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Paul Tudor Jones, Bitcoin, Digital Assets, The Tipping Point

Jeff Dorman, CFA
May 11, 2020
What happened this week in the Crypto markets?

Supply and Demand

US equities had another great week, rising 3% driven largely by euphoria from promising vaccines and a partial reopening of the economy, not new demand ($15 billion of net equity outflows).  Oil rose 25% week-over-week as well, thanks to less supply, not increased demand.  Meanwhile, Bitcoin digital assets ended the week largely unchanged, despite both a significant reduction in new supply this week (Bitcoin halving) AND one of the most significant announcements related to new demand in the history of Bitcoin’s young existence... 
 

...Paul Tudor Jones is Buying Bitcoin

Before we get to the significance of PTJ’s announcement, recall that crypto has been becoming more mainstream for years. This is not new.  Most institutional investors are already evaluating crypto, every financial advisor has clients that are asking about it, and every government around the world is discussing it.  Fidelity, the CME, Square, Susquehanna, the NYSE/ICE and hundreds of other large financial organizations are already involved.  A few weeks ago, Bloomberg put out a dedicated crypto report and updated the Bloomberg terminal to include more crypto data.  And just this past week, Jefferies’ head equity strategist recommended Bitcoin in a note to clients.

But all of this paled in significance to the Paul Tudor Jones investor letter on buying Bitcoin (the full letter is available here, and we will not be offended if everyone stops reading this and reads his letter instead). 
 
At the risk of being repetitive, Adam Pokornicky of DAIM Digital (an RIA for Bitcoin and Digital Assets) described the significance of this announcement perfectly  (paraphrased):
 
I believe a specific moment this past week marked a tipping point for Bitcoin and its crossover from its cultish following of freaks, geeks, anarchists and early adopters and their love of magic internet money to the investment asset of choice to hedge against inflation by legendary macro investor Paul Tudor Jones. Paul Tudor Jones and Lorenzo Giorgianni [former deputy chief of the IMF’s Strategy, Policy and Review Department] accomplished in a simple and well written investment letter what us Bitcoiners have been trying to articulate for the past 11 years. The way he articulates this point is so simple it just makes sense.
 
I’ve come to realize that despite the outrageously impressive innovation and success that Bitcoin has achieved to date, it still has a bit of a credibility problem and is not being taken seriously as a legitimate new asset (and class) that should be included (or at least considered) in every single investor portfolio at the highest levels of finance and Wealth Management. Until Now.
 
Hearing the message from an outsider praising Bitcoin’s value or diversification and risk-adjusted return benefits is going to be considered suspect and something [traditional investors] can easily dismiss. But what happens when the message comes from one of their own, who just so happens to be one of the most successful and legendary macro investors over the past 40 years?  Sometimes it is not about the message but the messenger.  
One passage from the PTJ letter resonated best with us:
 
“So that was the flavor behind some of the discussions that were had when scoring the suitability of each asset as a store of value [Fiat, Gold, Financial Assets, Bitcoin]. What was surprising to me was not that Bitcoin came in last, but that it scored as high as it did. Bitcoin had an overall score nearly 60% of that of financial assets but has a market cap that is 1/1200th of that. It scores 66% of gold as a store of value, but has a market cap that is 1/60th of gold’s outstanding value. Something appears wrong here and my guess is it is the price of Bitcoin.”
The takeaway is that Bitcoin doesn't have to be like a religion; mutually exclusive.  You don't have to be “all in” or “all out”.  A simple probability-weighted analysis concludes that you probably should consider owning something that has a tiny fraction of the market cap of its competitors, but a much higher proportion of strong characteristics.
 
We are watching a new monetary system being built right before our eyes, at a time when we need one more than ever.  How many times in your lifetime do you get to see something so extraordinary? 
 
Instead of worrying about which side of the picket line you are on -- it’s worth sitting back and admiring how something so insane when first presented in 2009 is now this large, this important, and attracting some of the world's greatest investors and some of the world's most forgotten citizens.
 
Simply amazing.
 

Paging Crypto Investment Bankers

In a capitalist economy, an investment banker is an individual who often works as part of a financial institution and is primarily concerned with raising capital for corporations, governments, or other entities.
 
So, um… where the hell are they in crypto?
 
This is the same group of people who brought us LBOs, CDOs, MBS, DRD preferreds, and a whole host of creative financing tools for corporations.  Yet, currently, companies are begging for government bailouts, issuing stock and diluting shareholders at severely depressed levels, and issuing record amounts of debt on already over leveraged balance sheets. How about finding a more creative solution for desperate companies?
 
We believe this is the perfect environment to explore creative financing solutions, especially for established corporates with strong brands hit hard by COVID-19.  And the blueprint is already here.  Non-dilutive, customer loyalty, digital assets, that are possibly recession proof
 
If I sound mad, I am.  Like many people with disposable income and job security, I’ve been spending as much money as possible ordering take out from local community restaurants and bars, tipping service workers, and even paying for haircuts and cleaning services even though we’re doing it ourselves.  Instead of accepting government handouts, all of these companies and small businesses could issue digital assets to help bridge the gap between today’s financing needs, and tomorrow’s demand for services.  This is exactly what an investment bank is supposed to be doing for businesses.  Airlines, cruise lines, coffee shops, hotels and many more industries have loyal customer bases and significant future demand, which is the perfect formula for issuing quasi-equity, quasi-utility tokens.  Where are the bankers?  Where is McKinsey? Which Fortune 500 company is going to be the pioneer?  For example, what if Starbucks combined certain features of their equity and loyalty rewards program into a digital asset that had equity-like features (10% of revenue used to burns / buyback tokens, the top 10% of token holders get additional dividends) and utility-like features (all token holders get discounts on coffee, special access to events where Starbucks is a sponsor, access to like-minded coffee nerds through online communities, etc.).  As soon as one company pulls it off — they will all do it. And, in our view, there has never been a better time.
 
Marc Weinstein wrote a great piece last week discussing the differences between “Shareholders and Stakeholders” (paraphrased).
 
“In 1984, Edward Freeman introduced the “Stakeholder” model of capitalism. Stakeholder Theory stresses the interconnectedness between a business and its customers, suppliers, employees, investors, communities, and the natural environment. The theory argues that a firm should create value for all stakeholders, not just shareholders.
 
Investing in companies that prove short term returns, even if they do so using financial engineering such as share buybacks, may have performed well last year, but as we have seen, their heavy emphasis on the short-term left them without savings to weather a future storm. Ultimately, this was value destructive for future shareholders (and generations).
 
A truly robust stakeholder model of capitalism would consider future stakeholders as much as it does current ones. This time when we build, we need to build with a stakeholder mindset. We need to understand the complex systems that our businesses both create and connect.”
While crypto is designed specifically to bypass the need for investment bankers and brokerages -- it’s also embarrassing that they aren’t here.
 
Notable Movers and Shakers
The final week before the Bitcoin halving came and went, but not without volatility. Bitcoin finished the week down 2%, after peaking at +13% (BTC.D +2%). A few projects provided updates that were notable enough to push through the volatility of the market:
 
  • Chiliz (CHZ) announced a partnership with the UFC that will give token holders access to ‘VIP experiences’, including tickets to UFC events, experiences, and related rewards. However, the larger goal seems to revolve around giving fans a voice in the experience, allowing fans to engage directly with UFC related events by using CHZ. The market reacted favorably to the news, as CHZ finished the week up 9%.
  • Numeraire (NMR) released an update on the Erasure protocol, announcing that over $2M had been staked, as well as a frontend update. The token has been on a tear in 2020, posting 380%+ gains. This week was no different, with NMR finishing up 45%.
What We’re Reading this Week
Last week, the ECB released a report calling for regulations on global stablecoins (GSCs). Stablecoin regulation has been a hot topic since Facebook launched its Libra project last year and the ECB report lays out the potential risks associated with having unregulated currencies. One such risk they outline is the potential for coins to lose their value peg, which could pose a threat to global financial stability. Despite these risks, the report highlights the benefits of GSCs such as speed and simplicity and discusses the importance of creating a robust regulatory framework that addresses GSC risks without stifling innovation.
 
A bill filed in the House of Representatives proposes the use of a blockchain network in tracking the Strategic National Stockpile (SNS). The use of the SNS has been a great topic of debate during the COVID-19 pandemic with the failure to equitably and fairly distribute supplies to front-line workers. The bill seeks to create a “National Emergency Biodefense Network” that aims to more accurately track all national stockpiles, including inventory and movement, all on a private blockchain. The bill sets aside $50m for the next two years to establish this network, signaling that blockchain solutions are at the forefront of lawmakers’ minds.
 
Last week the Libra Association named Stuart Levey as its first CEO with a start date of “later this summer”. Levey was previously the Chief Legal Officer of HSBC, a role which he took up during a time when the bank was fined $2b by the DOJ for failing to stop the transmission of funds from drug-running. Prior to HSBC, Levey worked under the Bush and Obama administrations as the Under Secretary of the Treasury for Terrorism and Financial Intelligence. Both roles position Levey well to take on Libra’s challenges especially as global regulators have raised concerns over money laundering while also greatly increasing the chances of a successful launch for Libra.
 
Mastercard, Alipay, and supply-chain blockchain platform VeChain are backing the new APAC Provenance Council, a consortium focused on supply chain tracking through the APAC region. The consortium, which has already received millions in funding, is working to track and authenticate the supply chains of food, produce and wine, specifically those exported from Australia to China. AliPay and Mastercard will handle the trade financing aspect, allowing instant payments as a novel feature of the solution, and VeChain will handle the tracking of products on its supply chain blockchain.
 
The Option Clearing Corporation (OCC), which clears equity derivatives for the CBOE, Nasdaq and NYSE, is moving its stock lending infrastructure to the Axoni blockchain. The Axoni blockchain has set up a platform for the OCC to manage its $72b in loaned out equities. The platform will allow participants anywhere to see and access deal terms and data instead of individual messaging counterparties to receive that data. The use of blockchain technologies such as Axoni is estimated to save the industry billions, specifically in areas such as auditing. The platform is slated to be ready for clients in early 2022.
 
 

And That’s Our Two Satoshis! 
Thanks for reading everyone!   
Questions or comments, just let us know.  

The Arca Portfolio Management Team
Jeff Dorman, CFA - Chief Investment Officer
Katie Talati - Head of Research
Hassan Bassiri, CFA - PM / Analyst
Sasha Fleyshman -  Trader  
Wes Hansen -  Head of Trading & Operations
  
To learn more or talk to us about investing in digital assets and cryptocurrency
call us now at (424) 289-8068.
 

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