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Special Sneak Preview: February Issue of Digital Dispatch

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Monthly Issue: February, 2024

IN THIS ISSUE

This month, you’ll discover...

• Why AI is Tesla’s greatest untapped asset
• Why bitcoin miner Riot Platforms (NASDAQ: RIOT) is making a killing on grid shortage (and why bitcoin mining and the US power grid have become symbiotic partners)
• And why Adobe (NASDAQ: ADBE) owns the future of AI-Generated images — quite literally

DISPATCHES

Why AI May Become Tesla’s Most Valuable Asset

The sky's the limit for Tesla’s future thanks to its upcoming AI supercomputer “Dojo.”

Tesla (NASDAQ: TSLA) is making significant strides beyond electric vehicles by constructing a state-of-the-art facility in Austin, Texas, designed like a bunker, to accommodate a groundbreaking supercomputer known as “Dojo.”

Chris and John visited Tesla’s gigafactory in Austin earlier this year. This photo was taken by John’s drone, which he flew to see the new construction.

The primary purpose of this supercomputer, as reported by The Information, is to empower the artificial intelligence systems integral to Tesla’s self-driving capabilities. Moreover, there are ambitions to leverage this supercomputer for providing AI navigation cloud services to other enterprises.

This endeavor represents an audacious move by Elon Musk to secure greater control over the technology required for the AI software that underpins Tesla’s products. Tesla has already paid $300 million for 10,000 of Nvidia’s powerful H-100 AI GPUs, which is enough to run a massive AI cluster.

But that’s not enough. Even though Nvidia is shipping units as fast as they can, they still haven’t caught up to the backlog of orders. And so Musk has decided to move the production of Dojo in-house. Tesla has designed its own custom chip, called the D1, and they’re pouring $1 billion into building 3,000 of these bespoke AI processors.

If successful, this new D1 cluster would give Tesla one of the most powerful computers in the world — and could be operational as soon as the end of the year.

This new computer could help Tesla finally reach its goal of a complete “self-driving” future for the 4 million Teslas already on the road, plus a host of “robotaxis” and other fleet vehicles.

Tesla’s forthcoming “Dojo” capabilities have garnered significant attention and even influenced financial analysts like Adam Jonas of Morgan Stanley. Jonas predicts that the introduction of the Dojo supercomputer could increase Tesla's market value by as much as $600 billion. This anticipated growth stems from the accelerated adoption of Robotaxis and the expansion of Tesla's network services as Dojo opens new market opportunities similar to how AWS transformed Amazon.

Dojo could provide Tesla with the decisive edge in a potentially $10 trillion market. Dojo’s speed, performance, and cost-effectiveness could catalyze the development and monetization of Tesla's software and services business.

Moreover, we see the potential for Dojo to extend Tesla’s technological capabilities beyond the automotive industry, opening doors to diverse applications in various devices equipped with real-time decision-making capabilities based on visual data.

Let’s not forget that OpenAI, the company behind ChatGPT and DALL-E, was first founded with significant involvement from Musk and up to $50 million of his money invested in 2015-16. While Musk quit the board of OpenAI in 2018, it was because he felt they weren’t doing enough to expand the practical capabilities of artificial intelligence.

Even though Musk has publicly expressed concern over AI’s potential for “thinking” capabilities (he’s not giving up on the creativity of humans just yet), he has full faith in AI’s ability to safely and swiftly move millions of objects through physical space.

The Dojo supercomputer could even one day give Tesla the ability to control all transportation, shipping, and logistics — worth trillions. While the true extent of its potential remains to be seen, as usual, Musk and Tesla should not be underestimated.

 

How Bitcoin Mining Became a Strategic Partner for the US Power Grid

At first glance, it wouldn’t seem like utility companies (especially publicly-operated ones) would have any love for bitcoin miners.

Miners consume enormous amounts of power, they have a tendency to build massive warehouses of mining servers in remote locations where the electricity is cheap, and they won’t tolerate even minor power interruptions.

And yet, when you look deeper, miners’ obsession with electricity — its quantity, quality, and consistency — makes them the perfect strategic partner. Nobody cares more than they do about ensuring the utility grid can fulfill its supply. While they can be particular, it also means they’re paying close attention to the same concerns that matter to utility companies.

Best of all, they’re willing to pay for what they want and commit to long-term contracts that ensure mutual benefits for all.

A new mutual benefit has also emerged: bitcoin miners are willing to sell those credits back to utility companies during times of peak load.

American bitcoin miner Riot Platforms (NASDAQ: RIOT) gives us the perfect example. They operate what is now the world’s largest bitcoin mining facility in Rockdale, Texas, with a total of 750 MW of electricity powering its mining capacity. Most of the year, they put that juice into hashing bitcoin transactions — but the brutal heat of this past summer changed their strategy.

The Electric Reliability Council of Texas (ERCOT), a public operation that runs most of the Texas power grid, was nearing max capacity on the hottest days and came dangerously close to blackout.

With the power grid in jeopardy, Riot powered down their bitcoin mining computers and sold the power back to ERCOT. Texas got the electricity it so desperately needed, and Riot was rewarded with cash.

According to CNBC, Riot was able to earn a total of $31.7 million in electricity credits from ERCOT, which manages the program. That includes a special premium from what ERCOT calls “Demand Response Credits” that Texas only uses when it's truly desperate — which, unfortunately for Texas, is often.

Bitcoin miners like Riot are in a unique position to aid during power emergencies since they can disengage up to 95% of their mining operations on short notice. That’s quite a haul in premium credits.

As Riot’s CEO Jason Les put it:

“August was a landmark month for Riot in showcasing the benefits of our unique power strategy. The effects of these credits significantly lower Riot’s cost to mine Bitcoin and are a key element in making Riot one of the lowest cost producers of bitcoin in the industry.”

Riot’s press release details the figures:

The future may also provide additional avenues for this symbiotic relationship.

Many industrial companies are beginning to experiment with using grid-scale batteries to store energy for use during critical times. Bitcoin miners are likely to be among them. This strategy would give them access to extra energy during key mining times, plus the option of selling that energy during peak load.

Riot Platforms (NASDAQ: RIOT) is one of our favorite picks in the Digital Digest model portfolio with a BUY recommendation up to $15.00.

 

SECTOR SNAPSHOT: ARTIFICIAL INTELLIGENCE

Why Adobe Owns the Future of AI-Generated Images

The impressive new capabilities of ChatGPT (AI-generated text) and DALL-E (AI-generated images) has created an incredible amount of popularity with users.

ChatGPT, for example, added 100 million users in its first 8 weeks (for comparison, it took Twitter over 5 years to accomplish a similar feat). But this instant popularity has also led to a glaring problem: AI-generated content uses a broad set of training data that includes material from copyrighted and/or questionable sources.

That growing problem has already resulted in several lawsuits. George R.R. Martin, Jodi Picoult, and John Grisham are just a few of more than a dozen prominent authors who are suing OpenAI for what they say is “systematic theft on a mass scale.”

While these particular lawsuits didn’t get very far, they’ve already opened the door for a host of other concerns. Governments across the globe, including the US, Canada, the UK, and India are already proposing new legislation to crackdown on these problems.

That’s where Adobe Inc. (NASDAQ: ADBE) stands out.

In addition to owning the powerful photo editing software platform Photoshop, they also have another asset that many people have forgotten about: one of the world’s largest stock libraries, called Adobe Stock.

Adobe’s AI-powered generator, called Firefly, is trained exclusively on the contents of its stock library and verified content. That means Adobe can say — without a shadow of a doubt — that all generated content is 100% free of any legal complications.

It also solves a lot of potential ethical problems. The stock library doesn’t contain any pornography, violence, hate speech, or other potential hazards that are lurking in other AI engines.

And as a bonus, the stock library’s carefully-curated, artist-led content is also thought to lead to higher-quality results.

Adobe also has another AI generator called Sensei, which helps content creators make quick, straightforward marketing and user experience decisions. And that, too, has set itself apart from other AI tools.

Adobe has been a software leader for over 40 years, and without a doubt, Photoshop remains the unrivaled gold standard in the content creation business. These new AI tools will help ensure that Adobe’s place remains secure for a long time to come — and should also lead to revenue growth in new markets as Adobe sets itself apart with AI content that’s proven to be legal and safe.

Adobe Inc. (NASDAQ: ADBE) is in the Digital Digest model portfolio with a BUY recommendation up to $615.

 

PORTFOLIO UPDATE

Palantir Tech Inc. (NYSE: PLTR)

Co-founder and board member Peter Thiel (PayPal, Tesla, Facebook) has remained a stalwart presence in the tech world. This deep data and cybersecurity firm is well-positioned to be an early leader in AI. Palantir is a BUY up to $25.

Hut8 Corp. (NASDAQ: HUT)

This bitcoin miner holds 9,195 BTC as of December, 2023. At present value, those are worth $377 million. Given that Hut8 has a total market cap of $617 million, it means that almost 50% of the market cap is in liquid holdings. Only in crypto can you find liquidity like that.

Hut 8 experienced a severe drop in stock price of 23% on January 18, coinciding with the release of a report by short-selling firm JCapital Research. The report, titled “The Coming HUT Pump and Dump,” alleges that Hut 8's recent merger with US Bitcoin (USBTC) could put investors at risk due to USBTC's history of legal troubles and questionable management.

USBTC's CEO, now Hut 8's chief strategy officer, has been accused of hiding his relationship with stock promoters, the Honig Group, previously penalized for fraudulent schemes. We think this recent dump is the result of panic selling and represents a good, while somewhat risky buying opportunity.

Despite the controversy, Hut 8 continues to increase its Bitcoin holdings, and grow its mining operations. This recent merger with US Bitcoin could be problematic, which makes Hut 8 a higher risk/higher reward play than other mining stocks.

Still, given a promising outlook for bitcoin in 2024, even a 20% increase in the price of bitcoin could put them in a commanding position for growth and profitability. Hut8 is a BUY under $10.

 

CRYPTO SPOTLIGHT

Coinbase Ventures: The Updated Investment Portfolio

I took a deep dive into the investment portfolio of Coinbase Ventures, the venture capital arm of the popular cryptocurrency platform Coinbase. Here are the key takeaways:

Key Points

• Coinbase's main interest lies in the domains of Web3 infrastructure and DeFi (Decentralized Finance).
• They typically enter the game early, participating in seed/private rounds.
• In 2023, their focus was on innovative DEXs (Decentralized Exchanges), ETH protocols, and Web3 projects that comply with regulatory requirements and offer secure multi-chain solutions.
• It’s worth noting that not all deals turn out successful - due diligence is always required.

In 2018, Emilie Choi transitioned from LinkedIn to Coinbase to assume the role of VP of Business. She established a new Corporate Development team for M&A and product strategy. Today, as one of the key C-level executives, she has played a pivotal role in Coinbase Ventures' success with nearly 400 investments in Web3 startups to date.

Investments

The portfolio includes a variety of projects in areas such as DeFi, infrastructure, data services, and the NFT/gaming/metaverse sector.

DeFi

Investments include Alkimiya ($7.2M), Architect ($5M), Alongside Finance ($11M), Rocket Pool, Mauve ($15M), and Term Labs ($2.5M).

Infrastructure

Projects in this category include Obol Network ($12.5M), Yoz Labs ($3.5M), zkLink ($10M), and Chaos Labs ($20M).

Data Service

Investments include Cloudburst ($3M), Turnkey ($7.5M), Pyor ($4M), and AwesomeQA ($2.8M).

NFT/Gaming/Metaverse

Investments focus on Avalon ($13M), Azra Games and Legions Legends ($10M), Backed ($3M), and First Mate ($3.75M).

The inaugural investments of the Base Ecosystem Fund have been unveiled, featuring the following six promising projects:

• Avantis
• BSX
• Onboard
• OpenCover
• Paragraph
• Truflation

Guided by the leadership of Coinbase Ventures, the Base Ecosystem Fund is committed to supporting the development of innovative onchain projects within the @BuildOnBase community.

Conclusion

Coinbase Ventures is one of the most active and effective VCs in the crypto and blockchain industry. With approximately 400 global investments, their ability to identify market trends is impressive, making them a venture firm worth keeping an eye on. They also promise to provide more educational content on DeFi and Web3 Marketing.

NEXT UP

• John Carl is investigating what’s next for the semiconductor industry — and how the old masters of Silicon Valley will fare in the years ahead. Look for his update in the next issue.

• Chris Curl is excited to see the crypto winter thaw and expects to find more valuable insights on the turnaround of Bitcoin (and most notably, the altcoin Solana). Investors have already doubled their money... but this is only the beginning of what’s to come. Chris will give you a glimpse of what to expect in 2024.

• And last but not least, don’t forget to watch the video recorded LIVE from our first Quarterly Tech Summit! Our topic was AI’s Pivotal Year: Decoding What’s Ahead for 2024. As you’ll hear, our discussion cuts through the hype of AI and gets to the core of how to make money as an investor. We also reveal our newest AI recommendation for the Digital Dispatch portfolio.

The future won’t wait,

John Carl and Chris Curl
Editors, Daily Profit Cycle