🌌 Reshaped #53
Existential risk, Green Deal geopolitics, space tech metrics, bitcoin as a store of value and much more
Welcome to a new issue of Reshaped, a newsletter on the social and economic factors that are driving the huge transformations of our time. Every Saturday, you will receive my best picks on global markets, Big Tech, finance, startups, government regulation, and economic policy.
🎙 You can listen to The DART Bullseye on Spotify, Google Podcasts or Apple Podcasts. This week, I met Simone Maggi, Co-Founder and CEO of Lanieri, to discuss the venture building challenges in an open innovation environment.
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🎂 1st birthday 🎂
I have been writing this newsletter for one year. It started as an experiment, mainly driven by a deep passion for writing. Then, the pandemic made it my weekly hobby. When life returned to a something-like-normalcy status, I was already addicted to this small exercise of perseverance. Dropping it has never been an option since then. Meanwhile, as the number of readers increased, I started to feel the responsibility to provide more valuable content. This is why I adopted the current structure, which I consider a balanced mix of news coverage and analysis.
Now, one year later, I feel it is time for another change. I want to give more space to big trends analysis and recover some of the initial soul of this newsletter. Reshaped started as a reaction to the diffused naivety that populates the innovation economy, where everything is either black or white and enthusiasm is too often considered as a valid substitute for thorough thinking. However, I am afraid this soul was a victim of the weekly structure of this newsletter, which forces me to prioritize news coverage.
Therefore, this is the last weekly issue of this newsletter and the last to be structured this way. The next issues will not follow any fixed schedule and will feature various types of content — from long pieces to interviews and in-depth analyses. Stay tuned!
Policy
A new Bruegel report sheds light on the geopolitical consequences of the European Green Deal, which will have an impact “on the EU energy balance and global markets; on oil and gas-producing countries in the EU neighbourhood; on European energy security; and on global trade patterns, notably via the carbon border adjustment mechanism”. These are some of the most relevant consequences of the expected evolution of EU energy imports to meet the net-zero pledge set for 2050 (see chart below).
These goals will have a diversified set of impacts on fossil fuel suppliers. Russia could benefit from an initial shift from coal to natural gas — which will continue to be a relevant element of the energy mix. Other countries like Libya, Azerbaijan, Algeria and Kazakhstan, however, would experience a radical drop in exports, due to their dependency on EU energy procurement. To overcome the potential negative effects of this scenario, according to the report, the EU could export the Green Deal policy framework to neighbouring countries, which could become suppliers of renewable energy and hydrogen.
However, some of the features of the Green Deal continue to attract criticism. A new paper examines some of the threats that economist Daniela Gabor defined as the key constituents of the “Wall Street Consensus”, an approach to sustainable development that ultimately ends up harming developing countries.
A key mechanism for “escorting” private finance to the Global South involves the use of subsidies and guarantees to de-risk PPPs, making PPP-based asset classes attractive to global institutional investors. This, it is typically argued, amounts to a more efficient use of scarce public resources than direct public investments – despite mounting evidence to the contrary […]. The project of de-risking goes beyond the use of fiscal resources to backstop PPPs: it extends to creating the market structures preferred by portfolio investors, and instruments that match the risk/return profile of SDG assets to the mandates of investors. The multilateral development banks are critical players, facilitating institutional investment in PPPs through credit enhancement of project bonds, securitisation of infrastructure loans and syndication arrangements.
On the risks of the financialization of the new green economy, see also this piece by sociologist Eve Chiapello.
➡️ The EU could soon implement laws that require digital platforms to pay news organizations for featuring their content (Financial Times). And, apparently, Microsoft is the big sponsor behind it (The Guardian).
➡️ On Foreign Affairs, Christopher Darby and Sarah Sewall analyze the erosion of the US technological advantage, claiming that “Washington has monitored China’s technological progress through a military lens, worrying about how it contributes to Chinese defense capabilities”. This, however, was not enough to properly understand the phenomenon.
Technology
Developed technological markets rely on reliable KPIs to inform decision-making at different scales. For new technologies, these indicators are often either unknown or impossible to determine. For space technologies, and in particular for rockets, analysts have been tracking the time interval between launches as an indicator of the cost curve evolution and scaling potential. It makes sense: lower time intervals mean that the same output can be achieved earlier or with more efficient use of the rocket. In a recent tweet, Sam Korus shows the evolution of SpaceX’s reusable rockets turnaround time, which is now close to 30 days.
This kind of statistics is extremely valuable to gauge the development of a market and the quality of technology. I would not be surprised to see investors in this field already keeping track of these metrics to improve the understanding of their potential investment targets. And, once these metrics enter VC deal flows, they become the most reliable financial expression of a technological standard. For instance, think about reference LTV/CAC for software applications, which has determined investment behaviour in this sector for (at least) a decade.
➡️ Facebook is building its own alternative to Clubhouse — and it is a hot topic in the new social media (The New York Times). Meanwhile, Chinese authorities are trying to block access to it (The Economist).
➡️ Amazon could be the global leader in R&D expenditures, with $42.7 billion spent on “technology and content” in 2020 (Bloomberg).
Finance
On Monday, Tesla announced that it bought $1.5 billion in bitcoin to “diversify and maximize returns on […] cash that is not required to maintain adequate operating liquidity.” In addition, the company will soon allow customers to pay using bitcoins (The Wall Street Journal). Not only this caused a 10% rise in the price of bitcoins; it also paved the way for similar announcements by tech companies. In a recent CNBC interview, Twitter CFO Ned Segal said that the company could integrate bitcoin into its business. Meanwhile, Mastercard “will begin allowing cardholders to transact in certain cryptocurrencies on its network” (Bloomberg).
Cryptocurrencies are now worth more than $1 trillion and speculation is on the rise. Dogecoin, a cryptocurrency that started as a joke in 2013 and recently surged to (relatively) high valuations, is the perfect example of this frenzy (Foreign Policy). Most of all, this situation is stretching the old belief that bitcoin is going to challenge traditional fiat currencies for trade. Instead, the dilemma is about the potential evolution of bitcoin as a viable asset class for large institutional investors and a store of value like other commodities. To that extent, the most important variable to consider is the deterioration of the value of the commodity, which makes the difference between cryptocurrencies as “digital gold” or “digital tulips” (Financial Times).
In a recent post — which I found via Benedict Evans — Ray Dalio sternly concludes that “Bitcoin looks like a long-duration option on a highly unknown future that I could put an amount of money in that I wouldn’t mind losing about 80% of”. The post is accompanied by a detailed and interesting analysis. Here are two points that caught my eye:
First, the idea that “similar to gold, Bitcoin has limited usage as a medium for directly exchanging goods and services” and “offers stable and limited issuance [see chart below] that cannot be devalued by central bank printing”. When yields are low and monetary policy is expansive, gold and bitcoin become viable asset classes for investors.
Second, the evidence that “for large institutions to hold Bitcoin in their portfolios, there also needs to be sufficient liquidity for trades to be conducted in size without destabilizing the market”. This is primarily due to the small size of the market (see chart below), which means that “a relatively small number of investors making small shifts in asset allocations could have a big impact on the Bitcoin market”.
➡️ The EV bubble could not be a disaster even in the worst-case scenario (The Wall Street Journal).
➡️ Reddit raised $250 million at a $6 billion valuation (The Wall Street Journal).
The big picture
Some of the biggest challenges humanity has to face entail doing some sacrifices today to safeguard our planet — and, ultimately, the future of humankind. In The Precipice: Existential Risk and the Future of Humanity, moral philosopher Toby Ord analyzes some of the most critical risks — both natural and anthropogenic — for humanity through the lenses of moral philosophy. I have read the book months ago and I found it a detailed and brilliant account not only of future risks but also of past (escaped) ones. To sum up, Ord believes that humanity should mitigate those risks that could hamper — if not impede — future generations, even at the expense of its own happiness. These risks include “unaligned artificial intelligence” and “engineered pandemics”, which are human-caused and technology-related. Hence, they have a direct relationship with the innovation choices we make as a society.
In a recent piece in The New York Review of Books, Jim Holt deeply analyzes The Precipice, explaining that Ord’s argument is characterized by a philosophical and an analytical weakness. The latter could be summarized in what he calls the “argument from excessive sacrifice”. In other words, how much should we sacrifice today so that future generations can live? In simple mathematical terms, he shows the complexity of this trade-off. (Notice that future value is not discounted: life is not a dollar and its value tomorrow should be the same as today in purely moral terms.)
As we push the existential risk closer and closer to zero, expected gains in value from the very far future become ever more enormous, obliging us to make still greater expenditures to ensure their ultimate arrival. This combination of increasing marginal costs (to reduce risk) and increasing marginal returns (in future value) has no stable equilibrium point short of bankruptcy. At the limit, we should direct 100 percent of our time and energy toward protecting humanity’s long-term future against even the remotest existential threats—then wrap ourselves in bubble wrap, just to be extra safe.
The interesting fact is that this analysis does not take into account another dimension that would make these mathematics even harder to sustain, namely the cumulative value of the past. Moral duties for both future generations and heritage from the past depend on cultural variables that make it hard to find an ethical balance on which to build collective action. Nonetheless, it is one of the most pressing challenges for humanity and a factor that will determine the boundaries of the innovation economy in the next decades.
Thanks for reading.
As always, I am waiting for your opinion on the topics covered in this issue. If you enjoyed reading it, please leave a like (heart button above) and share Reshaped with potentially interested people.
Have a nice weekend!
Federico