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“That’s Our Two Satoshis” - The JPM Coin Matters, and Doesn’t

Jeff Dorman, CFA
Feb 18, 2019

What happened this week in the Crypto markets?

Are Equity or Crypto markets more manipulated?

This is a crypto recap. Not an equities recap.
 
But digital assets were born as a direct result of the problems caused by too much government debt, central bank shenanigans, and inflationary worries — all of which directly influence the equity markets too. So it’s impossible not to at least mention that the equity markets are once again showing red flags, which strengthens the argument for diversification via uncorrelated digital assets.

Case in point: Last week US equity markets rallied another 3%, pushing YTD returns north of 10% (Reminder: it’s only February). It’s safe to say that equities have overcorrected a bit, considering earnings estimates are coming down, GDP will absolutely be lower as a result of the trade wars and government shutdown, and economic fundamentals are deteriorating quickly.

Is this sustainable? Maybe. But a quick trip down Greek memory lane reminds us that there is no end game when unsustainable debt levels are perpetually rolled over without deleveraging. And as Cantor Fitzgerald points out, the tiny amount of deleveraging the US and European governments have attempted are already creating massive ripple effects:

  • Global economic fundamentals continue to deteriorate, with Eurozone economic fundamentals deteriorating at an accelerating pace (German GDP printing at 0.0%., barely avoiding a technical recession)
  • Meanwhile, U.S. lending data continues to show a tightening.
  • US Household Debt and Credit report published by the New York Fed showed that credit inquiries, a sign of consumer demand, slipped in 2H18 to the lowest level on record.
  • Credit card account closings (and other accounts) jumped to their highest level since 2010. Flows into serious delinquency for credit cards rose to 5%, up from 4.8% in Q3.
  • Default rates among auto loans have risen to a seven-year high in Q4 of 2018. Auto loan 90-day delinquencies also rose to 4.5% in the fourth quarter, the highest level since 2012, despite lenders moving towards borrowers with better FICO scores and credit backgrounds.
  • Meanwhile, the crypto markets are essentially flat YTD, following a third straight week of positive price performance last week which has offset much of the January declines. If Bitcoin holds at or near these levels, Bitcoin will post its first positive month since July 2018. Unlike the equity market, there are a lot of positive headwinds affecting Bitcoin and the rest of crypto right now, most notably institutional adoption (US Pension Fund investments, ICE, Fidelity, Nasdaq indexes, and now JP Morgan).

JPM Coin = Adoption

The finance world was abuzz last week over JP Morgan’s announced cryptocurrency, JPM coin, which will primarily be used for large intra-bank transfers. The token is not a retail product, but it is designed to assist in the movement of wholesale clients’ assets across JP Morgan’s internal ledger.
First, the fact that it’s even news that JP Morgan now has the ability to transfer money between its own branches instantly and cost-free (versus the existing method of T+3 settles and high fees) should sound ridiculous in an age when you can video call someone 10,000 miles away for free with perfect reception and send documents in seconds across the globe. The reality is, the JPM Coin was a long time coming… the ability to transfer assets at no cost with the same speed as digital communication is not a new idea.
 
But there were a lot of positive and negative reactions to this rollout, as Nathaniel Whitmore summed up succinctly. We take the view that this is 100% positive for a very simple reason: Adoption 

While JPM Coin is a private, closed, permissioned blockchain versus that of cryptocurrencies which are public, open and permissionless, this is a step in the right direction. Private intranets now make little sense compared to the internet, but in the early days, intranets were incredibly valuable as a means for learning how to search and navigate online, and communicate with a small subset of trusted counterparties. The JPM Coin will be the intranet to Bitcoin’s internet, and that isn’t a bad thing.

The fact is it is incredibly difficult to get started using digital assets — setting up wallets, learning custody, understanding block times, and overcoming the initial panic after sending your money into the blockchain abyss, etc. But once you get set up, it’s actually quite easy to send and receive, spend and use tokens. More people and companies need to be onboarded in order to get over this initial hump, and the JPM Coin may prove to be the best onramp yet even if the coin itself turns out to be largely useless over time. Adoption matters.Once you learn how to use an intranet, the internet suddenly isn’t so scary.

Millions of people and thousands of companies are about to get a lesson from JP Morgan on how to ultimately never need JP Morgan in the future.

Notable Movers and Shakers

Crypto is becoming interesting again, with BTC up 8% for the month, which would be the first positive month since July 2018 if it holds. Alt-coins are outperforming BTC slightly, mostly due to short-term catalysts and the strength of Ethereum (ETH).

  • The price of Ripple (XRP) was flat last week despite the announcement of JP Morgan’s new digital token, JPM Coin. Many have speculated that JPM Coin will directly compete with Ripple’s products. Ripple CEO, Brad Garlinghouse, was quick to respond, rebuking the effectiveness of such systems, and urging for real cryptocurrency systems.
  • Wax (WAX) token rose 64% after Blockonomi claimed that WAX’s block explorer “blazes trails for widespread blockchain use”. As WAX facilitates the trading of non-fungible tokens (NFTs), the user experience of their block explorer needs to be vastly different than that of a currency blockchain such as Bitcoin.
  • MakerDAO (MKR) gained 18% last week after publishing statistics on the usage of Dai, MakerDAO’s stable token. Creation and usage of Dai has reportedly increased with the number of unique addresses on the platform rising as much as 20% monthly.
  • NEO (NEO) and Ethereum (ETH) saw gains of 8% and 14% respectivelylast week ahead of their separate conferences held over the weeknd. NEO laid out important updates around their 2019 roadmap and ETH showcased new projects including a partnership with UNICEF Ventures.
  • Cloakcoin (CLOAK), Modum (MOD), SALT Lending (SALT), Substratum (SUB), and Wings (WINGS) fell anywhere between 14%and 48% after Binance announced it would delist them from its exchange platform. Binance cited multiple factors that led to delisting including “commitment of team to project” and “evidence of unethical / fraudulent conduct”. The industry needs more self-cleansing… this is a step in the right direction.
What We’re Reading this Week

Pension Funds Dip Their Toes In
Two public pensions, Fairfax County, Virginia’s Police Officer’s Retirement System and Employees’ Retirement System, have agreed to anchor Morgan Creek Digital’s $40m venture fund. The fund will mostly invest in the equity of digital asset companies. Although not a direct investment in cryptocurrencies, we see this as the start of many institutional investors moving assets into the crypto space, and applaud the Morgan Creek team for spending countless hours educating endowments and pensions.

The Dangers of Centralized Banking
Major protests broke out in Madrid this weekend after BBVA, the second largest bank in Spain, froze thousands of customer accounts on suspicions of fraud and money laundering. Anthony Pompliano of Morgan Creek Digital, weighed in on the situation pointing out that “The legacy financial institutions are doing more to help the adoption of Bitcoin than they realize.”

Crypto Mom and The SEC
SEC Commissioner, Hester Peirce, a staunch proponent of crypto (nicknamed “crypto mom”) made comments last week explaining that the delay in regulatory guidance may actually be positive for digital assets. Peirce explains the SEC is walking a tight line, trying to not overregulate the industry but also protect investors as this ecosystem develops.

$3M For Listing Fees
Jonathon “JZ” Zeppettini, who spearheads listings for the Decred token, shared in an interview the headache and costs of gaining exchange listings for cryptocurrencies. One exchange requested a listing fee of $3m (for comparison, NYSE and Nasdaq charge $500,000 and $150,000 respectively).

Real Adoption in Argentina
Last week Argentina, one of the many Latin American countries to see widespread adoption of cryptocurrencies, took things a step further: the state’s public transit card, SUBE, now accepts Bitcoin as a payment method. Many countries in Latin America have seen extreme inflation and currency devaluation, and as a result have turned to cryptocurrencies like BTC to pay for everyday items and services.

Building Confidence, Not DApps
In this presentation, MyCrypto’s CEO Taylor Monahan, explains how the nature of decentralized applications (dapps) are fundamentally different from existing consumer applications today. Dapps interact directly with the blockchain and therefore lack “undo” buttons and centralized authorities. Coupled with the monetary value of the items that dapps handle, consumers do not have confidence in using these applications. Such problems require products managers, designers, and engineers to reimagine how to build dapps to suit the general public.

I’d like Two Pepperoni Pizzas Extra Cheese
Remember that time someone paid 10,000 BTC for two pizzas? Well now consumers can use the Lightning Network to order Domino’s pizza and pay with Bitcoin using, The Lightning Pizza app. Lightning Network is the off chain channel that allows individuals to transact in Bitcoin at smaller amounts with fees of less than one cent and ordering food is a perfect use case. We thank the team at Fold, who created the app, as apps like these are necessary to bridge cryptocurrency use to the real world.
Arca in the Press & on the Streets
  • Arca’s Chief Legal Officer, Phil Liu, discusses Abra’s crypto collateralized contracts and the ongoing QuadrigaCX saga in last week’s edition of “Reading the Merkle Leaves”.
  • In “[Block]chain of Events”, Katie Talati and Hassan Bassiri of Arca’s Research Team explored what did and didn’t work in event-driven crypto investing. January’s theme was centered on transparency and how that feature should not just apply to the technology, but also the teams that build it.
  • Arca CEO, Rayne Steinberg shared his thoughts on gold, money and Bitcoin and how JP Morgan would view the cryptoasset today.
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 — Portfolio Manager
Katie Talati — Director of Research
Hassan Bassiri , CFA — Junior PM / Analyst

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