Can humanoid robots help stop crime?
Which stablecoin is the most stable?
Understanding the “X-bond” strategy
Dear Reader,
Welcome to our weekly mailbag edition of The Bleeding Edge. All week, you submitted your questions about the biggest trends in tech and biotech. Today, I’ll do my best to answer them.
If you have a question you’d like answered next week, be sure you submit it right here. I always enjoy hearing from you.
Jeff,
For delivery robots and drones, what happens when people try and steal the packages? What would the robot do if confronted by a thief? Would the robot defend the package?
Would the porch thieves have to wait until after delivery and then pick it up? There is a huge problem with porch thieves (all kinds of thieves) in Albuquerque.
We need RoboCop out here.
Thx,
– Ken H.
Hi, Ken. You’re bringing up an interesting question that has a far wider scope than just dealing with porch thieves, or any kind of criminal activity for that matter.
It raises the question of how people will interact with these humanoid robots. The reality is that we’ll see a wide range of interactions. Many of us will still say “please” and “thank you” even though we know that we’re not interacting with a sentient being.
Others will feel as if they can be abusive to the robots because they’ll think of them as “just a dumb machine.” I wish that weren’t the case, but we already see similar behavior in how some treat other’s property irrespective of whether that property belongs to an individual or a corporation.
But let’s talk about your specific question for now. Sadly, this is not just a problem in Albuquerque, but in most states in the U.S.
The problem has grown severe for reasons that many don’t realize. Many states in the U.S. have implemented rules that don’t allow law enforcement to chase a criminal in the event of a property crime. In many states, if a criminal is being pursued by law enforcement for a property crime and they fall and injure themselves, they can sue the town and city for damages. Not only will they not be prosecuted, but they’ll also likely walk away with a large check for “damages.”
Law enforcement knows this, and so do the criminals, and they take advantage of this.
But of course, the punishment or lack thereof, completely depends on the jurisdiction. In Singapore, vandalism will result in fines, jail time, and three to eight strokes of caning (not a joke). The worse the offense, the worse the penalties get.
There may however be hope with delivery robots and drones. I’m confident that no company employing the use of a robot or drone would ever program it to pursue a criminal. Nor would it program it to even defend itself from an attack. The liabilities would be too high if a human got injured.
With that said, every robot and drone will be equipped with a suite of sensors, including a camera capable of recording video and taking photographs. Any offenses could be recorded and uploaded in real time and sent to law enforcement.
Perhaps an interesting analog are the kinds of video cameras that are used around the world at traffic intersections. If a car is speeding or runs a red light, a picture is taken that captures both the driver and the license plate. Then, a ticket is sent to the owner of the vehicle by mail.
The same kind of system could be implemented with regards to any kind of property crimes using the video cameras on robots or drones. If implemented properly in conjunction with law enforcement, it could become an effective deterrent.
This new technology will enable a variety of methods for addressing these problems. But the bigger issue is how each jurisdiction will choose to implement the law, or not, with respect to property crimes.
Jeff,
I have a question for crypto. Which stablecoin do you think is very safe? Or at least the safest?
– Fredrik H.
Hi, Fredrik. It’s an important question for any digital asset investor. As the name suggests, a “stablecoin” is a digital asset meant to maintain a consistent value—typically one dollar.
They’re an important piece of the digital asset ecosystem. Investors can convert their digital assets into stablecoins without having to “offramp” into fiat currencies, which can be expensive and time-consuming.
Stablecoins, by definition, are intended to be stable. They accomplish this “peg” to their underlying currency by backing each stablecoin 1:1 with a U.S. dollar-denominated asset.
But not all stablecoins are created equal…
One stablecoin I’ve always been a little suspicious of is Tether. It’s the most widely used stablecoin and the third-largest digital asset by market capitalization. But let’s have a look at Tether’s most recent audit. Keep in mind, these are assets that are supposed to be backing Tether and providing its peg.
Tether’s Most Recent Audit
Source: BDO
In the first category of “Cash & Cash Equivalent,” we can see that about 82% of Tether’s reserves are in U.S. dollar-denominated safe instruments. With the exception of the $182 million in “non-U.S. Treasury Bills,” the rest in this category appears to be fine.
But what about the other 18% of Tether’s holdings? Is it a 1:1 reserve holding of U.S. dollars to back up the Tether (USDT) issuance? Not even close:
$3.2 billion are in corporate bonds, funds, and precious metals.
$2.6 billion are in “other investments.”
$6.14 billion are in secured loans.
And on page two of the independent auditor’s report produced by Italian firm BDO, there’s a particular bullet point from the auditor listed in “Emphasis of Matter”:
The valuation of assets of the Group have been based on normal trading conditions and does not reflect unexpected and extraordinary market conditions, or the case of key custodians or counterparties experiencing substantial illiquidity, which may result in delayed realizable values. No provision for expected credit losses was identified by management at the reporting date.
As an analyst, and as investors, we should ask ourselves: “Are these normal trading conditions that we’re experiencing right now?”
The reality is that about 18% of Tether’s reserves are invested in assets that can experience volatility in price. And for a supposed “stablecoin,” that’s not a good thing.
By comparison, we can have a look at Tether’s competitor, Circle, which offers the USDC stablecoin.
Circle’s Balance Sheet
Source: Grant Thornton
Circle keeps it simple. It holds a range of short-duration U.S. Treasurys that make up the bulk of its reserves, and about 20% of its reserves are in cash.
At the time of the audit on September 30 of last year, Circle had issued 47,261,819,834 USDC. Therefore, it had slightly more in reserve than stablecoins issued at the time.
If I had to make a recommendation on my preferred stablecoin, I would say investors should stick with USDC. I’d avoid Tether, or any other stablecoin that doesn’t have a regular audit and one-to-one backing in whatever reserve currency, or asset, that the stablecoin is supposed to be pegged to.
Jeff,
I have purchased several of your convertible bonds, and am delighted that at least some have gone up in price.
You never mention them once you recommend them. You don’t even put a column on your chart that has a recent price (& therefore a recent %). Also, you said we might sell them, or keep them until they come due. But how high would they have to go before we sell them?
I’m afraid I’ll miss the sell alert, since I already missed a few buy alerts, and then when I went to buy the bonds, they were already too high. Thanks for answering my concerns.
– Louise T.
Hi, Louise. I’d be happy to answer your questions.
To catch readers up to speed, last year I added a new investment strategy to Exponential Tech Investor. Given the market volatility and overall downside risk, we began to gain exposure to stable, income-producing convertible bonds offered by high growth, high-quality technology companies.
Convertible bonds are very similar to the corporate bonds we may be used to. They have a par value, they pay a coupon (we can think of it as an interest payment), and they have a maturity date when the par value will be returned to investors.
But what makes them special is that these bonds can be “converted” into equity of the issuing company at a pre-determined price. What this means is that—assuming the value of the stock climbs—the value of the convertible bond will climb as well. And that’s how it’s possible to see significant returns—sometimes triple-digits—from conservative bonds.
That’s the upside potential, but we also have downside protection. If the stock for the issuing company stays flat—or even if it falls—we’ll simply wait until the maturity date, collect our coupon payments, and reclaim the par value at the time of maturity. And we’re always buying the bonds below par value. In order words, we’re buying at a discount.
Great upside, protected downside; that’s why I like convertible bonds in a market like this one.
But to answer your questions, Louise…
It’s true I don’t provide as many updates on our convertible bonds. That’s because investing in these bonds is different than if we invested in the underlying equity. We don’t need to worry much about any volatility in the underlying share price, because we have built in protection until the bond matures and returns the par value, which is always greater than our entry price.
The reality is that these investments—by their nature—are a “set it and forget it” type of investment vehicle. We buy the bonds, collect our coupons, and wait for equity markets to see renewed strength.
I expect that we’ll close out all these positions when the markets return back into growth mode, and when we do that, I expect we’ll sell all of our X-bonds at a nice profit. And in the absolute worst case scenario, we’ll simply hold to maturity and collect our interest payments along the way and then collect the par value of the bond.
And I’m sure that some subscribers will just decide to hold onto the bonds until maturity no matter what.
But one piece of general advice, when the underlying stock appreciates well beyond the conversion price, the smarts move is to either sell the bond for a large profit or convert the bond into equity. If an investor waits to receive the par value back for a bond that is worth far more than par value, it’s like leaving a bunch of money on the table.
We also do provide a portfolio table to track the performance of these bonds. You can view that here.
As for your next question: When should we sell? That answer will depend entirely on how markets behave over the next six to twelve months. As readers know, I expect we’re still in for a difficult few months. But I’m expecting more positive price action in the second half of the year.
When that happens, I believe growth stocks will lead the recovery. And that means the share price for the companies that issue our bonds will rise as well. And as I mentioned above, that will increase the value of our bonds.
I expect we’ll have at least a few opportunities to sell some of our convertible bonds above their par value—thus locking in a capital gain—sometime before the end of the year. But again, in the worst case, we’ll simply hold the bonds through to maturity, collecting our coupon payments and ultimately the par value.
As for missing buy or sell alerts, I wouldn’t be overly concerned. Some investment strategies do require precise timing. But buying and holding convertible bonds is not one of them.
The important thing is to purchase the bonds at a good price—preferably below their par value—and hold them as our thesis plays out. I’ll always send out alerts for any action to take, and the table of open X-bonds will always be available on the website.
And please take a few moments to read the new weekly Exponential Tech Investor updates that’s published every Friday afternoon. I’ll be sure to highlight any sells in the weekly as well.
And there’s nothing wrong with waiting a few days to establish a new position. With the current volatility in the markets, it is not uncommon to get a better entry price by simply waiting a week or two.
I’m glad you asked the questions. This is a moment in time where convertible bonds make for great investments. It won’t last for too long, but we’ll take advantage of it while we can.
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.
