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.
Jeff,
Following your recommendation, I purchased my Ethereum through Coinbase.
I see that BlockFi blocked withdrawals and all the cryptos held there by investors have become part of their bankruptcy.
Can this happen to us with our cryptos on Coinbase?
– John S.
Hi, John. It’s a fair question. Centralized entities like BlockFi and FTX have recently imploded. Should we be concerned about other centralized digital asset companies like Coinbase?
In the spirit of full disclosure, I would remind readers that I am an investor in Coinbase. I invested years ago when the company was still private. And for that reason, I won’t recommend the stock (our policy is to ensure that there are no conflicts of interest, I never recommend something that I own, and I can’t purchase anything that I recommend, doing so is my way of ensuring that I’m only working on behalf of my subscribers), but I am comfortable recommending their services and I also have held onto my shares in Coinbase because I believe in the company and its business.
FTX and Coinbase are both centralized exchanges. In the case of FTX, it would be more appropriate to say it “was” a centralized exchange. But the similarities start and end there.
First and foremost, FTX was a private company with no transparency. There were no quarterly or annual reports available to review.
What we now know is that FTX was nothing more than a fraud used to siphon off customer assets to benefit founders like Sam Bankman-Fried. Coinbase, by contrast, is a buttoned up, fully compliant exchange. In fact, Coinbase’s approach to regulation was one of the reasons I originally invested in the company.
Before Coinbase ever went public, the business was working with governments to hammer out regulatory guidelines. Sometimes, this meant going state by state in the U.S. It was hard work. But it let Coinbase lay the foundation for its business.
Coinbase is also domiciled in the United States. And as a publicly traded company, it files quarterly, annual, and a variety of other reports with the SEC on a regular basis for all to see.
Meanwhile, FTX was domiciled in The Bahamas, outside the view of U.S. regulators. And we now know that FTX was purposefully concealing their bad actions to keep the fraud going.
As for BlockFi, I don’t believe that was a fraud like FTX. However, the business was lending customer assets to institutional traders. That’s why the collapse of Three Arrows Capital in the spring had such a negative impact on BlockFi.
In essence, BlockFi lent capital to Three Arrows, which couldn’t make good on the loan once the digital asset markets began to fall. BlockFi then experienced a liquidity crunch and collapsed.
But as Coinbase states publicly on their website, the business “always holds customer assets 1:1.” And given Coinbase’s track record and public disclosures, I’m confident that is the case.
The only wildcard is if Coinbase itself were to declare bankruptcy. I don’t think that will happen though.
Coinbase has $5 billion in cash, generates roughly 80% gross margins, and will return to generating free cashflow next year. Yes, it was a tough year for Coinbase just like the rest of the digital assets industry, but if anything, Coinbase easily proved its resiliency this year.
In my opinion, the collapse of FTX puts Coinbase in a better competitive position in the industry. And one final point, irrespective of my position as an investor in Coinbase, if I were ever concerned about Coinbase’s prospects, I would absolutely alert readers.
And if holding our digital assets on a centralized exchange makes us feel at all nervous, there is a very simple solution. We can simply hold our assets in “cold storage.” That means transferring our assets to a hardware wallet. I would recommend Trezor’s or Ledger’s products for that.
All we have to do is move our assets to the hardware wallet and then we can literally put it in a safe under lock and key. So long as the wallet isn’t physically stolen—and we don’t disclose our recovery phase—our assets will be safe.
John, since you are a subscriber to Unchained Profits, you can learn more about this option in our Unchained Profits User Manual. You can find it under the “Special Reports” tab on our user portal.
If any subscribers would like peace of mind, then I’d strongly encourage us to explore this option. I hope that answers your question.
Hello Jeff,
I enjoy reading your work. My question for you is: Now that we have had a little time to reflect on what happened with the collapse of FTX, what are your thoughts on the future of Crypto, NFTs, the Blockchain and Web3? Do they have a future?
Thanks!
– Jeffrey L.
Hi, Jeffrey. I’ve been sharing my thoughts on this entire debacle as it’s unfolded. But I’m happy to take a step back and reflect on what it means for the industry. The bottom line is that the collapse of FTX will most certainly not be the end of digital assets.
But I completely understand why anyone would raise this question. The financial media and the naysayers are sensationalizing what happened and extrapolating the events to the broad digital asset industry. I get it, it’s one heck of an insane story.
And as an aside, it’s been interesting to watch the reaction from some members of Congress. Some clearly understand that this event is not an indictment for the entire industry.
But during the recent testimony of John Ray—the man tasked with overseeing the bankruptcy of FTX—Rep. Emanual Cleaver (D-Mo) suggested that the term “cryptocurrency” should be renamed to “creepy dough currency.”
What a ridiculous comment. And it’s wrong to castigate an entire industry for the fraud committed by one person.
SBF’s actions are entirely counter to the ethos of the blockchain industry.
Blockchain technology is designed to create a more open, transparent, and decentralized version of the internet. We know this as “Web 3.0” or just “Web3.”
FTX and Bankman-Fried never believed in that. I remember in an interview, SBF said he would switch to trading orange juice futures if it meant he could make more money. This is not a mission-driven person. And we’re learning more about just how cynical he really is.
SBF was foolishly treated like a wunderkind for the mainstream press because he was throwing money around in ways that supported the current political narrative – other people’s money actually. He was on the cover of magazines and was being compared to Warren Buffett. And a lot of the admiration was because he believed in all the “right” causes.
FTX sponsored initiatives for “future pandemic preventions.” SBF was a proponent of “effective altruism,” i.e. making money just to give it away.
And he was the second largest doner to democrats in the recent election cycle. Interestingly, it turns out he also donated to republicans, but didn’t disclose that because he thought it would hurt his image with the press.
And why did he do all this?
He said it himself. It’s a “dumb game we woke westerners play where we say all the right shiboleths [sic] so everyone likes us.” And the media fell for it. Just like they did with Elizabeth Holmes of Theranos.
This type of person does not represent the blockchain industry. And he doesn’t speak for it either.
And the only reason this fraud went on for as long as it did was because FTX was centralized, and it was able to cloak what it was really doing from the public. If all FTX/Alameda’s transactions had been conducted on a blockchain, the industry would have seen it immediately.
If anything, the collapse of FTX shows us that the industry should renew its focus on the decentralized ethos upon which the industry was created.
The spectacle of FTX has certainly been a drag on the market this year. But it won’t be the end of it.
And one final point for the most skeptical of us out there with regards to cryptocurrencies.
If we assume that cryptocurrencies won’t last, does that mean the death of blockchain technology? Absolutely not.
Cryptocurrencies perform a vital function in providing economic incentives for decentralized blockchain projects. When used properly, these incentives accelerate both development and ultimately adoption of a blockchain’s product/service.
But they aren’t necessarily needed to employ blockchain technology, or things like NFTs that run on blockchains. These things will survive no matter what happens with regulations surrounding cryptocurrencies.
These technologies are the next generation of the internet, communications, collectibles, and ultimately financial services.
I hope that answers your question, Jeffrey.
Hi Jeff,
I’ve had a few thoughts about the Fed-coin and wondered if you could comment on them in your mailbag.
It seems to me that most people just don’t understand the similarity between FTX and the Fed-coin i.e. they are both highly centralized and not at all independent, but it’s the Fed-coin that we should be more concerned about, because it’s controlled by a government, rather than an individual.
The latter is more focused on making money out of you, whereas the former is focused on controlling your whole way of life. Which is the scarier scenario?
Warm Regards
– Debbie F.
Hi, Debbie. I understand your meaning. I’d say it’s probably not an “apples to apples” comparison to compare FTX to a CBDC (“Fed-Coin”). But I certainly agree with the sentiment that a CBDC has some frighting implications. I plan to share a prediction along these lines over the next few weeks. But I’m happy to share some of my thoughts now.
To catch readers up, we can think of a CBDC simply as a digital version of a national currency. So, a digital version of the dollar, the pound, the yen, and so on. A CBDC would be under the centralized control of a country’s central bank.
From the perspective of a central banker, a CBDC would have several benefits. That’s because the money could literally be programmed.
For instance, until just this year, the Federal Reserve was trying to increase the level of inflation. Normally, the Fed would attempt to do this by adjusting its key rate lower. But these rate changes take time to work through the economy and affect the desired outcome.
But imagine an economy with a CBDC. The Federal Reserve could program the currency to “print” at a specific rate—say, two percent per year—to get to the desired outcome.
That’s just one example. But we can imagine the possibilities—good and bad.
Three years ago, I might have been more optimistic about CBDCs. They certainly would remove a lot of friction in the financial system. But today, the implications of this type of power in the hands of governments worries me.
What I’ve seen is this increasing rhetoric that is really frightening and very totalitarian. We have entities like the World Economic Forum (WEF) comprised of unelected officials openly advocating for programs that sound an awful lot like the Chinese government’s social credit system.
In essence, the goal is to link transactions and money with certain social behavior. There is very open discussion and active initiatives to create technology applications that are used to track our physical locations and consumption patterns.
So, perhaps we are creating a larger carbon footprint than “they” feel is appropriate. If the goal is to reduce a person’s carbon output, then you could stop any transactions that results in a larger carbon footprint.
So, maybe you can’t fill up your pickup truck one day. Or you’re limited to how much gasoline you can purchase. Or you’re now prohibited from buying any more meat for the month. That level of control would absolutely be possible with a CBDC.
I’ll have much more to say about that in a future issue of The Bleeding Edge. So please, be on the lookout for that. For now, I will say that I’ll be monitoring this story closely. And I’ll be doing whatever I can to support any initiatives that are working to stop the worst-case scenario from being approved and implemented.
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.
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.
