The Breakdown - Goldman Sachs Can No Longer Dismiss Bitcoin

Episode Date: January 20, 2021

Today on the Brief:  Gary Gensler is officially Biden’s pick for SEC chairman Investors are betting against the U.S. dollar Grayscale has best day ever with $700 million in investment Ethereum reaches new all-time high  Our main discussion: Goldman Sachs reportedly coming to crypto.  Over the last year, many traditional financial institutions have recanted previous skepticism to join the bitcoin space. For most of that time, Goldman Sachs has been a noticeable holdout, saying as recently as last May that bitcoin and cryptocurrency weren’t an asset class.  According to new reports from a Goldman insider, all that is finally changing as the bank prepares a crypto custody strategy. The change in attitude is inspired at least in part by the recent rulings from the Office of the Comptroller of the Currency. -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com

Just after Paul Tudor Jones made his great monetary inflation thesis, Goldman released a slide deck in advance of an investor call that put it bluntly. Cryptocurrencies including Bitcoin are not an asset class. The only reason this wealth management division would take the time to discuss it is if a more than anomalous number of their clients had started asking about it. Goldman Sachs lost them a ton of money. Bitcoin at that time was at 9,000, about 25% of 1,000. where it is today.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io and produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, January 19th, and today we are talking about the latest institution to come crawling back to crypto. and it's a good one, Goldman Sachs. First up, however, let's do the brief. First on the brief today, a quick set of follow-up,

so first we're talking about Gary Gensler. On Monday, President-elect Biden confirmed his selection of Gary Gensler as the next SEC chairman. I did a whole show about this last week, but the quick hits are this. Gensler was in the Treasury during the Clinton administration. He had a stint at Goldman Sachs. He was the head of the CFTC during Obama

dealing with the cleanup post-great financial crisis. Interestingly, there had been a concern at the time that he wouldn't be tough enough on former banking colleagues, but at least when it comes to Wall Street now, they seem nervous. The Wall Street Journal titled their article about Gensler, An Old Foe of Banks could be Wall Street's new top cop. That same article argued that he could be the most aggressive regulator in two decades and said things like he steamrolled opposition to right rules from scratch

governing derivatives during the Obama administration. Now, when it comes to what he's likely to be tough on, a lot of people expect it has to do with ESG environmental type things. They effectively anticipate more focus on the way that companies operate with regard to those issues. For us, crypto folks, as I mentioned last time, at least we have someone who understands the industry. Gensler has given a course at MIT around Bitcoin blockchain and the financial applications thereof, he's been public in his discussions of Bitcoin, Ethereum,

XRP. He said that Ethereum and XRP were likely unregistered security sales, but that at least Ethereum has become much more decentralized since then. Ultimately, we will still just have to wait and see, but it's going to be interesting, no matter what. In other regulatory news, Biden announced that Rohit Chopra would be the director of the Consumer Financial Protection Bureau. He is currently an FTC commissioner, and in 2019, he said this about Libra. The vague and scant details on the tech platform's proposed Shadow Global Central Bank have sounded international alarm bells, particularly in light of Facebook's ongoing scandals and reputation for abuse. Regardless of Libra's ultimate fate, the proposal's emergence underscores the appetite for real-time payments and the urgency of

intervention by the Federal Reserve. Two quick things I want to pull out there. One, proposed shadow global central bank. I think that way of explaining Libra actually shows some insight on the potential implications of that project and of sort of private stable coins in general. But the second part is that's interesting just how much he thinks this is an argument for the Federal Reserve to get into some sort of CBDC style or real-time payments game. Again, all really interesting pieces of evidence about what the Biden administration's approach to digital assets, digital currency might be. Next up on the brief today, investors are betting against the dollar.

A Bloomberg article was published yesterday called Dollar Shorts Mount before Yellen outlines market-based policy. Betts against Greenback rise despite latest rally against peers. Basically, the idea here is that the new Treasury Secretary Janet Yellen is expected to endorse a market-driven exchange rate, as reported by the Wall Street Journal. That means the authorities won't be fighting against a softer dollar. The net net is that short dollar bets are the highest since 2018. Rodrigo Ketril, a currency strategist at the National Australia Bank, said,

We interpret Yellen's view to mean the U.S. government is unlikely to stand in the way of an ongoing market-driven dollar depreciation. There's no challenge to the current dollar downtrend. A Goldman analyst added, We continue to believe that the combination of high dollar valuations, low nominal and real rates, and a rapid recovery in the global economy will weigh on the greenback through 2021. Third on the brief today, Gray Scales record day. Any of you who are worried that the recent dip, i.e. Bitcoin to the mid-30,000s, was deterring new investors, never fear. On January 15th, Grayscale had its biggest asset raised day ever,

raising more than $700 million in a single day. In Q4 of last year, they raised $3.3 billion all quarter, which was still huge, but my goodness, $700 million in a single day. Overall, Grayscale has 27.1 billion under management after entering 2020 with 2 billion under management. A senior ETF analyst at Bloomberg compared it to ARC saying, the similarities are pretty amazing. I think both hung in relative oblivion for three to four years, had like $2 billion 12 months ago, and then boom, 10x increase. Both defy trends. Arc with stock picking and grayscale with very high fees and 20 plus percent premiums. Finally, a quick bonus brief. I started prepping this episode last night, but had to make one quick note that after much waiting amongst the community,

Ethereum has crossed its previous exchange all-time high, or at least community agreed upon all-time high of 1420. It's had a 12% rally today and 92% overall this year. The question is, will that attract institutional eyes? And for that question, we'll get a little bit more into that later in the show. Many investors want to be a part of the next bull run. Others seek to build their dream home, finally launch that startup or fund their education. Try Nexos instant crypto credit lines and borrow against any major cryptocurrency with no minimum or maximum withdrawal amounts, no fees whatsoever, no credit checks, and flexible repayment. Not to mention the APR starts at just 5.9%. Stay on top of your investment game with nexo.io. And remember, it's your crypto,

your credit, your choice. Get started at nexo.io. With that, let's move to our main discussion, Goldman coming to crypto. By way of background, the meta-narrative of the last year has, of course, been the institutional infiltration of the Bitcoin space. This has been in the context of hedge funders. Paul Tudor Jones, with his great monetary inflation thesis in May, Stanley Druckenmiller a few months later, saying that he anticipated potentially seeing up to 5%, 10% inflation and thought that Bitcoin was more appealing as a hedge than he had previously given it credit for. Of course, you have a ton of high net worth individuals getting exposure to the space through instruments like grayscale, which

as we just mentioned, is just going bananas. Then there's the corporate treasury aspect of institutional investors, with micro-strategy blowing the gates off, square following, potentially others behind the scenes doing something similar. Insurance general funds, one of the most historically conservative investors in the world, getting into the game in the form of mass. mutual with their $100 million buy via Nidig. And as I've said before, I think this is likely just the tip of the iceberg. In the process of all these big institutional players coming in, many former statements from the big firms, big investment banks that serve those types of clients have come to look, well, wrong in the context of what we know now. One of the most stalwart institutions

when it comes to their disinterest in Bitcoin and crypto has been Goldman Sachs. Take, for example, May of last year. Just after Paul Tudor Jones made his great monetary inflation thesis, Goldman released a slide deck in advance of an investor call that put it bluntly. Cryptocurrencies including Bitcoin are not an asset class. This was their wealth management group that made the pronouncement, and the context for the deck was examining the impact of COVID-19 on the economy. They made a slew of silly arguments, many of which went back to very old, tired, trodden critiques of Bitcoin.

But focusing on things like claiming that it doesn't generate cash flow or earnings, they said, quote, we believe that a security whose appreciation is primarily dependent on whether someone else is willing to pay a higher price for it is not a suitable investment for our clients. Like I said, all in all, it felt like years old critiques. The same old thing hastily slapped together. I mean, they even use Bitcoin Cash and Bitcoin SV as undermining Bitcoin's scarcity, even though, in fact, the failure of those networks and the comparative strengthening of Bitcoin's core network effect have been part of what has gotten many people who were watching during the 2017-2018 period offline and into Bitcoin.

However, at the time, when I talked about it on this show, I, along with many others, speculated that the only reason this wealth management division would take the time to discuss it is if a more than anomalous number of their clients had started asking about it. Based on what we've seen subsequently, it was clear that their clients were right to ask, and it is also clear that Goldman Sachs lost them a ton of money. Bitcoin at that time was at 9,000, about 25% of where it is today. Meanwhile, their peers and competitors, such as Fidelity and J.P. Morgan, weren't as behind the eight ball, with Fidelity especially showing a significant foresight getting into the Bitcoin space. All the way up until December of last year, even as things were starting to heat up,

all the public statements that you could find from Goldman Sachs stuck to their guns of disinterest in Bitcoin. On December 18th, a research note said, quote, while there is some substitution occurring, we do not see Bitcoin's rising popularity as an existential threat to gold status as the currency of last resort. They called it an excessively risky asset. They accused it of being, as they have so many times before, an excessively risky asset. Well, fast forward, and it looks like someone is trying to play catch-up now. We got the first nuggets of a tone change at the beginning of last week. On January 12th, their head of commodities research, Jeff Curry, said that more institutional money would need to flow in for volatility to decrease. He said, quote, I think the market is

beginning to become more mature. He also said that he believed that roughly 1% of the more than 600 billion invested in Bitcoin was institutional money. And while this doesn't sound like a glowing endorsement in the context of Goldman Sach's previous statements, it was basically the least mean thing the bank has ever said about the space. But then at the very end of the same week last Friday, reports broke that Goldman would be entering the crypto markets with a custody play soon. The report came from a source inside the bank. This source said that they had issued an RFI, a request for information to explore digital asset custody that had been circulated to at least one well-known crypto-custody player. Regarding timing, the source said the custody plans would be

quote, evidence soon. And interestingly, the source also said that the initiative was part of a broad digital strategy citing stablecoins as well that comes in relation to the recent news from the Office of the Comptroller of the currency. You'll remember a couple weeks ago, on his way out of the OCC, then acting comptroller Brian Brooks issued new guidance, saying that banks could interact with stable coins and public blockchains like existing settlement and payments infrastructure, effectively giving blockchains the same status as something like Swift or ACH. I argued at the time that this could be transformational in terms of how banks play in this space and it seems to already be having an impact. This also dovetails with news that Anchorage got the first

national digital bank approval from the OCC, and their CEO said they are talking with all these guys referring to JPM, Goldman, and City. Obviously, this is only one source inside the bank, but it seems like it's a real thing. And I'll obviously be paying a lot of attention to any more nuggets of information we get before we have a formal announcement. This is not the only institutional discussion I've seen over the last few days, so I wanted to quickly go through a few more of those. Ruffer is the firm in the UK, which last year put 2.7% of its assets under management or 550 million British pounds into Bitcoin. They published a report reviewing their year in December and said that they thought they were relatively early, calling it, quote, the foothills of a long trend of institutional adoption and financialization. They said, as we move through the process of normalization, regulation, and institutionalization, the compression of this premium can have a dramatic effect on the price.

If we are wrong, Bitcoin will return to the shadows and we will lose money. This explains why we have kept the position size small but meaningful. 550 million British pounds does seem to me to be a pretty meaningful size allocation. More in the institutional space, little nuggets. Robbie Gutman of Nidig was on Frank Chaparro's podcast for the block. And when asked about which assets are in the discussion, he said 100 out of 100 of the last conversations I've had, with investors seriously looking to allocate, let's say over 50 million dollars, 100% of these conversations have been about Bitcoin and zero percent of them have

been about any other crypto asset. Lin Alden also recently wrote a paper about why she sees Ethereum is still categorically different than Bitcoin as well when it comes to those institutional allocations. And I think the important part about that is that it's not a critique per se, but just a different categorization, arguing effectively that Ethereum hasn't cleared certain hurdles to get into the institutional mindset in the same way that Bitcoin. coin has. In another dimension of this space, the MetLife Investment Manager, a massive institutional investor founded in 1868 with 651 billion assets under management, discussed central bank digital currencies in a recent note. They said they are a logical progression of money and unlikely to be

a passing fad. Those are their words. They also said that they didn't believe that a true CBDC launch among Western countries was likely to happen anytime soon. We've discussed this a lot and we'll keep discussing them, but I think when it comes to CBDCs, not only could they potentially bring more infrastructure and attention to digital money and digital assets, they really make a hell of a raise on debt for Bitcoin, as they are just about the most controllable money ever created. Anyway, 2021, just like 2020 is off to a lot of interesting intrigue when it comes to the institutionalization and institutional investment into Bitcoin in the crypto asset space. As I said, the Goldman Sachs part remains a rumor a report for now, but certainly given how many of their peers and competitors have moved

into the space, it wouldn't surprise me at all for us to get confirmation of this in the months or even weeks to come. Anyways, guys, I hope your week is off to a great start. I appreciate you listening. Until tomorrow, be safe and take care of each other. Peace.