Welcome to our Friday mailbag edition!
Every week, we receive great questions from your fellow readers. And every Friday, I answer as many as I can.
This week, the conversation surrounds hot Inside Wall Street topics – spot Bitcoin ETFs and artificial intelligence (AI)…
The future potential of AI is to do good deeds by, for example, assisting patients to live better lives, instructing machines to operate more efficiently and improve profits, instructing irrigation systems to target specific areas and minimize waste of water, etc.
How about the potential for evil, like using BCI to instruct drones to destroy cargo ships and other evils?
Humans have proven woefully incapable of regulating themselves or companies whenever profit is involved. There’s no evidence that we can harness the power of AI and BCI to do good without also doing unimaginable evil.
– EKM
Thank you for your thoughts, EKM!
You’ve touched on a crucial dilemma in advancing technologies like AI and brain-computer interfaces (BCI).
For readers who don’t know, BCI is a tech bridge that lets you control a computer with your thoughts. My colleague Clint Brewer wrote about one use for this kind of technology. You can read about it here.
You’re right that the potential for both good and harm is real.
On the positive side, AI and BCI can revolutionize industries and personal lives.
You’ve already pinpointed some excellent examples of how these technologies can create significant improvements.
AI’s application in healthcare can mean earlier diagnoses, personalized treatment plans, and improved patient care.
In agriculture, AI-driven irrigation systems promise enhanced efficiency and water conservation. And AI in business can streamline operations and boost profits.
But there’s also a chance of things going sideways. Like the AI/BCI-powered drone you mentioned. It shows how these tech advances could get tricky.
We’re only in the early stages of this technology, but some countries are already leading the way.
China is a case in point. It’s one of the frontrunners in developing AI-powered drones. My colleague Lau Vegys wrote about this in detail. Here’s Lau with more:
By 2021, China accounted for 70% of the global market for unmanned aerial vehicles (UAV) with AI systems.
Estimates put the Chinese government’s AI spending at $150 billion by 2025. And several Chinese companies are already developing AI-powered drones.
DJI is the biggest name, with AI-powered drones like the Mavic 2 Pro and the Inspire 2.
And this has been triggering a response from other countries. Over to Lau again:
For instance, Australia, one of America’s closest allies, could soon have dozens of lethal, autonomous robots patrolling the ocean depths.
The Australian government’s recent “Defense Strategic Review” noted that a crisis could emerge with little or no warning.
Australia knows it can’t wait decades to prepare. The U.S. is coming to this realization, too.
Recently, we learned that the Pentagon intends to field a vast network of AI-powered technology, drones, and autonomous systems within the next two years.
The goal is to “counter threats from China and other adversaries.”
It’s all part of the Pentagon’s so-called “Replicator” initiative. It includes plans to spend hundreds of millions of dollars to produce thousands of air-, land- and sea-based AI systems.
These are intended to be “small, smart, and cheap.”
In other words, the Pentagon wants to deploy thousands of autonomous systems, like unmanned aircraft and underwater drones, to match China’s escalating military prowess.
This move could signal the onset of an AI arms race.
As for your point about the business world, you’re spot-on. History shows us that ethics can go out the window, especially when money becomes the main focus.
On the other hand, there are multiple industries where rules and regulations have kept things in check.
Take the pharmaceutical industry, for instance. Strict regulations governing drug safety and effectiveness have, in part, led to substantial growth and profitability. The U.S. pharmaceutical market increased from roughly $40 billion in 1980 to over $450 billion in 2020.
Likewise, the tech sector has flourished thanks to regulations that safeguard intellectual property rights. This encouraged innovation and helped attract capital, providing investors with substantial opportunities in a well-regulated environment.
For instance, from the early 1990s to 2020, the global technology industry’s market went up from around $500 billion to over $8 trillion.
Plus, there’s a growing trend where businesses are not just about profits but also about doing the right thing – think corporate social responsibility.
Sure, it’s not perfect everywhere, but it shows that making money and being ethical can go hand in hand.
Finally, it’s important to understand that the rise of technologies like AI is inevitable.
From 2021 to 2023, the AI market size soared by 118%. It grew from $95.6 billion to $207.9 billion.
In other words, it more than doubled in just three years. And that’s just the beginning.
From 2024 to 2030, the AI market is set to grow at a compound annual growth rate of 37%.
That would put it at $1.85 trillion by 2030. And if you make the right moves, you could come out of this wealthier than ever.
One simple way to tap into the AI megatrend is with an exchange-traded fund. One fund we like is the Global X Robotics & Artificial Intelligence ETF (BOTZ). It’s a straightforward AI investment you can access with a brokerage account.
The fund has about $2.5 billion of assets under management. And it holds a basket of stocks (about 45 at writing), including leading chipmaker Nvidia.
BOTZ is a great place to start your search, but you can do even better by investing in individual companies.
That’s exactly what we aim to help you with at my Distortion Report advisory.
We have six AI picks that we believe offer the best potential upside with the lowest amount of risk. And we’ll always provide in-depth analysis of the picks we recommend. (If you’re not a paid-up subscriber yet, learn more here.)
Aren’t advances in chip technology critical in the advancement of AI? I think the hardware side of the equation is of equal importance to the software side.
– Dan H.
Hi Dan, thanks so much for your question.
Yes! Advancements in chip technology, or AI hardware, are just as crucial as software.
For those who don’t know, hardware refers to the physical parts of a computer system. That includes the central processing unit (CPU), memory, and storage devices. Chip technology covers the design and manufacturing of all these parts.
AI hardware is like the “brain” of an AI system. AI needs to process vast amounts of data quickly and efficiently, and it needs a place to do that. That’s why the hardware provides a place to store and process that data – just like your brain stores memories and facts – and it makes decisions.
Software is the link between the user and the hardware. It’s made up of programs (or code) and algorithms (computations or directions for analyzing data). Software’s job is to interpret data and then spit out decisions or results based on that.
Without hardware and software working together, AI can’t happen.
Your question brings to mind a summer paid internship between my junior and senior college semesters. I worked at IBM in Briarcliff Manor for its International Finance, Planning, and Administration School (IFPA) program that operated between 1988-1992.
There, IBM provided specialized classes for its technical staff on the future of telecommunications and the emerging digital revolution across the hardware and software arenas.
My job was to remove old graphics cards the size of an index card and replace them with upgraded ones. Those upgraded cards could hold more data (or memory, in computer terms).
I had to test each old and new one to ensure no data was lost in the process.
It was tedious! But it taught me the importance of hardware.
Things don’t just “happen” in a computer. Computer code needs a place to interact with data. Back then, it was on a memory card. Today, it’s on a much smaller chip – some are even smaller than a thumbnail.
AI comes down to data.
The more data there is, the more accurate it is, and the faster it can be collated and processed by a chip – the swifter and more reliable the result.
And that’s where hardware and software come together.
A better chip can store more data and software instructions than other chips.
And better software can process that data more quickly using more logical assumptions.
A better chip combined with better software creates a more accurate AI system.
The short version is that AI software can’t function without hardware. Hardware is useless without software.
And it’s possible for anyone reading this to use that knowledge in the markets. One way to take advantage of ongoing hardware and software AI developments is to invest in the Artificial Intelligence & Technology ETF (AIQ).
It’s a fund with about $945 of assets under management. And, at writing, it holds a basket of 86 stocks – including Intel (INTC), Nvidia (NVDA), and Meta Platforms (META).
Thank you for your skillful insights on market conditions and wise investment strategies. What are your thoughts on the new Bitcoin ETF?
– Brenda J.
Thanks for that question, Brenda. You may recall that I started writing about the spot Bitcoin ETF in these pages in June of last year.
As a refresher, the spot Bitcoin ETF is a fund that tracks the real-time, or “spot,” price of Bitcoin.
It’s significant because it lets investors tap into Bitcoin’s value without actually owning the cryptocurrency.
It’s also different from Bitcoin ETFs based on futures contracts, which have been around in the U.S. for some time now. In a spot Bitcoin ETF, the underlying asset is Bitcoin itself – not derivative financial products that bet on future Bitcoin prices.
Last week, the U.S. Securities and Exchange Commission (SEC) finally approved spot Bitcoin ETFs. That meant the launch of 11 different ETFs.
So, looking ahead, what do I think of it? A few things.
First, the approval of spot Bitcoin ETFs will mean higher Bitcoin prices in the long term. That’s because an ETF enables more trading volume.
Investors can buy individual shares in the ETF. These can be aggregated to buy larger amounts of Bitcoin. That streamlines transactions.
On the first day of trading, U.S.-listed Bitcoin ETFs saw $4.6 billion in volume.
Second, many regular brokerage accounts now offer spot Bitcoin ETFs – like Charles Schwab, Fidelity, and Interactive Brokers.
That makes it easier for more institutional and retail investors to buy Bitcoin.
Anyone can now buy and sell the ETF from those traditional brokerage accounts. That means no extra specialized cryptocurrency exchange fees.
For example, take Coinbase, the most popular crypto exchange. It charges a 0.50% fee every time you buy or sell Bitcoin and an additional 1.49% for bank account or Coinbase Wallet purchases.
On top of that, the exchange charges 3.99% for credit card purchases.
And if you use Fidelity’s Digital Assets platform, they’ll charge you an extra 1%. That’s built into the price every time you buy Bitcoin through them.
For many people, high fees like these can put them off. The spot Bitcoin ETFs remove that barrier.
And third, the SEC will regulate the spot Bitcoin ETFs.
In fact, it already established a regularity framework for a spot Bitcoin ETF.
This framework requires all Bitcoin ETFs to register with the SEC and adhere to the same legal code and practices as other securities under the SEC’s domain.
That includes providing transparent operations and accounting information to the SEC. It also requires that Bitcoin ETFs comply with the same stringent anti-money laundering laws as other publicly traded securities under the SEC’s jurisdiction.
That kind of regulation should foster trust in Bitcoin for non-investors.
But there are still some potential problems, too.
First, as we’ve seen, the SEC isn’t perfect. I say that because, the day before the approval, the SEC was hacked.
An announcement was posted on the social media platform X (formerly Twitter) from the SEC’s account, saying they approved spot Bitcoin ETFs.
This sent the price of Bitcoin leaping to more than $48K.
But as it turned out, the announcement wasn’t true. When people found out the SEC’s account had been hacked, the price of Bitcoin dropped. (I wrote about that in more detail in Tuesday’s dispatch.)
The SEC is the regulatory body for U.S. securities. You’d think they would have strong cybersecurity safeguards. But that wasn’t the case.
So, that means there are gaps in its ability to help deter or detect cybersecurity breaches of Bitcoin (or other) ETF funds.
In the long run, these cybersecurity issues could pose challenges for Bitcoin ETFs.
For starters, they might make regulators like the SEC more careful about greenlighting new digital asset products.
That could lead to a slower approval process for Bitcoin ETFs due to worries about misinformation and market manipulation.
Such incidents could also shake investor trust, not just in digital assets but in how reliable and secure regulatory info is.
This trust is key for Bitcoin ETFs to really take off and become mainstream.
Bodies like the SEC may also beef up their cybersecurity, making things more complex and costly operationally.
This kind of change could affect the whole digital asset market, including those looking to launch Bitcoin ETFs.
So that’s one potential problem.
Second, we know that institutional buyers have been waiting to buy Bitcoin. Nearly 90% of institutions interested in buying Bitcoin have been waiting on the sidelines.
There is an estimated $6 trillion sitting in money market accounts that could be deployed into other securities. And the size of the entire ETF market is about $9.6 trillion.
Not all of that sideline money will flow into Bitcoin ETFs.
But we already saw $4.6 billion in trading activity for these ETFs on the first day. That’s very bullish.
Of course, once large institutional buyers get involved, they could amplify price volatility.
That’s because they have one point of contact for Bitcoin. That means they can buy or sell large blocks, which will force the ETF managers to buy or sell large blocks of underlying Bitcoin.
That’s why we saw the price of Bitcoin drop so much on the second day of trading for the new ETFs.
But I believe that drop is temporary. In fact, this ties back to one of my predictions for 2024.
In the January 16 Inside Wall Street, I wrote that I expect Bitcoin prices to double – or more – this year. If you missed that essay, catch up here.
And that’s all for this week’s mailbag. Thanks to everyone who wrote in!
If I didn’t get to your question this week, look out for my response in a future Friday mailbag edition.
I do my best to respond to as many of your questions and comments as I can. Just remember, I can’t give personal investment advice.
And if there are any other topics you’d like me to write about, I’d love to hear from you. You can write me at [email protected].
In the meantime, happy investing… and have a fantastic weekend!
Regards,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins