Dear Reader,
The crypto winter we’ve been experiencing over the last year has been just as painful and disappointing as what we’ve seen in the stock markets. The blockchain industry has long believed digital assets would decouple from the performance of the broad stock markets as an alternative asset class.
Unfortunately, that hasn’t happened yet. Cryptocurrencies and other digital assets are currently viewed in a similar category to high-growth stocks. And that means in a rising interest rate environment and a weakening economy, valuations and market caps will get compressed. And that’s exactly what we’ve experienced.
And cryptocurrencies have had one additional headwind that the equities markets don’t. Regulatory challenges. More specifically, the lack of a clear regulatory framework for digital assets for the last decade has been the largest challenge for the industry.
The current stance of the Securities and Exchange Commission (SEC) on most cryptocurrencies is that they are securities and should be regulated as such. Prior to 2018, it was possible for U.S.-based investors to gain access to initial coin offerings (ICOs). These were the digital asset equivalents of IPOs for equities, just at a much earlier stage.
Most of the projects that pursued ICOs were terrible, but there were also a bunch of fantastic projects that raised capital up until 2017 in what were effectively crowdfunding raises. For the best projects, it was wonderful to see normal investors having access to these kinds of early-stage deals. But in early 2018, that came to a screeching halt in the U.S. as the SEC cracked down on ICOs, and all capital raises were limited to funds and accredited investors in order to stay out of trouble with the SEC.
During the last couple of years, the blockchain industry has had its most antagonistic regulatory environment since bitcoin was conceived. The SEC has been regulating through enforcement, not through a clear regulatory framework. That’s not a healthy environment for business creation and incentivizing innovation. We’ve seen the impact already. Tens of billions in investment has moved offshore, and with it, jobs and economic activity.
Targeting ICOs, scams, frauds, and bad actors like FTX makes a lot of sense. After all, most ICOs are similar to a securities offering and would meet the Howey Test, which is what the SEC uses to determine if something is a security or not. Therefore, they should be registered as such.
And the blockchain industry has certainly suffered its own circus of bad actors and frauds, much in the same way the stock markets suffered from Enron, WorldCom, Man Financial, and so many others. The sooner these “problems” are weeded out and cleaned up the better.
But what has been so confusing about the SEC’s actions against the industry has been the keen focus on going after so many of the most well-run and buttoned-up firms in the business. Companies like Ripple Labs, Coinbase, Kraken, and even Circle have been under investigation or defending against actions from the SEC.
The most surprising development of all has been a recent focus on U.S. dollar-backed stablecoins. Stablecoins are the one digital asset that is absolutely, without a doubt, not a security. It’s money. After all, a properly constructed stablecoin is backed 1:1 with U.S. cash and cash equivalents. And there’s no expectation of a profit whatsoever. Holding a U.S. dollar stablecoin is the same as holding a dollar – a digital dollar.
And I suspect that’s the problem.
I’ve predicted that 2023 is the year that the Federal Reserve formally rolls out its plans for its own central bank digital currency (CBDC), and I believe that there will be a major announcement in the first half of the year.
These latest SEC actions concerning stablecoins are a signpost that we’re getting very close to the day that it happens. The Fed, and many in the government, see a digital U.S. dollar as “government business,” not that of private industry. And they want to control it. They don’t want U.S. dollar transactions happening on private blockchains. They want them all happening under the purview of the Federal Reserve.
These latest developments are likely a precursor of what might come. Could it be that the government intends to ban all U.S. dollar stablecoins? Could the Fed Coin, or whatever it’s called, become the only stablecoin allowed? And will something similar happen in other jurisdictions around the world?
That wouldn’t surprise me one bit.
Amazon’s Project Kuiper just got approval from the Federal Communications Commission (FCC) to launch about 3,200 satellites into low-Earth orbit.
It’s been a while since we have talked about Project Kuiper. If we remember, this is Jeff Bezos’ answer to Elon Musk and SpaceX’s Starlink satellite constellation.
As regular readers know well, Starlink is now the largest satellite constellation in history. There are more than 3,500 Starlink satellites in orbit today. I have long predicted that Musk’s ultimate goal is to create a mesh network around the Earth, basically a space-based internet infrastructure.
And that’s why Amazon is racing to build out its own satellite network as well. For Amazon, I see this as potentially an extension of its Amazon Web Services (AWS) internet infrastructure targeted at the burgeoning space economy.
AWS is Amazon’s cloud-based internet services business. Ironically, it was the key to Amazon’s success in eCommerce. AWS became the leader in the industry, and for a long period of time it generated the majority of Amazon’s free cash flow, which enabled it to invest more in its low margin eCommerce business and logistics network.
So Amazon clearly sees Starlink as a future threat to its AWS business, at least as it pertains to the space economy. That’s why Project Kuiper is so important.
Amazon is years behind Starlink, which is why it has been pushing so hard to get Project Kuiper off the ground. Amazon is planning to get its first two satellites up into orbit this quarter. And the company has already booked 92 launches with a variety of launch providers in the coming years.
These launch contracts are worth several billion dollars. And they will enable Project Kuiper to get at least 2,000 satellites into orbit.
Amazon clearly has the resources to see this project through and become a competitor to SpaceX’s Starlink. That’s great news.
Strong competition drives quality up and prices down. This will benefit consumers, businesses, as well as governments that need internet backhaul in space.
And with Amazon and SpaceX battling it out with their satellite networks, we can be sure that we’ll have strong communications infrastructure in place to support the space economy as it grows.
Redwood Materials just hit another big milestone.
If we remember, Redwood Materials is an electric vehicle (EV) battery recycling company. It was founded by Tesla’s former Chief Technology Officer J.B. Straubel.
When we checked in on Redwood last month, the company had just unveiled its plans to build a $3.5 billion recycling campus in South Carolina. The key here is that the plant will be located close to a major hub of automotive manufacturing in the southeastern United States. This area is starting to be known as “the battery belt.”
Well, the big news today is that Redwood just secured a $2 billion loan from none other than the U.S. Department of Energy (DoE). It will help the company build out a recycling plant just outside of Reno, Nevada.
This is a strategic location as well. The Nevada plant will largely service batteries coming out of the California market… which happens to be the largest market for EVs in the U.S.
The company plans to have recycling facilities close to where the batteries will be discarded, as well as near big auto manufacturing hubs. That helps keep the logistics and the supply chain simple and efficient.
And the massive loan from the DoE is a big win for Redwood. It will provide all the capital the company needs to get its Nevada plant up and running.
Ironically, this loan falls under the Inflation Reduction Act… which as we know has nothing to do with inflation.
Still, this is the same mechanism that helped Tesla establish the EV industry in the early days. And we should note that Tesla repaid its DoE loan back in full. That tends to be rare. There are some disastrous examples of wasted taxpayer dollars in the past like Solyndra.
So I’m excited to see Redwood making such great progress.
We can think of Redwood Materials as the “back-end” of the EV industry. It may not be flashy. But its services are absolutely critical to the industry’s success.
That said, we need to keep everything in perspective here.
Remember, Redwood doesn’t produce batteries. It simply recycles used batteries and extracts the salvageable material. Then, Redwood sells that material back to battery makers. That’s the business model.
However, this isn’t enough to cover the drastic shortage of materials available for new EV battery production right now.
In fact, materials from EV battery recycling will barely put a dent in new EV battery production required to meet the current lofty goals many car makers have put out for 2030.
How small is the amount of new battery production that can come from recycling and reusing old batteries? The International Energy Agency (IEA) puts the amount at a tiny 0.3% by 2030. That means 99.7% of the needed minerals must come from new mining.
So the work Redwood Materials is doing is important. I’d much rather see those used batteries recycled than dumped into a landfill. But it’s not going to save those car makers who haven’t secured enough materials to hit their EV production goals.
And as regular readers know, this is pretty much every major car maker out there. So far, only Tesla has been proactive in building a secure supply chain for EV battery production.
We’ll wrap up today with another exciting story on the space exploration front.
NASA just awarded Blue Origin a big contract. It’s for a scientific mission to Mars. The mission is called Escape and Plasma Acceleration Dynamics Explorers (ESCAPADE).
ESCAPADE entails sending two identical spacecraft up to Mars. They will each orbit the Red Planet in two different locations.
And their mission is to assess the planet’s magnetosphere. This is all about analyzing how the atmosphere interacts with solar radiation.
Here’s an artist’s rendering of the mission:
Source: UC Berkeley
Here we can see two spacecraft studying the magnetosphere on Mars. Obviously this research is critical if we want to have a human presence on Mars one day.
Our atmosphere here on Earth shields us from solar radiation. That helps make Earth so habitable. How does Mars’ atmosphere compare?
The data this mission uncovers will help inform just how an outpost on Mars would need to be designed. If the atmosphere doesn’t provide significant protection from radiation, then we’ll need to build extra protection into our habitation and agricultural structures on Mars.
Now, what’s interesting here is that the ESCAPADE mission will launch on Blue Origin’s New Glenn rocket. This is Blue Origin’s analog to SpaceX’s Falcon Heavy rockets.
The New Glenn was designed to launch payloads up to 13 metric tons into space beyond low-Earth orbit. For comparison, the Falcon Heavy rocket can launch about 16 metric tons beyond low-Earth orbit.
So they are quite comparable. But there’s a problem here…
The New Glenn doesn’t exist yet. Blue Origin hasn’t completed a single test launch.
It seems odd for NASA to award a big contract for something that’s never made it to space yet, especially considering that the mission is targeted for next year. Bezos has strong influence in Washington D.C., so I suspect that played a significant part in making this happen.
Either way, we wish Blue Origin much success.
Having another next-generation heavy launch vehicle available in the industry would be great for the developing space economy. As we discussed, competition like this drives quality up and costs down.
Regards,
Jeff Brown
Editor, The Bleeding Edge
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.
