• The Ethereum Blockchain will attempt to change the way it operates this week which will make it much cheaper to operate (good for payments) but at the same time, there will be a load of graphics cards that suddenly are no longer needed by their owners (bad for Nvidia).
• There are two big blockchains in use today, the Bitcoin blockchain which has a market capitalisation of $370bn and the Ethereum blockchain which has a market capitalisation of $201bn.
• However, a key difference is that the Ethereum blockchain does far more than the Ether cryptocurrency that competes with Bitcoin as it also runs most NFT systems as well as decentralised finance.
• Consequently, the Ethereum blockchain is larger than it looks and in my opinion is probably more important to the crypto industry than the Bitcoin blockchain.
• While the blockchain systems are decentralised and independent of any centralised control they also suffer from being expensive to transact, inflexible, slow and unstable in terms of monetary value.
• This makes crypto wholly unsuitable for being used as a payment system or medium of exchange.
• This explodes the myth that crypto is needed to run the economy of the Metaverse as in its current state, systems like AliPay and WeChat Pay are far better suited (see here).
• Furthermore, blockchain transactions are verified by a system called proof-of-work which involves very computationally heavy mathematics which is where the enormous energy consumption of blockchains comes from.
• To put it in context, Ethereum consumes more power than Chile and produces more carbon than Finland while Bitcoin consumes more energy than Belgium.
• These calculations are best executed on Nvidia graphics chips which is one reason why Nvidia did so well when the crypto craze was in full swing.
• Gaming revenues increased by a factor of 3x between FY2017 and FY2022 to top $11bn.
• The Merge involves the Ethereum blockchain merging with another system that does not use proof-of-work but uses a system called proof-of-stake.
• Simply put, proof-of-stake means that those that hold Ether tokens pledge those tokens as collateral in order to validate the transaction.
• There are some potential shortcomings with this system, but because it no longer uses computation for verification, its energy consumption should fall by 99% or more.
• Given how much energy Ethereum consumes and how much carbon it produces, this is a very significant move and while it will not solve any of the problems of blockchain as a payment mechanism, I think it is a big step in the right direction.
• One of the reasons why transactions are expensive on the blockchain is due to the cost of verification which will now fall substantially should the Merge be successful.
• I see this as the first of many steps towards making crypto usable for transactions, but a lot still needs to be done if crypto wants to run the economy of the Metaverse or anything else.
• Furthermore, if the Merge is successful then I suspect that many of the other blockchains will begin to migrate over to proof-of-stake over time.
• This will be nothing short of a complete disaster for the picks and shovels of the crypto industry as demand for their products could effectively go to zero.
• The largest one of these is privately held Chinese mining equipment maker Bitmain but further down the supply chain are Nvidia and to a lesser extent, AMD.
• Nvidia’s unique system of massively parallel computing with its Cuda cores is ideal for executing the computations required for proof-of-work.
• If this moves to proof-of-stake then the bitcoin miners will no longer need the graphics cards they have bought and the increase of graphics cards we have seen coming into the second hand market as a result of the crypto winter could become a flood (see here).
• While this could easily put vendors like Bitmain out of business, the ramifications for Nvidia are far less as Cuda still remains ideal for graphics for gaming, AI in the datacentre, the Metaverse as well as a number of other areas.
• Nvidia has millions of developers across a wide range of applications and so while proof-of-stake may hurt Nvidia in the short term, it is a dent rather than a crater.
• Hence, if the Merge is a success, I can see another couple more bad quarters for Nvidia as gaming performs worse than expected as gamers will be required to absorb graphics cards being sold by obsolete miners into the second-hand market.
• It is important to note that as of FQ2 2023, the data centre is twice the size of the gaming segment meaning that its ability to hurt Nvidia’s overall performance has already been significantly curtailed.
• I still remain extremely cautious on cryptocurrency which shows no real sign of emerging from its current deep freeze and in semiconductors I continue to prefer the cheaper, more defensive end of the sector.
• Qualcomm, MediaTek and TSMC all offer good growth at valuations which are much cheaper than AMD or Nvidia.
• I would like to own Nvidia one day, but I suspect that the crypto crunch may give me the opportunity to buy it at levels below even here.

• Google has announced a countersuit against Match Group as the concessions that it originally made clearly do not go far enough, underlining just what a slippery slope the app store business model is on.
• The suit is in response to a lawsuit from Match Group claiming that it is now Google’s “hostage” and that the concession that Google made to cut its fee in half for some apps does not go far enough.
• This is a classic example of when an industry norm has no fundamental basis but has simply been a fact of life for years, there is no bottom to where pricing can go.
• Another one is patent licensing which is why one often sees patent licensors go to great lengths to ensure that the price they have historically charged does not erode.
• The problem now according to Google is that Match Group wants to use Google Play for free which I consider to be completely unreasonable.
• Match makes money by being present on the Google and Apple ecosystems and, as such, it should make a contribution to the cost of being there.
• I already see the revenue share paid by app developers coming under intense pressure and so when the dust finally settles, I suspect that the industry standard will be well below 30%.
• I think that the best scenario for all concerned is one where the platform owner makes a very healthy profit from the ecosystem that it has created and where the app store is run at break-even.
• This would ensure that developers maximise their profitability and at the same time make a contribution to the cost of running the platform from which they are benefiting.
• The platform owner benefits greatly from having the developers present as it is a core part of creating the engagement which it can then monetise through any of the traditional methods.
• However, until we reach that point, we are going to continue to see tit-for-tat warfare, spurious and frivolous lawsuits and great copy for the media and bloggers.

Klarna: The reality gap.

• Klarna has closed its much-discussed fundraising at a pre-money valuation of $5.9bn even lower than my fundamental valuation of $7bn (see here) meaning that the new investors Mubadala and the Canada Pension Plan Investment Board got a pretty good deal in my opinion.
• Existing shareholder Sequoia hilariously commented that the valuation shift was “entirely due to investors suddenly voting in the opposite manner to the way they voted for the past few years.”
• The reality is that this raising has to be done because Klarna burns so much money (despite its $1.4bn in revenues in 2021) that without it, it was going to go bankrupt.
• This enabled new investors to take advantage of the sudden withdrawal of liquidity from the market and rising interest rates to exact a much higher price for their dollars than before.
• It is also a reflection of a return to rationality after a classic and stratospheric, Softbank-pumped valuation turned out to be little more than hot air.
• Now that the liquidity event has occurred the existing shareholders who would have been very happy to mark up Klarna in their books last July to $46bn will now have to write it down by 85%.
• This has no cash implications for these investors, but it will damage sentiment towards their funds as well as their reputation as shrewd investors.
• Klarna will now be able to continue to grow but the imperative will now be to get to cash flow break-even as quickly as possible as another round like this will dilute the existing investors even further.
• Klarna is lucky to have been able to find investors and others that need to raise money in the next 12 months may not be so lucky as the great reckoning spreads.

• Klarna is raising $600m at $6.5bn in another clear example of the agonising problems that occur when one needs to raise money in a downturn when one has previously had a ludicrous valuation.
• The problem that Klarna faces is that it has to have the money meaning that it has no other choice but to accept whatever the market is prepared to give it.
• In this climate and with one of its peers (Affirm) down around 90% from its high, it is clear that whatever reasons the management and its advisors came up with to justify a valuation at $25bn and again at $15bn did not wash with investors.
• After being rebuffed twice by the market Klarna had no choice but to cut the valuation yet again resulting in the current price of $6.5bn.
• I had previously estimated (see here) that a fair price for Klarna would be around 2.0x EV/Sales and this looks like where it has roughly ended up.
• This puts Klarna close to the value end of the technology sector although its inability to make profits on what is likely to be $3bn of sales in 2022 is of concern.
• Klarna is also trying to raise as little money as possible as it has reduced its workforce by 10% so it needs less cash as the cost of cash in equity terms has increased by 10x.
• The other concern is that Apple is coming into its sector with its buy-now-pay-later (BNPL) service that it will fund from its own gigantic balance sheet.
• Critically, Apple will also do this at a 0% interest rate, which will put massive pressure on the sector’s ability to charge interest and make a good return.
• Apple has a habit of entering into segments occupied by its developers and making life very difficult for them causing many of them to exit.
• However, I suspect that both Affirm and Klarna are already big enough to survive this incursion but what it will do to their financial performance remains to be seen.
• This looks a bit like a rerun of the WeWork fiasco but the key difference is that with Klarna it is just the valuation.
• In contrast, with WeWork, it was valuation, business model and corporate governance.
• There is nothing wrong with Klarna’s business model and as far as I am aware, the company is well run although there have been a few issues around overextending credit and data privacy.
• That being said, the uncertainty around the impact of Apple leaves me concerned leading me to think that while 2.0x EV / Sales is a reasonable price, there are better options in this market.

• At a high level, Klarna looks like a re-run of WeWork although it is a much better company meaning that the only real issue I have is a stratospheric SoftBank-pumped valuation that is now causing great distress.
• Klarna is now enduring the hangover as it needs more money, but the market has some very different ideas about where it is prepared to put more money in.
• Peak valuation was achieved in July 2021 at $46bn but having had a brief look at it and the comparables, I suspect the right number is probably closer to $7bn.
• Klarna is classified as a Fintech company but at its heart, it’s a payment processor for e-commerce companies and also offers buy now pay later (BNPL) services on top of its core business.
• As with everything related to the technology sector and e-commerce, Klarna had a great pandemic which ended with SoftBank leading a $639m round at a valuation of $45.6bn.
• SoftBank has a horrible habit of throwing vast amounts of money at companies at valuations that make no sense and then getting into trouble when the market refuses to stomach the numbers further down the road.
• This looks a bit like a rerun of the WeWork fiasco but with the key difference that with Klarna it is just the valuation whereas with WeWork it was valuation, business model and corporate governance.
• There is nothing wrong with Klarna’s business model and as far as I am aware, the company is well run although there have been a few issues around overextending credit and data privacy.
• The company grew revenues 38% in 2020 to $1.07bn and then 32% to $1.42bn in 2021.
• However, the outlook for 2022 is much more difficult with inflation already crimping spending and consumers going back to physical shops.
• Hence, I would have thought that a generous estimate for Klarna’s revenues in 2022 will be around $1.8bn but of profit, there will be no sign as the company lost $730m in 2021.
• This means that on the last valuation, the company is valued at 25.3x EV / Sales (assuming a zero net cash position) which is obviously way too high.
• One of its closest peers is Affirm, which has fallen 89.6% from its high and now trades on 2022 EV / Sales of around 3.9x.
• These companies are roughly the same size and they both face the same current headwinds which are the spectre of regulation, inflation crimping e-commerce demand and Apple’s entrance into their market.
• Given Affirm’s greater exposure to the USA which is where Apple will be starting with its BNPL service on Apple Pay, the headwinds for Affirm look a little greater but I don’t think that there is very much in it.
• Hence, if I take the valuation that the market is giving Affirm, I arrive at a valuation for Klarna of $7bn, some 85% below its 2021 peak.
• WeWork was valued at $46bn at its peak and SoftBank ended up bailing it out at $8bn which sounds eerily familiar.
• Hence, it is no surprise to hear that the company’s overtures for investment were rebuffed at $25bn and again at around $15bn.
• In this climate, this still looks to be 2x too high and the deck that attempts to justify why Klarna should have a 100% premium to Affirm will make for some interesting reading.
• Hence, I think Klarna will be fortunate to raise money at $10bn and investors will probably demand a ratchet that covers them should the next liquidity event be less than that which they are paying.
• This will be hugely dilutive for SoftBank and its co-investors who put money in at $46.5bn and serves as yet another cautionary tale for SoftBank.
• There is every sign that the dominos are going to keep on falling until fundamentals and valuation are once again in line with each other.
• It is not until I can see this that I can start to think about calling the bottom but there are examples (like Alibaba) where the shares have fallen far below what the fundamentals point to.
• We are not out of the woods yet.

• It looks as if another round of crackdowns is about to be launched upon the Chinese technology sector and it is Tencent that remains by far the most exposed this time around.
• After a period of relative calm which emboldened the bottom fishers, it looks like the Chinese state is not done with reigning in its technology sector.
• This began on Friday with a regulation that required the food delivery sector to lower its fees to the restaurants in a move that took Meituan (the market leader) down by 15%, causing another $100bn of market value to evaporate.
• Chinese regulators also demanded that state-owned banks and companies assess their financial exposure to Ant Group and its shareholders and report their findings to the regulator.
• Ant Group has already been decimated by the state (see here and here) and one can only conclude from this move that there is even worse to come.
• The crackdown on payments and internet-based financial services is particularly impactful because, in addition to bringing the private sector to heel, the slow-moving legacy state-owned banking system stands to lose out as nimble fintech start-ups grab the market.
• Hence a move against fintech is also a move to protect the lumbering banking system which is already struggling with credit problems in Chinese real estate.
• This is why I think that the hammer of regulation will continue to fall hardest on the privately-owned Fintech sector, and it is Tencent that is by far the most exposed.
• At its Q3 2021 results, Tencent reported weakening growth from its core business of social networking and gaming but strong growth from its fintech business.
• This business has grown out of its enormously successful payment service WeChat Pay in almost exactly the same way that Ant Group’s financial services grew from AliPay.
• Fintech business showed 30% YoY in Q3 2021 growth to RMB43.3bn and made up 30% of Tencent’s total turnover.
• The regulator has hammered Ant Group turning it from one of the fastest-growing and dynamic fintech companies globally, into a bank that is unable to take consumer deposits.
• This has utterly decimated the value of Ant Group and once again, there is a very real risk that Tencent’s fintech business gets similar treatment.
• I have long suspected that the severity of Ant Group’s treatment was at least in part to punish Jack Ma for having the temerity to challenge the authority of the CCP.
• This means that the state may take a lighter hand with Tencent, given it has largely settled its regulatory issues in the other parts of its business.
• However, fintech is now the engine of growth for this company which depends on such growth for its valuation meaning that even a small intervention is going to hurt the outlook significantly.
• Ant Group is unlisted and goes largely unreported in Alibaba’s books, but Fintech is a separately reported division within Tencent meaning that the consequences will be plain to see.
• Just the idea that there would be a regulatory crackdown on Tencent’s fintech business prompted an emphatic denial from Tencent’s public relations department.
• The idea that Ant Group gets eviscerated while nothing happens to Tencent which is running a very similar business is very unlikely in my opinion even with a regulatory environment that is as opaque and whimsical as China’s seems to be.
• Hence, I am pretty certain that the regulator is coming for Tencent again meaning that the short to medium-term forecasts for Tencent are probably too high.
• This is why I have no interest in owning it, despite its recent falls and am sticking with Alibaba where the spectre of regulation has already passed.
• I think Tencent can easily go much lower from here.

• The Associated Press has worked out an easy way of making some extra revenue as it is moving to sell the original versions in a great example of how non-fungible tokens (NFTs) are going to become a big part of the digital economy.
• However, beyond investment purposes and the Metaverse, I think that NFTs offer very little utility over the infinite number of perfect digital copies that can be made of the unique asset meaning that the Metaverse is by far the best use case (assuming it takes-off).
• There is a lot of hype and confusion surrounding NFTs, but the reality is very simple.
• NFTs are unique digital watermarks that can be freely traded using the blockchain.
• This enables digital assets such as pictures, outfits, weapons or digital locations to be identified as unique with all copies (albeit perfect) easily identified as fakes.
• This is already being used to great effect by artists who create artwork digitally and are then able to sell the original.
• It also enables fractional ownership meaning that highly-priced investments (such as artworks) to be part-owned by small and individual investors.
• I have also long believed that it will make the ownership, trading of and investment in copyrights or patents much simpler to get access to and manage.
• Like cryptocurrencies, NFTs are run on the blockchain, the most popular of which is Ethereum (not to be confused with the cryptocurrency token) which in mining terms, are the picks and shovels of the cryptocurrency gold rush.
• It is here where I think the investment opportunity lies because cryptocurrencies do not fulfil any of the requirements of a medium of exchange and remain purely speculative assets.
• They are also not a hedge against inflation as their financial return remains completely uncorrelated with inflation.
• Over the long-term, an inflation hedge should be as perfectly negatively correlated with inflation as possible where the last 50 years of history clearly points to precious metals.
• The Associated Press will launch its NFT marketplace at the end of January and I expect that there will be quite a lot of interest from collectors and speculators.
• Despite the hype, I think that NFTs are only just beginning to get going, but that does not mean that there will not be a typical boom and bust cycle before this technology becomes widely adopted.
• We are currently in the upward climb of this cycle meaning that 2022 is likely to see more irrational investment actions as well as plenty of hype.
• At some point, however, people are likely to realise that outside of investment purposes, NFTs confer no utility at all other than the joy of ownership as digital copies confer exactly the same utility.
• The one exception is the Metaverse where unique digital assets will remain unique and will be very difficult to copy.
• The problem is that everyone has their own version of the Metaverse meaning that a unique asset in one version can be recreated and re-sold in someone else’s version which greatly undermines the point of owning the asset.
• It is not until there is only one version of the Metaverse which everybody accesses will NFTs really find their stride in the Metaverse.
• I am not expecting this much before 10 years have passed.
• Hence, it is likely that once users realise that there is very little practical point in owning the original version of a digital asset in the real world, then there will be a period of disappointment and disillusionment.
• Following that, I think NFT’s will find a strong position in the world of investments and then sometime in the next 5 to 10 years, they will become an integral part of the Metaverse, should it take off.
• I think that the best way to invest in this trend is to buy exposure to the blockchain rather than the assets that sit upon it.
• Consequently, I would avoid all of the cryptocurrencies (which I consider to be little more than gambling) as well as digital assets which in the current environment are likely to be overpriced.
• There will be a better time to get involved in the assets once the current speculative fever has passed.

• Meta’s purchase of trademarks is a clear sign that it has not given up on financial services, but the vested interests and central banks will do everything they can to prevent Meta from making any headway.
• The story of Meta’s cryptocurrency, Libra (now Diem), is a tale of woe.
• What began as a great idea was watered down through withering pressure into something that no longer challenged the current banking system and fiat currencies.
• This has been exacerbated by the exit of Diem’s creator David Marcus who stated that he wants to return to the start-up world.
• I think that this is Silicon Valley speak for “the outlook for Diem is so compromised that I don’t want to do this anymore”.
• This combined with all of the bad press would lead one to think that Meta is just going to give up on financial services, but this is clearly not the case.
• The company is spending $60m to acquire the worldwide rights to the trademark assets held by Meta Financial Group, a regional US bank.
• This is a signal that Meta intends to be more in financial services than just a currency and that these services will be offered under the acquired trademarks.
• This will undoubtedly be met with a great outcry about how Meta cannot be trusted with financial services data, but I think that the reality is that Meta in financial services scares the existing banking sector rigid.
• This is because the banking system as it exists today is not fit for purpose.
• Despite massive consumer digitisation, it is still slow, overly bureaucratic, expensive, and cumbersome to send money through the global banking system.
• Transactions that should already be frictionless and instantaneous are often taxed by multiple handlers and take days to complete.
• This is an industry that is more ripe for disruption than any other and yet all attempts to force it to modernise have failed.
• Facebook’s Libra / Diem project was the latest attempt to fail, and I continue to think that this one still has the potential to offer consumers decent financial services.
• This is because it has already built a massive global network of users who use its chat and social networking systems meaning that financial services could relatively easily be layered on top.
• This is exactly what Ant Group and Tencent have done with great success.
• This threatens to create an independent financial network that would compete very effectively on quality and cost against the existing system which would force it to shape up or shut down.
• Given the right protections for consumers, I think that Libra could have been extremely successful but clearly, the banks and payment companies see this as an existential threat.
• This, I suspect, was the main reason why there was so much horror and dismay from politicians and regulators when Diem originally launched.
• Following what must have been serious heat from banks and politicians, all of the really key players have pulled their backing from Diem, leaving it floundering.
• Meta is clearly down but it obviously intends to have another go at financial services.
• It is very unclear what form these might take but the testing of WhatsApp payments in India is an indication of where this might start.
• The migration of payments into financial services as executed by Ant Group and Tencent is also an indication of where it might go.
• However, this assumes that there is no further regulatory predation which looks almost inevitable to cause more problems.
• Hence, I continue to see a long hard struggle ahead for Meta to make any headway at all in financial services meaning that this will not become a meaningful part of its businesses for many years.
• I remain pretty ambivalent to Meta as it has fallen a long way but I can’t see a catalyst on the horizon that will cause it to turn.

• The Indian state’s desire to control its currency is so great that it is willing to forgo the huge opportunity granted to it when China outlawed cryptocurrency.
• India is reintroducing the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 which creates a framework by which to create a Central Bank Digital Currency (CBDC) and bans all private cryptocurrencies in India.
• This issue did raise its head earlier this year, but it was uncertain whether or not it would see the light of day.
• That uncertainty has now passed, and the Indian state hopes to pass this into law during its next session which runs from November 29^th to December 23^rd.
• This time the excuse is that cryptocurrency is a danger to the country’s youth but India’s real reasons for banning cryptocurrency are exactly the same as China’s.
  • First, control: Cryptocurrencies run on the blockchain which is a decentralised ledger-keeping system that no one controls.
  • Hence, if Bitcoin and other cryptocurrencies become a widely accepted medium of monetary exchange, then governments and central banks will have lost control of the money used within their domains.
  • The ability to print money and control interest rates is fundamental to the state’s ability to finance deficit spending through money printing and quantitative easing.
  • If it cannot print money, then its ability to borrow money is greatly curtailed as its lender of last resort, the central bank, can’t create the money to lend to the government.
  • This is especially the case when the interest rates are so low (like they are now) that no rational investor wants to lend the government money.
  • Hence, any cryptocurrency is deeply threatening to centralised control which is why this was always going to happen, it was just a question of when.
  • El Salvador is only backing cryptocurrencies because it (and many other economies in Latin America) have long been effectively based on the dollar having completely debased their own currencies through excessive spending and money printing.
  • All government and central banks, not just emerging markets, fear cryptocurrencies for this reason and while emerging markets will neuter them by outlawing them, developed market countries will do it through excessive regulation.
  • Second, digital Rupee: A CBDC offers the Indian government more control over financial transactions and its participants than it has ever had or could have ever dreamed of in the past.
  • The digital Rupee will be completely under the control of the central bank and will provide the central government with complete transparency on all transactions that use it.
  • It will be able to tell where each Rupee has gone and where it came from making money laundering and other criminal enterprises very difficult.
  • The digital Rupee will also provide the government with the ability to cancel Rupees held by any person or entity that it does not approve of.
  • This is the equivalent of having US$10,000 in banknotes in one’s safe where the Federal Reserve knows the serial numbers and can set fire to them remotely should it so desire.
  • This means that if the Indian government decides that a certain person or entity owes it tax revenue, then it can confiscate the digital rupees or simply cancel them and worry about the legality later.
  • This is why I think that no one both inside and outside of India will use it unless they are forced to do so.
  • There will be some who are compelled to use it but beyond that, no rational person or company is going to want to use this currency.
• I think that India is passing up a huge opportunity here.
• Instead of banning cryptocurrencies, it should be embracing them and welcoming all of the entrepreneurs and innovators who just got booted out of China onto its shores.
• Failure to do this means that these entrepreneurs and innovations will go elsewhere meaning that India, like China, becomes an also-ran in financial innovation.
• This, along with automotive, is the next big sector to be disrupted by digitisation, and outlawing it will mean slower economic development and ultimately lower tax revenues for the Indian state.
• Like China, this is a self-defeating exercise in the long term.

• Amazon has had a torrid time with its fledgling game studio, but its recent release is seeing good traction with gamers but I still think that Amazon’s real aim here is to sell the tools to developers rather than make the games itself.
• After the cancellation of two of its big-budget games, Amazon has finally released New World, a massive multiplayer online game (MMO), and the world that it has created is putting up good numbers.
• The game has managed to break 750,000 concurrent users on Steam, with hundreds of thousands viewing the streams on Twitch.
• Although some of the early impressions from reviewers are mixed, they admit that there are players everywhere in this world running around exploring and fighting.
• This early momentum is very encouraging and if Amazon can keep the interest going it might finally have a hit on its hands.
• This is important for Amazon because it has been trying to make a hit game since 2014, and the success of New World is an indication that it has finally figured out how to do it.
• However, I still do not think that being a successful games studio is the long-term strategy.
• I think it makes more sense for Amazon to become the go-to place to develop games and it has spent the last few years assembling the assets that would allow it to do just that.
• The fact that it has now created a decent game in its own right implies that it has figured out what it takes to create a good game such that it can now offer a great service to game developers.
• This is similar to the reason why Apple would want to build a vehicle.
• Once it has learned what it takes to create a digital vehicle it is in a better position to ensure that its existing and future products are tailored to offer an optimal experience when used in a digital vehicle.
• Hence, assuming that the current momentum continues, I don’t expect this to be the beginning of a stream of games, but that New World will be used as an example of what one can create if you choose to create your game with Amazon tools and infrastructure
• This is much closer to what Amazon does with AWS and hence makes more business sense than becoming a fully-fledged game studio.
• Amazon has been trading sideways for months now which I think is a reflection of the fundamentals needing to catch up with the dizzying valuation that is slowly unwinding.
• As a result, the valuation of Amazon is below its peak, but it still looks expensive compared to almost any other business out there that sells things to consumers for a living.
• I think it could go sideways at best for some time longer.

• China has outlawed cryptocurrencies in a move that seeks to protect the central government’s control of the financial system but will ensure that all of the innovation in this ground-breaking sector goes overseas and benefits other countries.
• In a joint statement on Friday, the People’s Bank of China (PBoC) in conjunction with nine other regulatory agencies declared that all activities related to digital coins are “illegal”.
• Cryptocurrency exchanges in China have been outlawed since May 2021 but there are many operating overseas that offer services to Chinese citizens and businesses in China.
• This activity is now illegal and anyone who participates in these activities is at legal risk of an unspecified nature.
• This is a heavy blow for Bitcoin which fell by 8% immediately where it remains fairly subdued.
• This is not unexpected as despite the restrictions, China was the second-largest market for cryptocurrencies which will now hurt demand for the asset class.
• China is justifying its stance by citing that cryptocurrencies are a breeding ground for Illegal and criminal activity, pyramid schemes money laundering, and so on but it is fairly clear what the real agenda is.
  • First, control: Cryptocurrencies run on the blockchain which is a decentralised ledger-keeping system that no one controls.
  • Hence, if Bitcoin and other cryptocurrencies become a widely accepted medium of monetary exchange, then governments and central banks will have lost control of the money used within their domains.
  • The current crackdown by China is driven at least in part by a requirement to maintain control over all aspects of the economy.
  • Hence, any cryptocurrency is deeply threatening to centralised control which is why this was always going to happen, it was just a question of when.
  • Second, digital Yuan: China is in the process of launching a digital version of its current currency the Yuan.
  • This will be completely under the control of the PBoC and will provide the central government with complete transparency on all transactions that use this currency.
  • It will be able to tell where each Yuan has gone and where it came from making money laundering and other criminal enterprises very difficult.
  • The digital Yuan will also provide the government with the ability to cancel the Yuan held by any person or entity that it does not approve of.
  • This is the equivalent of having US$1,000 in banknotes in one’s safe where the Federal Reserve knows the serial numbers and can set fire to them remotely should it so desire.
  • This is why I think that the digital Yuan will go nowhere outside of China and outside of those who are compelled to use it.
  • I can see China making it a condition of participation in the belt and road initiative, but outside of that, I can not see how anyone would use it as a store of value.
  • The currency is expected to be given a test run at the Winter Olympics in 2022 and this ruling by the PBoC & Co. will clear the market of any competitors for it.
• This ruling specifically outlaws cryptocurrencies but does not take any specific moves against the blockchain which is the technology that enables them to work.
• This is because blockchain can be used for many things of which cryptocurrencies are by far the most popular.
• Blockchain is used for non-fungible tokens (NFTs) which I think have a bright future in things like copyright ownership and fractional ownership of specific assets.
• These sorts of activities can still proceed in China but the question is for how long?
• The blockchain also supports decentralised finance (DeFI) where there is a lot of investment going on in terms of working out how to provide financial services on the blockchain.
• This is also deeply threatening to the CCP’s control of the banking sector and so I think that this too will soon be outlawed.
• It is viewed with similar suspicion in western countries for exactly the same reason, but these countries are likely to try and fight it with regulation as a blanket ban will cause uproar and never work.
• The real problem for China is that this sends a very negative message to any entrepreneur with a genius idea for using the blockchain for financial services.
• These entrepreneurs will now have a strong incentive to leave China and start up their businesses elsewhere depriving China of some of its best minds meaning that innovation in this sector will not be happening there.
• In the long run, this means that China will fall behind in developing technology meaning that its desire for technology independence will become harder and harder to achieve.
• This is not just happening in fintech but also in games and now also in education.
• This is a very long-term effect and we will only the results of these policies over 20 years or more but China is sowing the seeds which will lead it to lose the technological cold war with the USA.
• China continues to do more to hurt its long-term ambitions than the USA can ever achieve on its own.