• Is crypto a commodity?

  • What’s the outlook on biotech?

  • Can we make technology immune to misuse?

Dear Reader,

Welcome to our weekly mailbag edition of The Bleeding Edge. All week, you submitted your questions about the biggest trends in technology. 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.

Crypto: Commodity or security?

Let’s begin with a question on how the government classifies cryptocurrencies…

Hi Jeff, longtime reader and Brownstone Unlimited subscriber, first-time writer. Big fan of your analysis across various investment assets. I read recently that the U.S. government would like to categorize crypto as a commodity as opposed to a security. Do you see this as a positive or negative? Thank you in advance.

– Christopher G.

Hi, Christopher, and thanks for being a longtime reader and subscriber. This is a critically important question for how the industry operates going forward, so I’m glad you asked.

There’s been a lot of debate over how to treat cryptocurrencies. Some think they are securities, much like stocks. People “invest” in them with the expectation of future profits.

Others claim we should treat them as commodities. As one example, people often use ether to pay for transactions on the Ethereum blockchain network. In fact, its fees are often referred to as the “gas” payment. This gives it a connotation like oil, as it helps us get from point A to point B… In other words, it has utility.

And the difference in label matters because of who regulates each category.

The U.S. Securities and Exchange Commission (SEC) closely regulates securities, while the Commodity Futures Trading Commission (CFTC) manages commodities.

Many in the crypto industry argue that the CFTC should be the one with the reins – primarily because it tends to treat cryptocurrencies more leniently than the SEC. If the CFTC were responsible for oversight of cryptocurrencies, it would be incredibly bullish for the industry. And U.S. investors would once again be able to gain access to initial coin offerings of quality projects.

Sam Bankman-Fried, chief executive officer (CEO) of crypto exchange FTX, has been particularly outspoken about pushing for CFTC governance, as it could empower cryptocurrencies to potentially offer more products, such as crypto derivatives.

And some politicians are leaning this way as well. Senators Kirsten Gillibrand and Cynthia Lummis presented a new bill in early June that would classify most digital assets as commodities, putting them under the purview of the CFTC.

I’m glad to see forward-looking bipartisan moves like this. The SEC’s rules often restrict and inhibit the industry here in the U.S. – to our detriment.

If this bill passes, it would be a welcome step toward providing clarity for companies and investors in the crypto arena. That would go a long way toward encouraging innovation and development in the U.S.

Yet passing this bill will not be without its hurdles… namely, SEC chairman Gary Gensler. Just this week, he issued a statement saying the only cryptocurrency he would consider labeling a commodity is bitcoin.

Gensler is a longtime proponent of strict legislation in the cryptocurrency industry… He has often pushed for more power over – and oversight of – the space, claiming that everything from digital asset exchanges to stablecoins should fall under his watchful eye.

He claims, “we just don’t have enough investor protection in crypto finance, issuance, trading, or lending.”

Yet I’d argue that, while investor protection is important, it’s less of a concern compared to ensuring broad investor access. I’ve long been frustrated that the SEC often restricts regular investors from taking part in certain kinds of investment opportunities that have incredible return potential – crypto-related or not – in the name of protecting us.

However, the government is perfectly fine for those same investors to go to a casino and gamble their money away in games that statistically guarantee that they’ll lose everything they gamble over time.

Needless to say, there is a huge difference between gambling (entertainment) and investing.

I’ve long believed that non-accredited investors should have access to the same kinds of investments that accredited investors have access to. The SEC should require strong disclosures for individual asset classes – and should absolutely pursue bad actors – but the key is to have a level playing field.

Otherwise, the largest potential profits will be reserved only for venture capitalists, private equity firms, and institutional money. I don’t think that’s fair.

As I believe you know, this is a problem that I’ve been working hard to solve in Day One Investor. We’re “wrapping” the kinds of private deals that would normally be accessible only to non-accredited investors, in a Regulation CF or Regulation A/A+ crowdfunding structure, so that all investors can have access. 

One final comment: I think it is highly unlikely that the entire crypto asset class would be categorized as commodities. The reason is, almost every project sells a portion of its tokens for the explicit purpose to raise funds to build a business. And investors who buy those tokens are doing so because they have an expectation that the value of the token will increase over time. 

In other words, they expect to profit. If these things are true in any project, that’s a security offering.

Biotech spring is coming…

Next, a reader has a question about the biotech sector…

Hi Jeff, With the Fed sucking money out of the system through quantitative tightening (QT) in this risk-off environment, what makes you continue to believe that the less money that’s available is going to find its way into these risky biotech stocks? Thank you,

– Ron M.

Hi, Ron, and thanks for writing in.

As many readers are aware, the biotech industry has suffered what I’ve called a “biotech winter” that was caused not by the pandemic, but by the policy response to the pandemic. We’re about 16 months into the winter now… and spring is coming.

The quarantine lockdowns kicked off the downturn in the sector, as clinical trials faced unexpected delays – patients either couldn’t, or were too afraid, to show up to follow-up appointments and checkups in many instances. And that lasted even once the mandated lockdowns ended.

Likewise, struggles to maintain stock of medical supplies during supply chain failures led to more difficulties.

Wall Street, of course, reacted poorly to these delays. And then, as the market shifted more and more to “risk-off” investments, biotech has suffered even more. We’ve experienced a sector-wide rotation out of biotechnology and into investments perceived to be “safer.”

Yet as I’ve explained to readers of my Early Stage Trader research service, these sector rotations happen from time to time, and they never last. In fact, a biotech winter has never lasted more than 18 months. 

But even aside from market history, it’s the valuations that always drive investment back into a sector. Many of the best early stage biotech companies are now trading at valuations less than the cash they hold on their books.

Back in May, Jefferies reported that 128 – a historic number – of small- to mid-cap biotechs were trading below cash. Since 2007, that number has never risen higher than 45 – until now.

And this means that the market is not only undervaluing the companies themselves… It’s also completely discounting much of the intellectual property and therapies in progress that these companies hold.

In all of my time as an investor, I’ve learned that these kinds of distortions always revert. Once the market returns to a more “risk-on” environment, institutional money is going to flood back into these kinds of opportunities. They see it as low-hanging fruit, an easy way for a guaranteed outsized return when valuations are so irrationally depressed.

As for how the Fed’s monetary policy plays into this… I don’t see it maintaining its tightening tactics for much longer. It may raise rates again here in July, but I believe by September it will have to change course.

The Fed erred by not addressing inflation last year. And if it were really serious about tackling the problem now, it would raise rates to 5% or more… not just by 75 basis points. 

A very large hike would be the only way to have a serious impact on inflation at this point. That would likely have a serious (negative) impact on the markets, of course, and perhaps even lead to a crash.

As it stands, we’re still at historically low interest rates… basically free money for corporations and financial institutions. Yet the existing rate hikes have been enough to send the market into its current volatile downturn.

As we get closer to the elections, I believe that the Fed is going to be forced to pivot from tightening to some form of easing. We can expect additional stimulus. I would argue that has already started with the most recent “gas tax holiday”… and there will be more of that. 

And we can be sure that the Federal Reserve will be printing more U.S. dollars to buy more U.S. Treasuries, in order to fund the record levels of deficit spending.

Either way, I expect markets to recover in the latter part of this year. We’re officially in the second half of the year now, and I’m much more optimistic than I was in the first half. And that could very well play into the timing of a biotech rebound – or “biotech spring,” if you will.

Regardless of how the Fed plays things, a biotech spring is definitely coming. We saw record levels of investment into biotech companies in 2019, 2020, and 2021… I’ve never seen anything like it. 

This year alone, we’ve already witnessed functional cures of forms of cancer and blood diseases. I’ve never seen so much progress in such a short period of time. The next biotech bull market will be the best that I’ve seen in my lifetime.

“No safe that can’t be cracked”…

Let’s conclude with a reader who shares some more thoughts on Ethereum founder Vitalik Buterin’s “Decentralized Society” whitepaper …

Hello, Jeff, I really enjoy Bleeding Edge. You are always reporting something new and cool, and it is like daily watching science fiction become science fact. I also appreciate that while you are an optimist you also are a realist.

I understand the advantages of Buterin’s DeSoc idea tempered with your cautionary assertion that “before this concept can be implemented, we would need to do a great deal of preparation and refinement to ensure that it cannot be used in ways that are detrimental to a free and democratic society.” However, I tend to take a more pessimistic view about being able to make any technology immune to detrimental use.

According to the old quip, “There is no safe invented by man that cannot be cracked by another man.” My case is supported by an article I just read about cybersecurity personnel leaving the profession in droves primarily due to stress arising from the fact that, despite their long work hours and best efforts, they are burning out, unable to protect their companies from the relentless barrage of hacking and ransomware attacks.

The more mandated the digitization of personal information becomes, the more likely a determined individual, group, or government will be able to gain access to it and use it for ill. For that reason, I see any implementation of DeSoc as just one more nail in the coffin of freedom.

– Wynn R.

Hi, Wynn, and thanks for writing in. As a quick recap for anyone who missed it, DeSoc’s core mechanism would provide a way to document and validate our key credentials.

I deeply share your concerns, much more so after the unnecessary hell that we’ve been through in the last two years. We witnessed false information, being pushed out to a global population, in order to create a false narrative that was used to force upon free societies’ draconian controls.

I never thought I would see anything like it in my lifetime… Yet it is still persisting today. And we are being told to prepare for the “second” pandemic. To your point, if a nation-state wants to do something so badly, it becomes so determined that it will try to do just about anything to achieve that end.

Sadly, large search and social media companies like Google, Facebook, and Twitter were happy to collude with the government to ban and censor scientific research that didn’t fit the desired narrative. So you are very right to have healthy skepticism towards how technology will be used to potentially strip away our freedoms.

In a perfect world, we would all have that same skepticism and help to “police” anything that would put our freedoms at risk.

With all that said, the reality is that the technology that we are using in our lives is becoming far more complex. And that is leading to the necessity to develop easy-to-use user interfaces (UIs) for this technology. These simple UIs are fantastic for just about all consumers, but they certainly come with some risk… the kind that you mentioned.

The problem that DeSoc is trying to solve is that life has become far more complex than it was just 20 years ago. It’s not unusual now for someone to go to school, get a degree, and then work at 20+ companies over the course of their career.

On top of that, they’ll likely attend many ongoing education courses and earn certificates in various areas of interest. It has become nearly impossible to keep track of everything and verify that what someone claims to have done is true.

When we list our accomplishments on a resumé, for example, a potential employer must do quite a bit of work to confirm their accuracy. Usually, they don’t verify everything and make the hire knowing that they are taking a risk doing so. DeSoc’s vision would simplify and standardize the record of our experiences.

We would receive a “soulbound token” (SBT) in our digital wallet when we complete a college or graduate degree… when we pass a specialized course… or when we take part in a training program, for example.

These SBTs would authenticate our skills as we advance, evolve, and change our careers. Yet as I noted in my coverage of this idea, it has the potential for great misuse.

And as you pointed out, it’s not simply nefarious governments that could misuse a system like this. Hackers and other bad actors pose another threat to any system that holds our personal information.

In fact, you’ve pinpointed a huge challenge for the technology industry as a whole. It’s becoming ever more critical for companies to protect their customers’ data from a whole host of threats.

And given that many corporations have underspent on cybersecurity over the past decade, they are now realizing the need to catch up. That’s why we’ve seen record amounts of venture capital (VC) interest in cybersecurity – reaching $21.8 billion last year:

That said, blockchain technology – on which DeSoc would be based – does offer us some unique ways of protecting our information.

First, our SBTs would be nontransferable. We wouldn’t trade them, as each one will be uniquely assigned to a specific person.

Yet if such a hack does somehow manage to occur, Buterin suggests a decentralized way of dealing with it. According to his “social recovery model,” each person would choose a group of trusted people or organizations that would serve as “guardians.”

A consensus of these guardians could change the private keys of the wallet in the event of a hack and recover stolen SBTs.

On a broader level, this could also be extended to “communities” of guardians, based on our broader social networks:

Decentralized Wallet Recovery

Source: Glen Weyl, Puja Ahluwalia Ohlhaver and Vitalik Buterin

Additionally, the system would allow users to hide their SBTs from the public or destroy them if they wanted to for some reason. That would reduce the risk of SBTs being used to target specific groups.

While it’s certainly not perfect, I do find it encouraging to see these kinds of creative approaches to data management.

That’s a big part of why I’ve been so in favor of the move toward Web 3.0. While you’re ultimately correct – there will always be bad actors probing for weaknesses – the very nature of Web 3.0 enables some very innovative ways to tackle the problem of cybersecurity.

Our biggest challenge is that we, as a society, must remain vigilant against nefarious motives, especially those held by the governments and their proxies. This is especially important in a world of abundance and complacency. We have just witnessed this with the pandemic, as there have clearly been evil forces at work.

That’s all we have time for this week. If you have a question for a future mailbag, you can send it to me right here.

Have a great weekend… And for my U.S.-based subscribers, have a fantastic 4th of July!

Regards,

Jeff Brown
Editor, The Bleeding Edge

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