"That’s Our Two Satoshis"  — The Financial System is Broken, But There is a Solution

Jeff Dorman, CFA
Jun 1, 2020
Thats Our 2 Satoshis LogoWhat happened this week in the Crypto markets?
Week-over-Week Price Changes (as of Sunday, 5/31/20)
Bloomberg Galaxy Crypto Index
S&P 500
Gold (XAU)
Oil (Brent)
Source: TradingView, CNBC, Bloomberg
The System is Broken, and People are Angry
Risk assets performed remarkably well across the board last week. The S&P 500 gained over 3%, but that gain seemed small compared to the returns of airline, travel, leisure and bank stocks, all of which significantly outperformed as a “risk-on / recovery imminent” attitude unfolded.  Similarly, Bitcoin climbed 8% week-over-week, but that too seemed pedestrian compared to 15-50% weekly returns from Ethereum and a select few other digital assets, many of which had “mainnet” announcements (equivalent to product launches or upgrades), which fueled event-driven buying.
Yet in light of what transpired over the weekend, all of this seems rather trivial.
The system is so broken.  The scariest pandemic in 100 years just blew a huge 4th quarter lead to racism, which is playing the second game of a double-header following a match between record unemployment and decades of wealth inequality. There may be no fix other than supporting a completely new system, both financially and politically.   We try very hard to be pragmatic, especially in an era of extremes, yet it certainly feels like investors and individuals should begin to feel an obligation to help build the new path forward, if they haven’t already.
Trust is Completely Gone
Just about everything in society is built on some level of trust:  trust in humanity, trust in the law, trust in corporations, trust in governments, and trust in a better future.  Each of these is being broken down simultaneously.  While we may forget all about this in a few months or years, as has been the norm, it’s also possible that corporate America and governments may begin to finally give way to a people's republic and a trustless society. 
A recent Deloitte study on Millennials shows just how precipitous these declines in trust can be.

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Source: Deloitte
The lack of trust manifests further into demographic wars… black versus white, citizens versus police, rich versus poor, and even young versus old.  We highlighted the “OK Boomer” meme six months ago, and why that is not going to go away is because demographic change, wealth inequality, and access to ubiquitous information are the three most important shifts affecting our world.  But we never envisioned it coming to a head so quickly.  One look at this graph on depression rates by age shows just how uneasy the world has become, as older generations generally ride into the sunset.
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Source: LinkedIn
This lack of trust is everywhere. 
On top of this, citizens across the world who are at home suffering with unemployment, depression and mounting bills are getting a real-time glimpse of the other side every day as financial advisors, wealth managers, asset managers, CEOs and CNBC reporters broadcast live from their posh and ultra-comfortable living rooms.  This is truly a perfect storm of mistrust and hate.
This All Leads to Change
So how exactly are we going to rebuild trust across society and financial markets?   It may be too late, as a generation of investors and citizens have lost faith in a system that is broken and has failed them.
Which leads us (finally) back to digital assets.  Perhaps the only solution IS a new system altogether.  While this doesn’t solve for what caused the lack of trust highlighted above, it may help prevent it in the future.
Bitcoin has been heralded as “the people's resistance”.  Many of us have heard stories about our grandparents fleeing Nazi Germany or Ireland or Caribbean islands as very wealthy citizens, and coming to America with nothing, willing to give up everything for a better life.   For many, Bitcoin may now represents that better future life, as far-fetched as this may seem to those who haven’t been bitten by the bug yet.

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Beyond just Bitcoin, the recently issued Edelman Trust Barometer highlights just how fast trust in traditional financial services and governments is declining, while trust in blockchain and digital assets is on the rise (most notably in Asia, with the US currently a big laggard).  The "TrustNet" revolution, as some are calling it, builds upon the internet (mid-90s), and mobilenet (2010s), where we take global coordination and seamless communication further to build a new infrastructure that is decentralized and does not rely on banks and brokers and governments and middlemen.
Just because the US doesn't see it as clearly as other nations yet doesn't mean it isn't happening.  Investors in the US need to see this trend, and recognize where it leads --- trustless, decentralized, digital assets are one investable theme to not only help increase wealth, but to help advance society.
This shift to digital is coming whether we like it or not.  Satya Nadella, CEO of Microsoft, recently said that the company has experienced two years of digital transformation in two months.  Gary Cohn, former director of the US National Economic Council, wrote that the Coronavirus is speeding up the disappearance of cash.  Coinbase, Twitter, Facebook and other leaders in technology have announced “remote first” companies.  Restaurateurs are discussing ways to fit into the new norm of fewer customers. Even the NFL draft, once a wild and celebrated in-person event, was heralded a huge success as people recognized that staying at home is just better. 
From the Future of Finance
We will not be stuck at home forever. But the limitations of fully physical businesses in times of quarantine have been laid bare. If you are a financial institution IT department using remote desktop software, this shutdown has been brutal for you. If you are a compliance officer that argued against social media and chat tools like Slack or Zoom, this shutdown has proven you wrong.  To that end, digital workspaces will continue to blossom. It is hard to imagine reversing the trend of remote productivity once the quarantine ends. People are learning to gather in digital spaces and create a real sense of community.  More generally, embedded finance will benefit from our increasing digital upskilling. Instead of going to the branch or the office to buy financial product, we will have access to it at the point of sale. This will harden digital assets into things that can be anchored to economic systems and markets. 
I just stumbled upon an old interview I did with EisnerAmper from April 2019, where I was asked "What keeps you up at night?".  Sadly, this may be incredibly accurate.

The lines between night/day and weekday/weekend are perpetually blurred by the fact that digital assets never sleep.  But when I do sleep, my biggest fear is that those of us who see the potential of digital assets end up being too right.  Inflation, unsustainable government and private debt levels, fractional banking, and global trade wars are all very good reasons to own digital assets in your portfolio, at a minimum as a hedge to complete fiat collapse.   And even though I want to be right, I don't really want to be right at the expense of a complete collapse of the banking system.  But this is unfortunately in play, especially now that modern monetary theory (“MMT”) is creeping into the narrative.  While digital assets may seem like a toy right now, they may become the only asset of value left. 

Oh, Wall Street
Last week we highlighted that “Goldman is Entering the Bitcoin Narrative”.  Well, they entered, but the digital asset community quickly helped them exit.  The analysis refuting Bitcoin as an investment, and digital assets as an asset class, was so outdated and misinformed that it makes it hard to even come up with a worthwhile rebuttal.  Perhaps the simplest rebuttal will be in a few years’ time when they join this infamous list of Bitcoin naysayer quotes. It’s not as if Goldman has never been wrong before.

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Coincidentally, this same week, JP Morgan released a new report saying that Bitcoin was fairly valued, trading at its intrinsic value (based on cost of production), and also announced that their banking arm would serve two of the largest digital asset companies, Coinbase and Gemini.  These actions cannot be understated.  Regardless of the analysis, a large investment bank simply trying to value Bitcoin shows that it can be modeled quantifiably, and the fact that they are banking companies in the industry adds credibility to other financial institutions in the same way that Paul Tudor Jones recently gave other hedge funds the greenlight to buy Bitcoin.
Maybe the future is bright after all.

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Notable Movers and Shakers
If one were to split this week down the middle, the first half would be defined by Bitcoin swiftly moving up and leaving the market behind, with the second half being defined by alternative assets playing catchup while Bitcoin took the back seat. At the end of it all, Bitcoin dominance was rather muted (-30bps), but there were some significant outperformers: 
  • Theta (THETA) has been beating the drum for the past couple of weeks, coming to a crescendo on Wednesday as their Mainnet 2.0 officially went live. Historically, “buy the rumor, sell the news” tends to happen around a Mainnet type event: Theta tried to stymie this by simultaneously announcing Google Cloud as an Enterprise Validator Node as well as a Launch Partner. As of Wednesday, the token peaked at 70% gains; nonetheless, the token sold off immediately after and finished the week down 28%.
  • Maker (MKR) joins the long list of tokens that are the direct beneficiary of a Coinbase Pro listing, which was announced on Friday. Maker has previously been available to send/receive in the EU, United Kingdom, Australia, Canada, and Singapore, which makes the listing to Coinbase Pro (for US users, with the exception of New York) particularly interesting. The market reacted favorably to the news, with the token finishing the week up 41%.
  • Cardano (ADA) had its first breakout since March of 2019 this week, with founder Charles Hoskinson releasing a roadmap for the long awaited Shelley upgrade. The news spread fast, and the token moved just as quick - ADA finished the week up 44%.
What We’re Reading this Week
According to analysts at JP Morgan, the US is the country with the most to lose if digital currencies rise to prominence. Despite recent studies that have shown most central banks are only exploring digital currencies, not actively looking to issue them, JP Morgan warns that digital currencies could threaten the US Dollar’s hegemony as the world’s reserve currency. Although the US Dollar will likely be unaffected as the global reserve currency for use in international trade, “more fragile” aspects of the system that revolve around global settlement and the use of the SWIFT messaging system are at greater risk should digital currencies catch on.
Last week, Goldman Sachs held a client call covering “US Economic Outlook & Implications of Current Policies for Inflation, Gold and Bitcoin”, the presentation of which was leaked to the public. The presentation notably writes off Bitcoin as “not suitable” for its clients, is used primarily for illicit activity and stated that digital assets is not an asset class at all, prompting many prominent crypto figures to fire back on Twitter. Goldman Sachs now officially joins Warren Buffet and Jamie Dimon (both of whom have publicly rebuked Bitcoin) in resisting the slow infiltration of digital assets into the mainstream.
Crypto prime brokerage is often stated as the missing infrastructure piece necessary for institutional adoption of digital assets. Last week, two prominent companies in digital assets made strides to begin shifting their business to offering these services. First, leading US exchange, Coinbase, announced it acquired Tagomi, a prime-brokerage trading firm. Although the news was leaked last year, the sale has now officially gone through and Coinbase will begin to integrate the platform and team into their business. Second, crypto custodian BitGo announced it was launching BitGo Prime to offer prime brokerage services with a set of full integrated products including a lending business and tax accounting offering.
Samsung’s Blockchain Wallet will now support US users on Gemini’s digital asset exchange. The wallet, which is designed to be a cold storage device used on newer Samsung Galaxy models, will allow users to connect their Gemini account directly to their cold wallet so they can transfer assets in and out and view their Gemini balances. The South Korean smartphone maker has long been crypto-friendly and this latest integration only shows its willingness to push adoption of digital assets forward.

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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