• Is Coinbase in trouble?

  • Where semiconductors are headed…

  • “Could this be a bridge till we’re capable of nuclear fusion?”

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 downturns bring fear…

Let’s begin with a question on Coinbase’s financial state…

I would like to ask Jeff about Coinbase. I have an account with them and have recently heard that they might be in financial trouble. How can I get Jeff’s opinion? Thank you,

– Jim C.

Hi, Jim, and thanks for sending in your question.

Along with the stock markets, crypto has been feeling the burn lately. In mid-June, the crypto market cap dropped below $1 trillion for the first time since January 2021.

And among the sudden bearishness, we’ve seen crypto project Terra Luna blow up, while the Celsius Network froze withdrawals as a result of market conditions. Last week, Voyager Digital declared bankruptcy as the latest victim of the downturn. Rumors still swirl about what could be the next domino to fall.

So it’s no surprise that some people are looking closer at Coinbase. News broke last month that the company was laying off 18% of its workforce as a result of the downturn.

And back in May, I addressed concerns about the threat of bankruptcy.

So I want to reassure readers now… Coinbase isn’t going anywhere. (For full disclosure, I was an early angel investor in Coinbase and still hold my entire position. And I have no intentions of selling.)

Unlike the companies that have imploded, Coinbase is an incredibly strong business within the crypto space. It has gross margins above 76% and has more than $6 billion of cash on its balance sheet.

That’s more than enough to service its $3.4 billion in long-term debt. This is a healthy company that will continue to grow in the years ahead… And it is a company whose valuation will recover quickly as the cryptocurrency market return to health.

In fact, Coinbase is already working on expanding its offerings further. As I shared back in April, it has now launched a beta version of its non-fungible token (NFT) marketplace. That will give it a whole new range of services, and a source of future revenue.

And it has the advantage of a strong user base. Currently, it boasts over 98 million verified users. Compare that to Fidelity, which has roughly 40 million individual investor accounts, and Schwab, which has 33.8 million brokerage accounts.

Coinbase’s move to scale back its business, during a time when the market is correcting, was simply good management. Having worked in high tech my whole career, it is something that I am very used to. 

Tech companies tend to adjust quickly to prevailing trends and pivot their business as things change. Coinbase is no different, and this will only make the company stronger when the market returns to growth.

How would a recession impact semiconductors?

Next, a reader wants to know more about semiconductor demand…

Hi Jeff, you have remained extremely bullish on semiconductors, and over the next 5–10 years, I am sure you are correct. You discussed supply disruptions and the technology stock. Never did you anticipate that the semiconductors would decrease by 50% and more (AMD, NVDA, ASML, etc.).

Rather you discussed how many technology stocks would go to zero if they did not adapt to the new Web 3.0 and associated technologies. Could you please comment on this and project what will happen to the semiconductor industry, which apparently has decreasing demand if we actually go into a recession? Thanks as always,

– Gordon E.

Hello, Gordon, and thank you for writing in. Your question highlights an important bit of nuance when investing in the stock markets.

As I’ve written recently, the semiconductor industry has been releasing some incredibly bullish signals…

Last month, Taiwan Semiconductor Manufacturing (TSMC) – one of the most important companies in the space – announced it expected its revenue to jump “at least” 30% this year. And that comes just two months after it had guided to mid-to-high-20s growth.

TSMC is also spending an incredible $44 billion this year on capital expenditures (CapEx), primarily to build additional manufacturing capacity. That means that its outlook is bullish not just this year, but years into the future.

The company then followed up all this good news by sharing its path to 2 nanometer (nm) chips… which it expects to achieve by 2025. TSMC would not be advancing this quickly if it weren’t seeing demand and economic growth.

TSMC is a bellwether for the semiconductor industry, and as all this shows, it’s powering ahead at full steam.

All of this growth, investment, and impressive performance has been happening despite the current economic conditions and inflation. Yet to your point, so far this year, its shares (TSM) are down about 37% along with the rest of the market. Other companies that you pointed out, like NVIDIA, AMD, and ASML, have also been impacted as well.

Nothing has changed with our investment thesis. But what did surprise me is how the market has punished such high-quality growth companies. This came in the form of compressing their valuations. And it hasn’t happened in just semiconductors, but in the entire equity markets.

Unfortunately, this is the market environment that we’re in right now. The good news is that it won’t last.

These companies continue to invest and grow, and once institutional capital returns to the equity markets and growth companies are again valued appropriately, we’re going to see higher prices.

There is one soft spot that has emerged in the industry and that’s related to PCs and smartphones.

The rising costs in gasoline, food, and electricity have reduced discretionary income. And that has meant that there has been some softening in demand for things like laptops, desktop computers, and smartphones. Consumers can hold off for another six months or a year until things improve before buying a new one.

Demand in other areas of the semiconductor industry remains strong, however. Even silicon wafer suppliers have their orders booked out through 2026–2028. They literally can’t manufacture enough to meet the current demand. There will certainly be some volatility along the way, but the multi-year trend is most certainly bullish.

What’s exciting about this decade is that we’re seeing breakthroughs in so many areas of high tech and biotech all happening at the same time. Companies that adopt the latest technologies and incorporate them into their businesses have a clear competitive advantage over legacy players.

Those that adapt will thrive, and those that don’t adopt the new technologies and methodologies will struggle to keep up. Yes, some who fail to make the transition will collapse. Kodak is a perfect example of that happening – It completely missed the shift to digital cameras, which ultimately led to its bankruptcy in 2012.

These large shifts, however, never take place overnight. They tend to unfold over years, and it usually takes a decade-plus before we see a company fall over like Kodak did. 

Fortunately, as investors, it is fairly easy to see these things happening in advance. And I would argue that simply reading The Bleeding Edge and staying on top of the latest developments will put readers ahead of 99% of all other investors in understanding the trends that are shaping our future.

Sending nuclear waste to space…

Let’s conclude with a question about nuclear waste disposal…

Hi Jeff,

I enjoy reading The Bleeding Edge. Your section on nuclear fission on the Moon made me wonder: given the improved economics and accessibility of space launches, as covered extensively in The Bleeding Edge, why not launch nuclear waste into the depths of space or aim it at the Sun?

The fallout from a failed launch could be catastrophic, but theoretically, could this be a bridge until we’re capable of a better alternative such as fusion?

– Lauren C.

Hi, Lauren, and thanks for writing in with such an interesting topic. 

To your point, nuclear waste disposal is a big problem that doesn’t have a great solution yet. As of 2020, the U.S. alone had more than 90,000 metric tons of radioactive waste. Worldwide, there is over 250,000 metric tons.

With much of this waste aging in degrading containers, we need to come up with better options for managing it so that it doesn’t risk contaminating the surrounding environment – and if possible, cleaning it up entirely.

Launching this waste into space or the Sun is one proposal that people have contemplated for many years now, but unfortunately, there are several clear reasons why it hasn’t been done.

The first is the one you mentioned: the risk that something could go wrong.

If there is a launch failure, we could send radioactive waste over wide swaths of the planet due to the atmosphere. Even though rocket launches are consistently successful, every once in a while, one fails. While rare, the risk is still material and too great given the potential fallout.

And there is a significant expense to launching heavy objects into space. Those 90,000 metric tons in the U.S. are equivalent to 90 million kilograms. A SpaceX Falcon 9 rocket can lift 22,800 kilograms into low Earth orbit. If we wanted to clear out all the radioactive waste in the U.S., it would take about 3,950 launches.

At $67 million a launch, that would come to a total of nearly $265 billion, not including any operational and project management costs. With that many launches, there would most certainly be a handful of failures. 

SpaceX has the best record in the industry with the Falcon 9, 164 successful missions out of 166, a 98% success rate. But even a 99.5% success rate wouldn’t be enough, considering how dangerous the fallout could be from one failed mission.

A far less risky solution, and one that I think is more likely, is that the industry develops new forms of either nuclear fission or nuclear fusion technology capable of processing the spent nuclear fuel.

The reality is that about 97% of nuclear waste can be “recycled” in certain kinds of reactors. Two of the more promising reactor designs that are being developed to do this are the sodium-cooled fast reactor and the molten salt reactor.

While I continue to believe that the best path forward is through nuclear fusion, I do hope that we develop advanced nuclear fission reactors that are safe and will help us clean up the large majority of our spent nuclear fuel repositories.

Thanks again for the fun question.

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 good weekend.

Regards,

Jeff Brown
Editor, The Bleeding Edge

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