| | | The Quiet Part Out Loud | | By Jeff Brown, Editor, The Bleeding Edge | | | | The biggest story of the week was, of course, the unfolding developments related to the release of the DeepSeek artificial intelligence (AI) models. | | Not only are the government, industry, and venture capital community all grappling with the implications, as it turns out, things aren’t what they originally seemed. | | This has led to deep concerns over China’s underlying involvement and motives, as well as reignited both the industry’s and the U.S. government’s determination to make sure that it is the first to achieve artificial general intelligence (AGI) and remain the global leader in AI. | | For investors, naturally, there are implications. | | Nowhere else in the world is seeing more capital invested in both infrastructure and software development for AI. It’s not even close. The U.S. market is also where AI software is being implemented in existing U.S.-based software companies and adopted more quickly by both consumers and businesses. | | These facts combined with the pro-tech, pro-innovation, pro-energy, and pro-growth administration in office mean we have some amazing investment opportunities ahead in U.S. equity markets. | | We have been years ahead of these trends at Brownstone Research, so we’re already prepared for what’s coming and we’re going to continue to make sure our subscribers are as well. | | Hope everyone has a wonderful weekend… and please don’t download DeepSeek onto your phones. Grok, Perplexity, or Anthropic’s Claude are far better options that are not malware. | | Jeff | | The DeepSeek Chaos | | Many of you have been writing in your questions and concerns… |
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| Hello Jeff, any thoughts you’d care to share on the DeepSeek R1 story out of China? Is there any substance to it? Is it likely to put an end to a lot of the AI push in the U.S.? If so, is it likely to tank the Magnificent 7 that has been spending billions on developing AI? And what would that mean for the broader market? What are likely to be the winners and the losers? | | – Al R. |
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| Your suspicions and doubts… |
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| After learning how and what its response was to certain queries, I’m not convinced [DeepSeek] is true AI. I think America was just played again in a major way. This could be an in on these stocks and a win for those who see it for what it is. Thank you | | – Thakman | | My first thoughts regarding the ulterior motives of any Chinese/CCP product is always what data can they scrape from any users’ actions/requests… And that applies to DeepSeek!! | | – Merrill L. |
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| You are 100% correct. The way they put [DeepSeek] together is Chinese government propaganda to try to throw a wrench into U.S. investment. | | I also don’t believe it’s a coincidence that this comes out right after Trump hits office. I also strongly believe that this DeepSeek platform was built on a ton of illegally obtained H100 chips and not older/cheaper chips. Except they won’t want to admit it due to sanctions, etc., and the way it sows doubt in investment in the U.S. | | This is pure propaganda. Why all these media people don’t take any time to recognize these realities and truly call into question how it was built is beyond me. Even Elon says these were built on H100s! | | – Scott H. |
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| Thank you to all who wrote in. There were too many to list. I love the critical thinking and curiosity about this issue. This is a perfect example of noticing when some story or development seems a bit “off” and is worth deeper study. That’s what I’ve been doing all week, and the developments of the last 48 hours have confirmed my suspicions. | | I’ll get to that in a moment, but for those who missed the two issues referenced above, I highly encourage you to give them a read for more context on the DeepSeek issue. | | But as a quick recap, here’s what I wrote on Monday… |
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| The bombshell announcement over the weekend was the release of some brand new AI research out of Hangzhou, China-based hedge fund, High-Flyer Capital Management. | | High-Flyer Capital released a brand-new large language model (LLM) called DeepSeek -R1. For those interested, you can find the research here. | | What shocked the industry and the tech markets today – aside from it not coming from Silicon Valley – is the incredible performance of DeepSeek-R1, as shown below, compared to OpenAI’s o1 foundational model. | | | | As we can see above, DeepSeek-R1 performed on par with OpenAI o1 – OpenAI’s current production model. On three of the metrics shown above, it was slightly better. And on the other three, slightly lower. Either way, the results were impressive… |
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| What’s more, they claim to have accomplished this at a fraction of the cost (just $5.5 million) of what U.S.-based AI companies have put toward the development of their own foundational models. | | And it’s got Silicon Valley in an absolute tizzy. | | And the media just added fuel to the fire with lazy articles like “How China’s DeepSeek Outsmarted America.” If this were true, I can assure you that I’d be writing about it critically in The Bleeding Edge. | | But the facts this week have revealed the truth about DeepSeek and its AI models… and it is very different than what has been positioned by the media. That’s why I used the term “lazy.” There hasn’t been any good investigative journalism yet on this matter. | | To put things in perspective, U.S. companies have spent more than $100 billion developing the leading frontier AI models used widely today. | | The claims are that DeepSeek has developed its own model from the ground up for just $5.5 million. Many have incorrectly assumed the U.S. tech companies “got it all wrong” and “wasted all that money when they could have just spent $5.5 million.” | | But that $5.5 million price tag doesn’t include the research and development costs associated with prior versions of DeepSeek. It’s also almost certain the team that developed DeepSeek avoided export bans and managed to access larger cloud-based GPU resources and/or banned semiconductors through intermediaries to get the job done. | | Putting that aside, an even worse indictment is that DeepSeek leveraged open-source AI models from Alibaba (Qwen2.5) and Meta’s Llama 3 to develop its own model. The real kicker is that Microsoft and OpenAI discovered that DeepSeek stole massive amounts of data from OpenAI’s model to build DeepSeek. | | This reminds me of when China-based Huawei stole Cisco’s routing code, line for line, back in 2003. It re-engineered Cisco’s hardware, stole its software code, and then undersold Cisco, Juniper, etc. at far lower prices in the global markets. It’s the foundation of what made Huawei a powerhouse today… At the expense of the billions of dollars Cisco invested in research and development. | | So, this premise that the model was just developed for $5.5 million is completely false. It could not have been developed without the billions of dollars invested by other companies. This is a key point to understand as we look to the future. | | It has also come to light that anyone using DeepSeek is being surveilled. Data is being taken from your phone and sent back to China, and not just data related to the use of DeepSeek. This is written clearly in DeepSeek’s privacy policy and has been confirmed in practice. As I suspected, DeepSeek is doing precisely what TikTok does. | | For that reason, I cannot recommend anyone download the DeepSeek software. In fact, I strongly recommend against it. | | While the team at DeepSeek did use some new techniques for lowering inference costs, we can’t forget that the model was developed through the theft of others’ technology… I suspect for the purpose of profiting through short positions in NVIDIA (re: the DeepSeek team is from hedge fund High-Flyer Capital Management), as I discussed on Tuesday in The Bleeding Edge – The Perfect Short. | | These latest developments will only tighten security at U.S.-based AI companies and the government, as well as harden their resolve to accelerate and build AGI as quickly as possible. | | What’s quite remarkable is that the investment is happening entirely in the private sector. | | The U.S. government didn’t do anything in this area over the last four years, but the private sector did. And now, it’s very far down the line in terms of research and development. Taxpayers aren’t going to have to pay for the breakthrough. It’ll be xAI, OpenAI, Anthropic, Meta, or Google to get there first. | | And no one wants to be last, which is why major tech companies have reaffirmed their R&D spend and are racing ahead. They’re not going to fall for China’s psyop trying to trick the U.S. into slowing down and re-evaluating its approach to AI. | | Our investment thesis is strong. Artificial general intelligence (AGI) cannot happen without sufficient hardware and infrastructure. And as this technology grows more advanced and is adopted by more companies and individuals, demand is going to rise.Exponentially. | | It isn’t far off now. I’m already seeing small signs of AGI capability. It will happen no later than next year. And it will feel like it’s here later this year. |
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| Hi Jeff and crew, I’ve enjoyed your publications for many years. AND made a couple of bucks now & then! | | My need for AI – about 40 years ago, I bought 20 acres with mostly spruce trees. I have been living on that same chunk of dirt since 1983. The problem… the spruce bark beetle. It has killed over 100 of the biggest & nicest trees. | | I’m 76 and chainsaw work is great exercise but not as enjoyable as it used to be. And the firewood keeps my natural gas bill lower. But I get tired quickly… 2 to 3 hours is more than enough for me. The firewood companies would be getting excellent firewood but they want me to pay them!! | | So when I’m perspiring and thinking that the chainsaw is heavier than it was, the thought hits me… where can AI help me?? Thanks for all of your non-chainsaw ideas ! | | – John Demske (BNF) |
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| Hi John, | | I’m with you, I love to fell my own trees and split my own firewood. Wonderful exercise and great to be outdoors. I’ve done it for years. And if you’re going at it for two to three hours, that’s fantastic. | | Here’s the little bugger that has been causing you so much trouble: | | | | Spruce Bark Beetle | | You definitely have a tough problem to solve. This beetle is not easy to deal with. | | Obviously, using insecticide sprays and pheromone traps as well as removing infested materials would all be effective. | | I’d have to think that a humanoid robot like Optimus would be ideally suited for helping to manage a problem like this. The healthier the trees are, the less susceptible they will be to the beetles. That means active maintenance of your acreage, which wouldn’t be very feasible if it’s just you. | | That’s where a “thinking” autonomous humanoid robot would come in very handy. It would be an expert on forest management and have the knowledge to address the issue at hand. | | Agriculture in general is one of those areas suffering widespread labor shortages, so the adoption of intelligent robotics seems obvious to me as something that will happen sooner than later. | | I wish I could give you some good short-term news for your immediate problem. But if I had to guess, industry will prioritize robotics applied to food production over pest management. | | But with that said, Tesla is building a general-purpose robot with the dexterity and fine motor skills of a human. Current plans are to start selling commercially around a $25,000 price point in 2026. | | And Optimus is already walking on uneven terrain amongst the trees… | | | | Won’t AGI Completely Replace Humans? |
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| Jeff…has it ever occurred to you that one of the main uses of AGI, if or when it is developed, will be to replace humans? Yes, I know these fears have been raised in the past and have always been wrong. However, I think this time is different. We have never had a replacement for the human mind before. Is this the kind of world you want for your kids? | | – Stephen C. |
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| Hi Stephen, | | Yes, absolutely, this is something I think about often and write about quite a bit in my research. | | AGI will not be a replacement for humans though. We’re not going anywhere. But it will dramatically change our lives in very good ways. | | The most important near- to mid-term benefits of AGI will be to apply it to… | | Jobs where there are large labor shortagesTasks that are menial and suck away productivityJobs that tend to result in repetitive stress problems (like lifting and moving boxes in a logistics facility)Complex self-directed research to solve problems necessary to advance technology/biotechnologyDefense and national security | | AGI will be used for augmenting human ingenuity, not for replacing humans. | | And one of my favorite future applications of AGI is for educating children, all children around the world regardless of their family’s income level. AGI can and will be used to give personalized, best-in-class education to children on par with the best private schools at a nominal cost. And an AGI can teach each child in ways that are optimized for the individual child’s learning style. | | If you want to read more about how artificial general intelligence is going to democratize education and help supplement the shortage of qualified educators in schools worldwide, I wrote about this topic at length in The Bleeding Edge – The Future of Education. | | AGI won’t replace humans, but it will take over the menial work that holds humans back from pursuing more productive and fulfilling endeavors. It will free up more time for humans to focus on pursuits that challenge us, work that energizes us, and projects that inspire us. | | AGI will also be used to bring about a world without disease, an abundance of clean energy (nuclear fusion), and a dramatically higher quality of life. | | And that is a world that I want for my kids. | | Strengthening American Leadership in Digital Financial Technology |
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| Jeff, Trump’s Day 1 has come and gone and he has not mentioned one word about Crypto! NOT even a peep! And you expect me to spend more money on your false promises? Thank you. | | – Stan H. |
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| Hi Stan, | | I hope you’ll be happy to know that last week was nothing short of remarkable concerning digital assets. | | First and foremost, President Trump did issue an executive order: Strengthening American Leadership in Digital Financial Technology. It is public information and published on the White House website – you can find it here. | | This is a quick summary of the key points in the executive order… | | The Executive Order establishes the Presidential Working Group on Digital Asset Markets to strengthen U.S. leadership in digital finance.The Working Group will be tasked with developing a Federal regulatory framework governing digital assets, including stablecoins, and evaluating the creation of a strategic national digital assets stockpile.The Working Group will be chaired by the White House AI & Crypto Czar @DavidSacks and include the Secretary of the Treasury, the Chairman of the Securities and Exchange Commission, and the heads of other relevant departments and agencies.The White House AI & Crypto Czar will engage leading experts in digital assets and digital markets to ensure that the actions of the Working Group are informed by expertise beyond the Federal Government.The Executive Order directs departments and agencies to identify and make recommendations to the Working Group on any regulations and other agency actions affecting the digital assets sector that should be rescinded or modified. The Executive Order prohibits agencies from undertaking any action to establish, issue, or promote central bank digital currencies (CBDCs).The Executive Order revokes the previous Administration’s Digital Assets Executive Order and the Treasury Department’s Framework for International Engagement on Digital Assets which suppressed innovation and undermined U.S. economic liberty and global leadership in digital finance. | | In addition to the executive order above, another executive order – a Regulatory Freeze – was issued that also directly impacts the digital assets industry… | | Consumer Financial Protection Board (CFPB) actions, as well as all pending rules such as the IRS’ decentralized finance (DeFi) broker reporting rules are frozen.The IRS DeFi broker reporting rule requires certain DeFi platform operators to report gross proceeds from digital asset transactions. The rule also requires these operators to provide payee statements to customers. December regulations, the IRS further specified that DeFi participants who fall within the definition of “trading front-end service providers” will be treated as brokers and required to report to the IRS and provide copies to their customers. | | On January 21, the SEC launched a crypto task force to develop a comprehensive and clear regulatory framework for crypto assets with Commissioner Hester Peirce leading the task force. | | Also on January 21, a U.S. court overturned sanctions prohibiting the use of Tornado Cash – a popular privacy-enhancing application for senders and receivers of cryptocurrencies that allowed users to deposit into and withdraw from a pooled crypto fund, rather than a direct peer-to-peer transaction… | | U.S. Treasury’s Office of Foreign Assets Control (OFAC) originally sanctioned Tornado Cash in 2022 accusing it of money laundering. Sanctions led to the arrest of developers. Tornado Cash’s “immutable smart contracts (the lines of privacy-enabling software code) are not the ‘property’ of a foreign national or entity.”The U.S. District Court for the Western District of Texas ruled that Tornado Cash’s smart contracts are not subject to sanction under the International Emergency Economic Powers Act (IEEPA), as they cannot be owned.The court reinforced that immutable, decentralized protocols cannot be classified as regulated assets under current U.S. laws, challenging the government’s ability to target open-source software. Would have considered non-custodial wallet or non-custodial software as a money service business (MSB). | | Senator Cynthia Lummis has been appointed chair of the recently established Senate Banking Subcommittee on Digital Assets. The scope of the responsibilities in this subcommittee will include… | | Promoting innovation in blockchain technology and digital assets while protecting consumersStablecoinsEstablishing a strategic Bitcoin reserveThe oversight of financial regulators to ensure they are following the law and that there isn’t a Choke Point 2.0 stifling innovationAdvancing legislation for a comprehensive digital asset framework | | President Trump addressed the World Economic Forum and said he will make the U.S. the “World Capital of AI and Crypto.” Morgan Stanley and Bank of America immediately commented they were looking to participate in the cryptocurrency market. | | Caroline Pham was named as the acting Commodity Futures Trading Commission (CFTC) chair. She’s a crypto advocate with four years of CFTC experience who previously pitched a pilot program for crypto oversight. | | Additional pro-crypto developments led by the Trump Administration last week… | | Trump will nominate former SEC Commissioner Paul Atkins to run the agency permanently.Representative French Hill has been elected to be chairman of the House Financial Services Committee (HFSC) – the original sponsor of the Financial Innovation and Technology for the 21st Century Act (FIT21).XRP and SOL will now have futures contracts on the CME. Previously only Ethereum and Bitcoin had futures contracts on CME. Representative Mike Carey and Senator Ted Cruz introduced Congressional Review Act resolutions to roll back the DeFi broker rulemaking. | | Stan, there’s even more that happened last week that is pro-crypto, but I’ll let you be the judge as to whether or not you think these are great developments for the digital assets market. | | And if you’d like some additional context, keep an eye on your inbox in the days ahead. I held a live call for my Permissionless Investor subscribers and Brownstone Unlimited members on Friday, January 24, where I covered this specific topic. The recording of that call will be posted to our subscriber website next week for you to view. | | From my perspective, everything I predicted would happen right here in The Bleeding Edge was proven accurate last week. And these developments are the most bullish thing to happen in the crypto markets in the last decade. | | What’s Going on With the Brownstone Research App? |
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| When will the Brownstone Research app resume operations? I miss the immediacy of the buying and selling notifications, which will be especially critical to the Deep Access service. | | – William B. |
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| Hi, William. You’re not alone in wondering about the app. A number of Brownstone readers have written in with concerns about the Brownstone Research mobile app, particularly regarding alerts… | | My team and I are aware of the functionality issues and are working tirelessly behind the scenes on a significant upgrade to the app. We do understand your frustration and apologize for any inconvenience this has caused. | | I want to reassure you that we’re getting close to relaunching the “new and improved” Brownstone Research mobile app so you can have easier access to all your Brownstone Research products, services, and insights. | | We want you to be able to make the absolute most of your Brownstone Research services, and we know one way to facilitate that is by offering an all-around more seamless and user-friendly mobile experience. | | Not only will there be more utility on the app, but I hope you’ll find it will look great and will be a productive and profitable place you’ll enjoy returning to again and again. | | Thanks for your continued support as well as your patience and understanding as we smooth out the last of the bugs and glitches, and thank you to everyone for writing in. | | My team and I love reading your thoughts and questions. And as always, if you wish to reach us, you can go right here. | | Have a wonderful weekend. | | Regards, | | Jeff | | P.S. If you’re at all curious about how Brownstone Research employs artificial intelligence in our own services, I encourage you to check out our Neural Net Profits trading service. | | I’ve developed a neural network that focuses on analyzing patterns in the cryptocurrency markets called the Perceptron. | | With all the innovation and rapid-fire change coming to the cryptocurrency industry in the months and years ahead, there’s never been a better time to profit from crypto. And the Perceptron helps us know where to look and when to act on tokens poised for short-term swings. | | You can go here to watch my presentation on the Perceptron and how we’ll utilize it through the volatility ahead. | | |
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| The Perfect Short | | HFCM just released another generative artificial intelligence model… |
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