I have a few hot takes on some topics that I’m trying to combine into a coherent thesis about what will happen over the next 2-5 years. This isn’t meant to inform any big stock plays right now, but these are things I have in mind as time moves forward. Feel free to discuss or just point and laugh.
The Global Chip Shortage
Right now, everyone is talking about it. There’s a shortage of chips. The US needs domestic chip production for national security purposes. TSMC and INTC, the two largest chip fabs, are investing hundreds of billions in US production facilities with the help of tremendous government subsidies. The fab race will end some time around 2023/2024 as the new facilities begin production. The semiconductor companies will milk the US govt for every dollar they can squeeze out. The chipmakers are in a race for capacity. This race will lead to an overproduction of chips and we’ll see a huge decrease in chip prices around mid 2024. But the important thing here is that the chip companies want to kill each other. So their best bet in the long term is to maximize chip production capabilities, weather the coming storm, and emerge from the glut victorious.
American Exceptionalism
The USA is special. If you disagree, I will nuke you. See how it works? That’s right. We are special. Say it again.
Now that you’ve been enlightened, let’s think for a moment about the impending technological revolution we’re living in. Artificial intelligence, decentralized finance, electric vehicles, and so much more. And whether you’ve drunk the red, white, and blue Kool-Aid or not, the USA will lead the world in all of these technologies. That’s just how it is going to be. This increase in production will further increase the wealth gap between the USA and most countries. We’re just going to be flat out more productive than everyone else. This might be more like 10 years out, but the ramifications are already upon us, and within 5 years we’ll be in the thick of it. America is special.
And since the other major players in the world know it, they’re constantly trying to steal our stuff. Just a side note.
Cryptocurrency
I’m a software engineer and I actually know how the bitcoin protocol works. There’s a lot of hubbub about crypto, but there’s a few big problems it has (like any emerging technology) that will prevent it from global domination until these problems are solved. I’m sure some have been discussed in the crypto forum, but I haven’t read them all, so here’s my take:
- permanently lost coins
- power consumption and the proof of work
- the fiat principle
- central bank hostility
- quantum computing
- transactions/block limitation
These each deserve their own post, but I’m going to try and give a few sentence summary to each. If you understand it, great, if not, I’m sorry I don’t have more time.
Permanently lost coins
Cryptocurrencies uses asymmetric key cryptography to generate a private and public key. You must maintain ownership of the private key at all times. If anyone gets the private key, you’re royally screwed. Between 10-25% of all bitcoin is permanently lost, locked away in accounts that will never again see the light of day because the private keys have been lost. If you own crypto and don’t know what your private key is, that means that some entity out there has your key stored in their database. And that’s a recipe for disaster. This problem with crypto is not so much about it being non-useful. The less coins in circulation, the higher the value, right? Sure, but this also can push participants out of the market because they are afraid of storing their key somewhere else or they don’t believe they can maintain it. Putting a tremendous amount of money into an asset that can disappear like this is extremely risky, and most people aren’t willing to take that risk. If someone steals my money from Chase, I can call Chase and get remediation. The cryptocurrencies do not care.
Power consumption and the proof of work
One of the ways that distributed ledgers work is by the proof of work concept. Miners must hash the previous block and new transactions with a guessed random number that causes the hash to begin with a certain number of 0s. Since the odds of a hash beginning with a certain number of zeros is statistically improbable, the higher the number of zeros, the more numbers must be guessed. The bitcoin protocol also works by increasing the number of zeros required as more miners enter the network. This leads to tremendous amounts of power consumption as miners all try to guess simultaneously, with a lot of duplicate guesses. There’s fixes and incentives that can be introduced to reduce the power consumption, but that’s not what this post is about.
The fiat principle
Crypto, like all currency, is fiat. It is only worth what society ascribes to it. The problem with crypto is that anyone can create their own currency, hence doge and shib. There’s a strong network effect with currency, and the winner will be orders of magnitude larger than their competitors. Just look at Amazon and the USD, which also have strong network effects. I don’t know which cryptocurrency will win, but I’m pretty sure it isn’t bitcoin. Whichever one does win, has to fix all or most of the problems I’m presenting here. I don’t think the future winner exists yet.
Central bank hostility
China.
They’re acting like it is the power consumption that is the problem. It isn’t. They know it is a threat to their central bank’s power.
Quantum computing
Quantum computers are coming. I’m not going to explain how they work. It would hurt your brain (and probably mine). But they present a big risk to the security of the foundational algorithms used in crypto. Whoever owns a function quantum computer could seize all of the bitcoin in the world overnight.
Transactions/block limitation
Related to the proof of work and power consumption issue, bitcoin, for example, has a limit of like 2400 transactions per block. Other cryptos have attempted to increase or remove this block size, but it presents challenges like big sacrifices to the proof of work.
My hands are tired. I wasn’t planning on typing this much.
Ok so where am I going with this? Let me connect a few threads.
A superior cryptocurrency protocol will arise (if it hasn’t already) and quickly become the global fiat crypto. This will cause a relative crash in all other cryptos popular today. It will also challenge global currencies, leading central banks and governments to fight it. The problem for them is, it will be unbannable and untraceable. If you want to know how to spot a crypto that solves the big challenges that keep bitcoin and others from world domination, I can write another post. It will have the following features:
- Recoverable keys or remediation for lost keys
- Power-efficient proof of work
- I actually believe that the winner will be a platform for global trust, and that a currency will be one of many services built on top of it. Ethereum has the right idea, but is still not perfect.
- unlimited transactions per block
- A protection against quantum computing, or the incorporation of quantum computing into the protocol
Graphics cards sales are driven by crypto power consumption inefficiency. Once a superior cryptocurrency arises that includes a protocol fix for this issue (and it is very fixable) the demand for graphics cards will plummet. I don’t know when this will be, but it will cause a crash in chip prices.
Combined with the overproduction of chips, this will lead to some of the chipmakers going out of business entirely, or consolidating into even fewer enormous chipmakers. Who will win? I’m not sure. But I do think companies with large focuses on graphics will lose. I expect large declines in AMD and NVDA within the next few years.
American technological dominance will piss off the rest of the world. OPEC will be mad because their economies will collapse without oil. Saudi Arabia, UAE, and Qatar see the writing on the wall. But others simply cannot make an economic transition. China and Russia already hate us and want to eat our lunch. They’re constantly trying to steal what they can’t create on their own. And they’ve had some pretty good success at it. They can’t afford to let the US win this technological revolution, so they will do everything in their power to stop it. This will lead to armed conflict, and potentially war. If you like defense contractors, keep an eye out. They’re probably lobbying for the next war as we speak now that Afghanistan has wound down.
If you didn’t learn anything from my rambling, I hope you were at least entertained. If you weren’t entertained, I’m sorry for wasting 10 or minutes of your life, depending on how fast you read.