $674 million.
Starting with this kind of raise would be impressive for any company. And here’s the thing – Anthropic didn’t have a product or a business model. All it had was a vision of being a “public good.” That made the size of this raise especially surprising.
Fast forward to today, and Anthropic just completed its second funding round. This one raised a whopping $580 million. It didn’t disclose the post-money valuation, but Anthropic is easily worth more than $1 billion now.
And there were some powerhouse investors in this round. Among them were former Google CEO Eric Schmidt, former Skype co-founder Jaan Tallinn, and CEO of digital asset exchange FTX, Sam Bankman-Fried. They each poured big money into this round.
Yet Anthropic still has no product and no business model. What’s going on here?
Anthropic’s goal is to build an AI that can both explain itself and operate without bias. And the company has had some early success with this on a small scale. It has been able to reverse engineer smaller AI models to understand why the AI made the decisions it did.
This is the first step toward building AI that can explain itself. The next step is to do this at a large scale… and then build the safeguards so that the AI doesn’t act with bias.
That said, it’s still not clear how they will monetize this. There’s no obvious business model or go-to-market strategy here.
Of course, we can imagine future licensing models for some kind of “AI bias compliance” tool, or an “explainable AI module,” but it’s too early to know.
The thing is that $700 million of investment in just a year is kind of hard to explain for something like this. Why are powerhouse investors pouring so much capital into Anthropic?
There’s really only one explanation. Anthropic must have demonstrated something extraordinary behind the scenes. I’m betting this company is going to have an incredible impact on the AI industry.
That’s the only reason these savvy angel investors would be committing millions of dollars in funding. I am certain that there is a clear strategy toward monetization that has been identified, and I suspect it is spectacular.
So Anthropic is an early stage startup that we need to watch closely going forward. It must be up to something big.
And we are starting to see a clear trend form within the AI space. It’s all about explainable AI. Having clear natural language models and being able to communicate with an AI in our own language helps to solve the concern of whether an AI is “safe” to use.
This stands in stark contrast to my own neural network, the Perceptron, that we use in my new cryptocurrency trading system.
For research, analysis, and trading purposes, it’s not critical to understand exactly how the AI comes to its conclusions… It’s only important that the Perceptron consistently gives us strong signals that accurately predict future price movements.
Something incredible is happening right now.
With newly funding projects like Inflection AI and Adept AI that we’ve recently talked about, combined with something like Anthropic, we have the makings of what will become an AI-driven interface to computing systems. And this will radically change work and productivity as we know it.
We’ll wrap up today with a major development in the world of cybersecurity.
Cloudflare just thwarted what was likely the largest distributed denial-of-service (DDoS) attack in history. The target was a “crypto launchpad.”
Crypto-related projects or companies are often targets for cyberattacks, as digital assets make for attractive prizes for a successful hack.
For unfamiliar readers, a DDoS attack is a relatively simple cyberattack. It’s where hackers pound a website with a flood of traffic to overwhelm its servers. This causes the website to effectively go offline. And from there, the bad actors can often take advantage of any vulnerabilities the site may have.
Hackers launch DDoS attacks for many reasons. In some cases, it’s used to distract cybersecurity companies while the attackers attempt to hack something else. In other cases, these attacks punish rivals or make a political statement.
And I’ll point out that bad actors can launch normal DDoS attacks very cheaply. Simple software leverages local internet service providers (ISPs) to produce extreme levels of traffic.
However, this large DDoS attack was much more sophisticated.
This attack created an encrypted connection to the target website, and Cloudflare reported that it attempted to flood the site with 15.3 million requests per second:
There’s no way hackers could launch an attack of this caliber using just local ISPs. They had to do it by leveraging many data centers around the world. And this chart shows the distribution of attack traffic coming from data centers in a host of countries:
It’s important to note here that the country itself didn’t necessarily have anything to do with the attack. This just shows that data centers in a country were a part of this massive DDoS attempt, not where the hackers themselves are from.
And here’s the key – whoever was behind this would need significant resources to pay the data centers for the computing power used. No doubt the cumulative total invested was quite expensive.
The sheer complexity tells us that “simple” hackers didn’t launch this attack. It’s much more likely that a nation-state or large cyber organization was behind it.
And think about this – cybersecurity giant Kaspersky recently said that DDoS attacks have increased 4.5 times this year. The firm believes this is due largely to Russia’s invasion of Ukraine.
Putting the pieces together… I can’t help but wonder if hackers orchestrated this attack specifically to punish one of the cryptocurrency exchanges that refused to freeze all Russian accounts and stop transactions linked to Russian wallets.
Binance, Coinbase, Kraken, and KuCoin each refused to go along with a blanket sanction on Russian customers. Could it be that one of these companies was the target of this massive attack?
This is certainly a curious case study – both in practical cybersecurity and in the psychology behind cyberattacks. And there may be a chance to link the data center usage back to the organization, or country, that levied the attack.
Bigger picture, this is a great example of why I remain bullish on the cybersecurity industry. Cloudflare’s tech is impressive, and I really like the company overall, but it is still trading at unrealistic valuations.
This is one of those companies that still has the potential to fall significantly from current levels before it becomes an attractive investment.
As I have said countless times before, corporations have underspent on cybersecurity over the past decade, and they are just now realizing the need to catch up.
Regards,
Jeff Brown
Editor, The Bleeding Edge
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The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
