- Is China putting this semiconductor stock at risk?
- “Are we late to the party?”
- How LUNA’s peg was broken…
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.
Before turning to our questions this week, there’s one more thing I’d like to share first…
Readers may have heard of Nomi Prins – she’s an excellent author and former Wall Street insider who jumped out of the world of investment banking to come help regular investors instead.
I had the pleasure of meeting with Nomi this past March at the Legacy Investment Summit in Washington, D.C., and hearing what she has to say about investing in our current environment.
Most notably, she sees a disconnect between the real economy and the stock markets… something she calls “The Great Distortion.”
We’re in an era of extraordinary debts and spending… yet we are also going to see exceptional innovation. And by positioning ourselves in the trends seeing a strong influx of capital, she believes regular investors can build real wealth.
And now Nomi believes it’s time for the “next chapter” in the Great Distortion… and that it could be an incredible way to profit if we know how to take advantage of what’s going on.
I recorded a short video to tell readers about it… Simply click below to watch.
And if you’d like to learn more about what Nomi sees coming, then please go right here to sign up for her upcoming event for free.
Why I still like this semiconductor stock…
Let’s begin with a reader who wants to know more about our recent mailbag advice…
Good morning, I am totally confused with Jeff’s choice of picks, namely the inclusion of Taiwan Semiconductor Manufacturing Company (aka TSMC). Just a few days ago in another article, Jeff wrote that he expected Taiwan to come under mainland governance (or words to that effect) within one year. If that prediction becomes reality, then TSMC is NOT a stock that I would want to be holding.
Yes, we know that TSMC has big plans to expand outside Taiwan, but it seems to me to be too little too late. There are also reports that given a mainland takeover, TSMC would destroy some key foundries, and if that were to happen, it would also be bad news for stockholders. These two statements from Jeff Brown are in contradiction with each other. Would you please provide some clarification? Sincerely,
– Alan H.
Hi, Alan, and thanks for writing in. There is definitely some nuance here, so I’m glad you asked the question.
As you noted, I mentioned several of my top large-cap tech stocks in a recent mailbag edition of The Bleeding Edge. There, I noted that Taiwan Semiconductor Manufacturing Company (TSM) is the largest and most bleeding-edge semiconductor foundry in the world, making it a great choice for investors.
Yet you’re right that there are some geopolitical risks to it as a company. As I’ve previously shared, China has a vested interest in Taiwan, and I expect it could make a move – as soon as within the next year – to take administrative control of it.
Taiwan’s strategic importance at a global level has never been more obvious. Possessing Taiwan would give China the ability to place a chokehold on the global production of just about any kind of electronics. It would impart tremendous geopolitical power.
And as investors, it’s good to be aware of these kinds of factors that could impact a company’s stock.
This is why TSM has been expanding its manufacturing facilities to other countries. It is actively working to reduce this risk.
It’s planning to build a multibillion-dollar manufacturing plant in Singapore in addition to its new plants in Japan and Arizona (with as many as six U.S. plants planned). The company is also in early talks about a plant in Germany.
And TSM intends to spend $44 billion in 2022 alone on its expansion beyond Taiwan’s borders.
The diversification of TSM’s manufacturing base will take years to complete. Aside from the money required, the time it takes to build and commission a semiconductor manufacturing facility is measured in years.
The real nuance here is around how China would take over Taiwan. I’ve argued in the past that China has been building a presence in Taiwan for decades. In the event of taking control, that doesn’t need to mean a violent military confrontation.
China might still choose to display a show of force, but I seriously doubt that it would intentionally destroy TSM’s factories in a war. After all, the value of having administrative control over Taiwan is economic. It would want Taiwan to continue to be a powerhouse and generate plenty of tax revenues and maintain its presence on the world stage.
In the event of taking control, there will likely be some initial fear and uncertainty, but that will subside. Something similar happened when China took over Hong Kong in 1997.
Many expected the worst, but in the years that followed, Hong Kong was largely the same. China’s control over Hong Kong was implemented slowly over the course of the last 25 years.
Right now, TSM is preparing as best as it can for the worst-case scenario. And it also continues to produce the most advanced semiconductors in the world. Its semiconductors appear in products around the world… That’s why we’re currently up more than 154% on the stock in our model portfolio despite the current market volatility.
If something drastic or unexpected happens, we may reevaluate whether we’re willing to accept the heightened risk. But for now, this is still a fantastic company for any investor’s portfolio.
Technology is so advanced already…
Next, let’s look at a question about whether we’ve missed out on exciting tech trends…
Hey, Jeff, Day One Investor is edge-of-your-seat exciting, to say the least, for me anyway. Are we late to the party on most things? If you’re writing about it in the Bleeding Edge, it feels like it’s already too late. I think of quantum security, nuclear fusion, eVTOLs, and Web 3.0, for example.
The way you write, it feels like the space is so advanced already we missed the really big opportunity on the first companies operating in that space to get in on day one before people even know what it is. Please let me be clear, the basket of companies we have is nothing short of spectacular. Your extreme hard work and dedication don’t go unnoticed. I hope one of our Day One Investor companies is making headlines or being featured in the Bleeding Edge one day.
– Jeremy T.
Hi, Jeremy, and thank you for sharing your excitement about Day One Investor and this excellent question. And yes, I absolutely expect that we’ll be reading about some of our Day One companies in The Bleeding Edge, or in the Wall Street Journal when they are acquired or even go public.
Watching a private company build and grow, create incredible products and services, and increase in valuation year after year, is one of the most enjoyable and rewarding aspects of being an investor.
And as I’ve written before, being an active angel investor is like having a window to the future. It allows me to see technological advancements happening years in advance.
I ended my very first presentation as an analyst back in 2015 with the point that the pace of technological innovation will never be slower than it is today. I said, “At this moment, the rate of technological change is the slowest you will ever experience for the rest of your life.”
In other words, the rate of technological change continues to accelerate. And it’s changing the world as we know it. I’ve used this chart to illustrate:
While linear growth happens in a slow, steady slope, exponential growth sneaks up on us. We don’t see it coming until it’s already here. Yet in hindsight, it’s easy to see.
This is important to keep in mind as we plan our investments in technology – especially in Day One Investor, where we’re investing at the earliest stages.
We have to constantly look for companies that are innovating… that are revolutionizing their fields… or that are changing all of our lives. I’ve spent most of my life honing my ability to spot these kinds of opportunities. That’s how I’ve put so many trends on my readers’ radar early.
For example, I began recommending 5G companies to my readers back in 2018, years before it reached the mainstream media’s attention. And I first profiled bitcoin back in 2015, when it was trading for around $240. In both those instances, most people were still in the dark about the potential.
And while it may feel as though trends like quantum security, nuclear fusion, eVTOLs, and Web 3.0 are old news to regular readers of The Bleeding Edge, it’s all a matter of perspective.
If we went up to someone on the street and mentioned any of these terms… do we think that they would understand what we are talking about? I’d bet most people wouldn’t have a clue about these topics.
These technologies are still in early stages of development… And we can’t discount the opportunities that will develop as a result of their progress.
In regards to Web 3.0, we’ve explored so many applications that blockchain technology will enable… like improved digital payments, a censorship-free 5G network, play-to-earn games, decentralized funding and profit-sharing in the film industry, and non-fungible token (NFT) markets for the music industry… among so many other examples.
Or look at 5G… We’re still benefiting from the expansion of these networks, and we have lots to look forward to.
5G will enable technologies like holographic telepresence, and real-time multi-player social gaming, which depends on its low latency and high speeds. It will also allow self-driving cars to create a connected fleet of vehicles coordinating in real-time.
As we can see, one single technological innovation can spawn a vast array of potential use cases. And the same will be true for the future as well.
Right now, we may not even realize the incredible research and development going on behind the scenes… but I guarantee it’s happening. We’ve been seeing record levels of venture capital investment, which will fund a number of incredible advances in the coming years.
So no, we haven’t missed out on all the great investment opportunities. We still have the largest gains ahead of us in all the fields that you mentioned, and if there is one thing that I can promise you, in the worlds of technology and biotechnology, there will always be another exciting high growth “next thing” right around the corner.
And I’ll do my best to make sure the most promising of those projects appear in the pages of Day One Investor, Exponential Tech Investor, Early Stage Trader… and of course, here in The Bleeding Edge.
How to understand this crypto debacle…
And let’s conclude today’s mailbag with a question on the events surrounding the LUNA coin…
Hi, Jeff, who or what attacked LUNA and its stablecoin to break their peg? Why did they choose to do this? What might be the next project to be attacked? How long do you expect this downward price pressure to continue in crypto? Thank you.
– Mark B.
Hi, Mark, and thanks for those questions. This story has gotten lots of attention in the crypto world – and for good reason.
And while the answer gets a bit technical, it’s important to understand how things went so sideways with the Terra Luna project.
For unfamiliar readers, we recently saw the total collapse of the LUNA cryptocurrency and its associated stablecoin, known as TerraUSD (UST).
As a reminder, stablecoins are cryptocurrencies that aim to maintain their value with a real-world fiat currency. In this case, one UST should always be worth one U.S. dollar.
Yet in early May, UST started to “depeg” from $1, eventually falling as low as 9 cents. Now both UST and LUNA are no more.
So how did this happen?
Unlike most stablecoins, UST wasn’t backed by money sitting in a bank account. It was backed using an algorithm.
At a high level, a user needed to deposit one dollar’s worth of LUNA to receive one UST. Simultaneously, the reverse could also take place… A user with one UST could claim one dollar’s worth of LUNA by depositing their UST. The UST was then destroyed – or “burned” – after the swap.
And this algorithm worked because it gave users an incentive to swap their tokens.
If one UST traded at $0.95, a user would want to swap the asset for $1 worth of LUNA. They would make a 5% return instantly. The same held true in reverse… If UST traded above $1, a user would want to swap $1 worth of LUNA to receive UST.
The swaps and burning helped keep UST near $1. Theoretically, this makes perfect sense.
This model worked very well for a time. From 2021 to May of this year, the UST in circulation ballooned from $182 million to more than $18 billion.
And as a result of the stablecoin’s growth, LUNA’s price went from less than a dollar to more than $110 per token. It was one of the biggest success stories of 2021.
But all this success came to a halt in a matter of days, as a weakness in the model was exposed…
Due to the broader cryptocurrency market sell-off in early May, investors began to move from riskier assets like LUNA into stablecoins like UST. After this swap, LUNA would get burned to reduce the circulating supply… This would typically reduce the downward selling pressure on LUNA during a sell-off.
Ideally, investors holding UST would want to eventually convert it back to LUNA, so the system would stabilize as the market became bullish again.
However, that’s not what happened this time.
LUNA experienced a vicious sell-off. The token dropped over 30% between May 5–8 alone. We can see this in the chart below.
UST holders are usually incentivized to swap UST for LUNA if the value of one UST falls below $1. But with LUNA falling so quickly, that incentive disappeared.
No one wanted to receive an asset that appeared to be in freefall… And with that incentive gone, the peg destabilized.
In a short time, it essentially became a “bank run,” where everyone tried to head for the exits at once.
And the rapidity of this collapse has led some to speculate that it was a result of a malicious attack by a person or hedge fund.
One theory claims a wallet sold $350 million worth of UST to try to crash the stablecoin. The attacker could have profited from short positions on bitcoin when the Terra Luna founders liquidated positions to shore up their finances.
Analysts will no doubt dig into the data to see if there’s any hard evidence to support this theory. Yet at present, we don’t have proof of any concerted efforts to destabilize LUNA or UST.
However, these events have revealed a flaw in the project’s design.
And intentional or not, this bank run will have implications for the entire crypto space for years to come. These events are already bringing increased scrutiny from regulatory agencies.
During an annual testimony in front of the Senate Banking Committee, U.S. Secretary of the Treasury, Janet Yellen, called for stablecoin regulations to help protect investors.
Regulators have been waiting for an opportunity to impose stablecoin regulations. After all, this isn’t the first time we’ve seen the industry deal with a crisis around currency pegging. We’ve seen similar issues around Iron Finance, which lost $2 billion of value, as well as Basis Finance.
So there’s a push to closely examine this incident to try to learn how we can avoid similar crashes going forward.
As for where that leaves us now, we shouldn’t let this incident frighten us away from this space.
This is simply a reminder to deeply understand the potential risks of whatever we invest in alongside potential rewards. That’s what I aim to help my readers grasp in Unchained Profits. And events like this are why I always recommended rational position sizing.
And I fully expect the cryptocurrency market and blockchain industry to dust themselves off in the coming weeks and months. The crypto pullback we’ve been experiencing could even be a buying opportunity for the right projects. We’re already seeing stock markets begin to stabilize, and the crypto space will follow.
And from here, it will all begin to march higher again.
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.
Editor, The Bleeding Edge
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