- A new development in the “Tech Wars” with China
- The Ethereum supply shock
- “Green” EVs aren’t so green
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 in a future edition, you can submit it right here.
Now, let’s turn to the mailbag.
An all-out economic war is unfolding
Jeff, according to a lengthy series of tweets, the Biden Administration gave Americans working in China’s semiconductor industry the choice between quitting or losing their American citizenship. The result was a mass walkout on the part of the engineers, leaving China’s industry “reeling.”
I am wondering: 1) is the above information true, and 2) does that increase the likelihood of an invasion of Taiwan?
– David R.
To catch readers up, last week we discussed new export controls put out by the current administration targeted at the Chinese semiconductor industry. The export controls make an effort to ban access to advanced semiconductor manufacturing technology, and advanced semiconductors.
They go even further by restricting the ability for Americans to work in China’s semiconductor industry. In short, yes, this is true. This is what the Biden Administration has implemented as part of its foreign policy concerning China.
I’m surprised I haven’t seen more coverage on this topic. The United States has essentially declared an all-out economic war with China. And hardly anybody has noticed.
And as I pointed out, there are several workarounds to these export controls. From my view, the net effect of these controls will be to damage American companies and antagonize the Chinese government. Readers can catch up on my full analysis right here.
But one aspect of these orders we didn’t have a chance to touch on was the impact it has on American citizens working in the Chinese semiconductor industry. Here’s the language, directly from the report:
BIS is also informing the public that specific activities of “U.S. persons” that ‘support’ the “development” or “production” of certain ICs in the PRC require a license.
In essence, the Bureau of Industry and Security (BIS) is saying that any American citizens contributing to the Chinese semiconductor industry—specifically as it relates to military applications and advanced semiconductor technology—need to register with the government.
We haven’t seen this policy put into practice yet, but tens of American executives and technologists are already caught up in this mess. And given how aggressive this new policy is, most of them will have to choose between their U.S. citizenship and employment/residency status in China.
Under the circumstances, I could certainly see the government revoking citizenship for any Americans that don’t comply.
This is criminal.
Every American has a right to life, liberty, and the pursuit of happiness, which includes the right to work anywhere they want in the world.
They have a right to work to support their families and whatever causes are important to them. I lived and worked for two decades overseas and sold billions of dollars of technology for American companies.
International trade and international work forces deepen understanding, improve global trade, and tend to reduce the likelihood of conflict. The U.S. is moving quickly in the opposite direction.
These misguided policies have already had an impact on China’s high-tech industry. Last month, China-based Naura Technology ordered all its American engineers to immediately stop all work. More will follow.
As for the second part of the question, that is certainly my fear. China has been antagonizing Taiwan for the past year. And Xi Jinping has been very clear about his views towards Taiwan. Here he is after his re-election to a third term as general secretary of the Communist Party of China:
We will safeguard the overall interests of the Chinese nation and take resolute steps to oppose ‘Taiwan independence’ and promote reunification.
While the entire world is focused on the war in the Ukraine (great distraction for China), and the U.S. government is lacking leadership, from China’s perspective there is no better time to make its move on Taiwan than now.
And I believe that China knows that it won’t get a better chance to do so. I don’t say that lightly. And I certainly hope I’m wrong.
But this is something we’ll certainly need to follow closely. As readers know, Taiwan is home to TSMC, the world’s largest semiconductor fabrication company.
And while TSMC has worked, and continues to work, to diversify outside of Taiwan, the majority of the company’s manufacturing is still on the island. And all of the company’s bleeding-edge semiconductor manufacturing takes place there.
The United States government is playing a dangerous game. A game that has negative repercussions for the semiconductor industry, for the U.S. economy, and for every U.S. citizen. For obvious reasons, I am watching these developments very closely.
Checking in on “The Merge”
I was wondering about your feelings about ETH and its ecosystem. I looked at price projections, which are notoriously unreliable and often are overly optimistic, and ETH is projected to reach its previous peak within 5 years. That is vastly different from your own projections as a result of the long-awaited merge, which finally happened.
I would be most interested in an update from you on this most important crypto coin. Keep up the good work! Thanks!
– Gordon E.
Hi, Gordon. Unfortunately, ETH did not perform as we expected soon after “The Merge.” The asset has remained strongly correlated with the overall market weakness. But it’s worth pointing out that our investment thesis for the asset is still intact. In fact, it’s playing out precisely as we predicted.
To catch readers up, ETH—or “ether”—is the native asset for the Ethereum blockchain. After bitcoin, it’s the most well-known digital asset. We took a position in the asset in the summer, just ahead of what’s called “The Merge.”
At a very high level, The Merge is a process that is transitioning the Ethereum blockchain from a “proof of work (PoW)” to a “proof of stake (PoS)” model.
What this means is that Ethereum will no longer need expensive, energy-consuming mining rigs to validate transactions on the network. Instead, holders of ETH will be incentivized to “stake” their assets to validate the transactions.
One of the consequences of this is that Ethereum will reduce its energy use by more than 99%. In essence, Ethereum “went green.”
That will help attract institutional capital that is—per their charter—required to deploy capital into ESG investments.
That alone was reason enough to buy the asset. But there was another consequence of The Merge that very few saw.
We—my team and I—predicted that The Merge would result in an unprecedented supply shock for ETH. This supply shock would come from three sources:
Reduced Issuance: The Ethereum blockchain has its own pre-defined form of monetary policy. Unlike bitcoin, which has a pre-defined amount that will ever be mined, Ethereum issued 60,000,000 ETH in its very first block and has continued to issue fewer ether per year in perpetuity. This has led to ETH’s inflation rate dropping over time. It recently sat at just over 4%. We can see this in the chart below.
“Locking Up”: I mentioned “staking” as a way to validate transactions above. And one important thing to know is that staked ETH will be effectively “locked up” and taken out of the circulating supply.
“The Burn Pit”: Not many investors know this, but a change took place last year that started to “burn” a portion of transaction fees. Meaning as transactions are conducted on the blockchain, more and more ETH will be removed from circulating supply.
The result of these three forces is that the amount of newly issued ETH would go negative sometime after The Merge. And that’s precisely what’s happened. Since The Merge, issuance of new ETH has dropped by approximately 88%. And we have now seen the inflation rate of ETH go negative as of early November.
Put more simply, the supply shock we predicted has started to take effect. Circulating ETH is starting to drop. And on the demand side, some very bullish things are happening.
Fidelity has moved ahead with its plans to allow its 401 (k) investors to hold bitcoin in their retirement accounts. It’s only a matter of time before ETH is added to that list.
Another 401 (k) provider—ForUsAll—is also offering its investors the ability to hold bitcoin and ether in their retirement accounts.
On Wednesday, JPMorgan executed its first live trade on a public blockchain. The company used the Polygon network but stated its desire to also use the Ethereum network. With Ethereum’s upgrade, JPM will be able to interact with Ethereum’s blockchain via scaling solutions.
In other words, Wall Street has been preparing for the move to take advantage of the potential of decentralized finance and digital assets. This is good news long-term for Ether and digital assets.
And one final point, the current U.S. administration in conjunction with the SEC have continued to take a very hostile stance against all digital assets. I would argue that the SEC is in an all-out brawl right now with the industry. It’s attacking some of the very best and most compliant companies like Ripple Labs and Coinbase.
There is an ongoing and very drawn-out SEC case against Ripple Labs which the SEC appears to be losing. And other best-in-class companies in the industry have stepped up to support Ripple in their defense. It’s really an incredible moment in the industry.
I believe that the U.S. government, the Federal Reserve, and the U.S. Treasury are taking these actions intentionally to “hold back” the industry until they get their plans implemented for their “Fedcoin” – a U.S. dollar backed CBDC.
They want to lock up what they feel is their domain before they loosen up and let the rest of the industry get on with it. My best guess is that will happen in the spring of next year. There will be some huge developments in 2023 that we have to look forward to.
This mess has held back institutional capital in the digital asset markets, but once capital floods back in, it will hit the wall of reduced supply I outlined above.
When that happens, we can expect outsized movements from ETH compared to the rest of the market.
The EV revolution still has some obstacles…
I think the best place to put a recycling plant would be close to a lithium battery producer. From my understanding, only 80% of the cells produced are efficient, therefore, you have raw material to recycle…
– Jean-François B.
Hi, Jean-Francois. You bring up a great topic that I’m quite passionate about.
The current government policies talk non-stop about how much better the world would be if we all just move to EVs.
But they don’t mention a word about what to do with all the used toxic batteries. They don’t discuss the amount of destructive mining that needs to take place to get the metals to produce those batteries. And we never consider whether we are “fueling” our EVs with electricity that comes from clean energy.
After all, what’s the point of driving an EV if the electricity used to power it comes from coal and natural gas? The car might not be producing any emissions, but the powerplant still produced the emissions to produce the electricity.
And current battery technology is far from perfect. It may come as a surprise to know that current EV batteries lose their charge capacity by about 2% every year. And the amount of annual performance degradation increases over time.
Basically, after seven or eight years, the charging capacity becomes so limited that the car can only drive very short distances. At that stage, an EV owner needs to make the decision of paying more than $20,000 to replace all of the EV’s batteries, or to simply purchase a new car.
But what to do with the used batteries?
Historically, the “solution” for these drained batteries has been to ship them to a dump. Not a good solution to dump these toxic chemicals into the Earth. But as I shared on Wednesday, there are a handful of companies addressing this problem. Readers can feel free to catch up here.
And you’re absolutely correct. The logical place to locate a recycling plant would be next to an EV battery manufacturing plant. It’s simple, straight forward, reduces unnecessary logistics costs and more carbon emissions, etc.
But there’s an issue that we’re already seeing in the industry. Automotive companies haven’t shown any interest in getting involved in battery recycling. Their focus is almost entirely on automobile manufacturing and, for some, EV battery manufacturing. They want to manufacture their products, sell them (preferably for a profit), and move on.
Battery recycling companies so far are building independent operating businesses apart from the automotive manufacturers. Therefore, they are locating themselves in good business jurisdictions for this kind of industrial recycling. They also want locations that have good access to major highways. Redwood and Ascend are too great examples of this.
Almost all the co-location that is happening in the automotive industry is with automobile manufacturing plants being co-located with EV battery manufacturing plants. This makes perfect sense of course.
My sincere hope is that policymakers take a holistic view of the industry and understand the environmental impact of EV policy from the mining of metals all the way to the recycling of toxic used EV batteries.
And even further, I hope we address the underlying issue of where our electricity comes from in the U.S. – more than 60% comes from coal and natural gas.
If the U.S. and other countries don’t migrate away from carbon-based energy sources to power their electrical grids, we will have accomplished no net environmental benefit.
Nuclear fission and—longer term—nuclear fusion are the only technologies available to us that can provide clean, reliable, emission-free electricity to power EVs.
That’s all the time we have this week. Remember, if you’d like me to answer one of your questions, please send me a note by writing to [email protected]. I’ll do my best to get to it in a future mailbag.
Editor, The Bleeding Edge