- Is Coinbase going bankrupt?
- How to invest in quantum computing…
- Bold calls in the midst of fear…
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 we turn to today’s questions, though, I’d like to thank everyone who came out to my Wednesday night event, the Crypto Placements Summit.
I know cryptocurrencies have tumbled lately along with the overall markets. Yet this is still an extraordinary space to invest in. The best coins and blockchain projects will lead us into the future of Web 3.0 – the next generation of the internet.
So how can we profit from this opportunity… without losing our shirts in the current volatility?
That’s where crypto placements come in. These combine the explosive growth of blockchain and cryptocurrency technology with the extraordinary return potential found in investing in private startups.
Longtime readers know that I’ve invested in over 300 private deals with my own capital over the years. There is no better way that I know to build generational wealth.
That’s why crypto placements are so powerful. Even in these shaky markets, private crypto deals enable us to sleep well at night. They aren’t buffeted by the volatility, and they don’t crash when the S&P 500 falls or when bitcoin takes a dip.
Rather, as long as they continue to build and meet their goals, their valuations continue to grow.
If any readers weren’t able to make it to Wednesday’s event, then a replay sharing all the details will be available for a short time. I’d encourage anyone who’s looking for reliable ways to grow their wealth to watch.
And one final thing – I have a crypto placement going live tonight. It’s an incredible startup that solved a problem in the industry that no one else has figured out. Investments like this don’t last long. There is a hard cap, and that means that they usually fill out in a matter of hours.
It’s not an exaggeration. I’ve recommended several of these kinds of placements over the years, and every single one of them filled up in less than 24 hours. The fastest one sold out in less than five hours. So if this is something that might be interesting to us, this is not the time to wait.
Are our Coinbase holdings at risk?
Let’s begin with a question on this popular crypto exchange…
Jeff, today Business Insider published a piece saying that “Coinbase warns users could lose their crypto holdings if the company goes bankrupt.”
It seems the Coinbase CEO went to tap dance around the statement, saying that it was really unlikely for that to happen, but still such a message sent a chill through my spine. What do you think? Are we really at risk of losing everything there if Coinbase goes belly up?
– Miguel J.
Hi, Miguel. Thanks for sending in your question – this topic has understandably drawn some attention in recent weeks. For full disclosure, I was an early angel investor in Coinbase and still hold my entire position. And I have no intentions of selling.
This story originated with Coinbase’s quarterly filings, where the company acknowledged that bankruptcy could pose a risk to its users.
That shocked many people. Most of us are used to traditional brokerage accounts, which have specific rules about how they must hold customers’ assets.
Namely, customers’ money has to stay in separate accounts from the brokerage’s own assets. That way, creditors can’t seize customers’ holdings in the event of a bankruptcy. Brokerages are also required to insure their customers’ assets up to $500,000.
On crypto exchanges, however, the scenario is different. Customers’ assets are “custodially held” by the exchange, which means that those assets could potentially be exposed to any bankruptcy proceedings.
And U.S. Securities and Exchange Commission (SEC) chair Gary Gensler has been quite the doomsayer about this difference: “If that exchange gets hacked, if somebody steals the underlying token… you’re just a creditor. And when crypto exchanges fail, you’re just in line in bankruptcy court.”
However, let me be clear… This story isn’t making headlines because Coinbase is on the verge of going bankrupt. Coinbase is literally one of the most successful and well-run businesses in the entire industry. It has gross margins above 76% and has more than $6 billion of cash on its balance sheet. This is an incredibly healthy company.
Rather, the SEC changed its guidelines in March and told crypto exchanges to report their customers’ assets on their balance sheets. This actually applies to all crypto exchanges, not just Coinbase.
And the situation isn’t quite as dire as it might sound. As Coinbase CEO Brian Armstrong pointed out, this topic isn’t something the courts have previously ruled on.
He noted that – while technically possible – a court would have to decide to include the customers’ assets as part of a company during its bankruptcy… which seems unlikely.
Of course, if customers are uncomfortable with this kind of risk, there’s a simple solution. All we need to do to avoid any potential bankruptcy entanglements is self-custody our coins in our own digital wallet. This could be a hot wallet like Metamask or MyEtherWallet. Or a much safer alternative would be a hardware wallet like Ledger.
What this news story really highlights is the need for clear, comprehensive rules within the cryptocurrency and blockchain space.
Having set guidelines and precedent in place will enable this industry to continue to grow and develop with much more ease and simplicity… and maintain consumer confidence without these kinds of dramatic headlines.
If I’m disappointed in anything about Coinbase, it’s that Brian Armstrong didn’t give the heads up in advance of making the changes with a clear explanation. That would have been a smarter move.
And I’ll make one final point. These issues aren’t just about Coinbase. They affect the entire industry. Poorly run, badly secured, and financially unhealthy digital asset exchanges have cost investors billions of dollars over the years. Losses that affect normal, unsuspecting investors pile up every year.
In my investment research, we avoid projects and companies like these. But many investors simply don’t have the knowledge or the time to do the research to understand any given risks.
And these kinds of problems aren’t just about the blockchain and cryptocurrency industry.
In the U.S., a normal bank account is only insured up to $250,000. If a bank goes bankrupt, normal savers can lose anything beyond $250,000 in their savings.
We learned the hard way during the financial crisis that banks are not trustworthy organizations. We saw how they leveraged their balance sheets up 30:1, 40:1, even 50:1 – putting everyone’s hard-earned savings at risk.
The same thing happens to brokers. MF Group, known as Man Financial, collapsed in 2011. It took its customers’ funds and traded them with leverage, and the whole thing blew up.
Sadly, it wasn’t the large financial institutions that got hurt the worst. It was the individual investors and small business customers like farmers that lost the most.
The financial services industry has been rife with stupidity, corruption, collusion, and pure greed for as long as I can remember. There are literally too many examples to list.
The best thing that we, as individual investors, can do is to be well-informed, understand the risks, and diversify our portfolios so that if a bunch of clowns do something stupid and bankrupt an organization, our savings and retirement will not suffer an irrecoverable loss.
My top quantum computing stocks…
Next, a reader wants to know more about opportunities in a big tech trend…
What are your thoughts about investing in quantum computer stocks?
– John K.
Hi, John – this is an exciting topic. What’s not to like about investing in the next generation of computing technology?
As longtime readers know, quantum computers are capable of operating at speeds exponentially greater than any classical supercomputer on the planet today.
And they can tackle complex problems at a massive scale… in areas like global climate analysis, cosmology, materials design, drug development, and nuclear fusion technology.
Not only that, but quantum computing will impact fields like blockchain technology, cybersecurity and cryptography, artificial intelligence (AI), and more.
Those are some enormous use cases for quantum computing. And that means the investment potential for this technology is incredible.
Many don’t know this, but quantum computing is here today. It’s still early days, but there are several companies that have already built functional quantum computers.
In most cases, the quantum computing divisions are part of a much larger technology company like Google, Microsoft, IBM, or Honeywell.
And there are a couple of pure-play quantum computing companies that are even publicly traded today. Both have commercially available products in use. They are a work in progress, but they are generating revenue already.
Rigetti Computing, one of my favorites, will generate about $21 million in sales this year. IonQ, another interesting company in the quantum computing space, will generate about $11 million in sales this year.
And there are private companies that have been generating revenue from quantum computing for years, like D-Wave Systems. D-Wave will likely go public later this year.
Of the “big guys”, Google is the most advanced and is already generating revenue from its quantum computing systems by leasing the computing in the cloud.
Amazon is doing the same. Amazon buys other company’s quantum computers and makes the use of those computers available in the cloud through Amazon Web Services.
These are just a handful of ways readers can gain exposure to this technology as it takes off.
Please note, though, that we are very early in this trend. These companies are making great progress, but investors may experience higher volatility in this space. So we should have a risk management strategy in place and position size appropriately.
And if you’d like to follow along with my specific recommendations in this space, then I’d encourage you to have a look at Exponential Tech Investor. This is my research service where I recommend small-cap companies working on cutting-edge technology trends like quantum computing.
“Let time do the heavy lifting…”
Let’s conclude with some feedback about our recent market analysis…
Dear Jeff and Jason and team, you all are doing a great job and helping everyone maintain perspective with your analysis. These are bold calls, especially when fear just grips everyone and the media echoes it.
Personally, I’ve been following your updates and buying as I’ve gotten to understand more and more about the companies you have selected. They really are best-in-breed for their market caps. Thank you for all you do. We’ve seen this rodeo before. Buy the best. Let time do the heavy lifting. Get some rest.
– Yogesh M.
Hi, Yogesh, and thank you for the kind words. It’s great to see your balanced and objective perspective at a time like this. As an investor, this is one of the hardest skills to develop.
This market volatility has certainly brought more fear and anxiety into the marketplace than we’ve experienced in some time. That’s why all of us at Brownstone Research have done our utmost to bring our best intel on the developing situation to readers.
I can tell you that we’re working around the clock monitoring the markets, testing our assumptions, and reassessing every day.
Jason and I were in fact chatting yesterday and sharing what we were seeing in the markets. We’ve been very aligned, and we’re both seeing very oversold markets right now.
When valuations are abnormally cheap, large institutional capital and hedge funds always come rushing back in to take advantage of the bargains.
Sadly, the media is notorious for stirring up our emotions – whether or not that’s actually in our best interests. After all, strong emotions tend to generate more clicks and ad revenue for the news outlets. This situation became even truer during the pandemic.
Yet as I’ve shared before, I don’t believe now is the time to panic. The Fed has only raised interest rates a total of 75 basis points so far. And that was from a base of 0%. We’re still under 1% for the Fed Funds rate. The interest rate rises are insignificant to date.
Even if it raises them again at every meeting throughout the rest of this year (which I doubt), we will still be sitting at a historically low rate.
And I’m far more inclined to think that the Fed will reverse course. I suspect that the Fed likely has an ulterior motive. It may very well be trying to raise rates, just so it can lower them again in the near future.
Of course, this means we’re in an environment of terrible fiscal and monetary policy. But a reversal like this would certainly drive more capital into the equity markets.
For obvious reasons, Russia has not really been buying U.S. Treasuries lately. China has also reduced its buying. It’s the same story with Saudi Arabia.
Even Japan, historically a strong buyer of Treasuries, has been experiencing a trade deficit. The Japanese yen has fallen, which is limiting that country’s ability to buy.
Given this situation, we can count on the Fed and the current administration to continue to print money to fund all of the deficit spending. Long term, this is a disaster for our children and grandchildren.
Short term, this will act as a form of stimulus, which means the current market downturn will be short-lived.
Investments into private companies are still incredibly strong right now, and I continue to see private companies focus on “building” the next generation of tech and biotech companies. What’s in the pipeline is simply unbelievable.
I always find it useful to stand back and assess the pace of development despite what is happening in the short term with the markets… Which I might add are being manipulated intentionally by the Federal Reserve.
As long as we continue to see advancement, investment, and growth, we know that this market volatility right now is just going to be a speed bump in the grand scheme of things.
If I ever saw investment and growth dry up, then I’d be worried and expect a prolonged downturn. If that ever happens, my subscribers will be the first to know, and I’ll be researching and writing about that extensively.
It has been a long time since I’ve been so excited about market valuations. Companies that I never thought I would see trading at current levels are there. To me, this is a great opportunity. Yes, it will probably be bumpy for a bit more, but moments like these don’t come along too often.
Ultimately, while the news and financial media want us to think the sky is falling, we intend to take a much broader view of the current events. And here at Brownstone Research, we’ll continue to update readers on the best course of action going forward.
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.
And despite the current turmoil, I hope that everyone can still have a great weekend.
Editor, The Bleeding Edge
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