The Breakdown - JPMorgan: ‘Bitcoin Shows Some Merit as a Store of Value’

Starting point is 00:00:00 Interestingly, I think that they're noting that Coinbase is now, being a public company, subject to other types of considerations and is not necessarily just a proxy for the crypto industry. They point to skepticism of a specific corporate decision to invest more heavily, as the reason the price underperformed versus any larger skepticism of the crypto industry. And I may be belaboring the point here a little bit, but it just feels so different than past types of reports on the industry. It feels in short like the beginning of an ongoing thing where this is just, just a part of the world that they now have to understand.

Starting point is 00:00:34 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 nexus.io, Arculus, and FTX, and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, August 6th, and today we are talking about J.P. Morgan's latest comments on Bitcoin. You might say they were damning with faint praise, but really I think there's something interesting here. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dig deeper into the conversation where we discuss things like what J.P Morgan has to say about Bitcoin, come,

Starting point is 00:01:21 join us on the Breakers Discord. You can find a link in the show notes or go to bit.org, that's L.Y slash breakdown pod. Also, a disclosure as always, in addition to them being a sponsor of the show, I also work with FTX. And finally, if you haven't bought tickets yet, I highly suggest you check out CoinDesks Consensus 2020, what they're calling the festival for the decentralized world, taking place between June 9th and June 12th in Austin, Texas. This is the first time the conference has been in Austin, which I think is really, really cool. One of the things that Consensus tries to do that's a little bit different from other conferences is it's really focused on getting the full breadth of the crypto ecosystem.

Starting point is 00:02:05 That means Bitcoin, blockchain, Web3, Metaverse, you name it, and what's more the content is for people who are new to the space, people who are investors, builders, and really any type of person who has any interaction with the crypto industry at all. The speakers are, of course, just as broad. If you listen regularly to this show, for example, you know I always want to hear what Kathy Wood has to say. If you're interested in coming to Consensus, use the code breakdown at coindesk.com slash consensus 2022 to get 15% off your pass. It should be a great time. All right, but with that, let's move to our main topic. J.P. Morgan has had a long and winding relationship with Bitcoin and crypto.

Starting point is 00:02:50 You oldies like me will remember when CEO Jamie Diamond threatened to fire people over it in 2017. you'll also remember the next year when they started to get into the enterprise blockchain side of things. And then over the course of the last couple years, where as like pretty much all institutions and banks in America, they have slowly but surely found their way deeper and deeper into the crypto space, having to offer products for their clients and discussing the industry a lot more. Now credit to Jamie Diamond himself for sticking to his guns, he has nary said a nice word about Bitcoin.

Starting point is 00:03:25 But sometimes you got to watch what they do, not what they say, and when it comes to J.P. Morgan, that's certainly been the case. The latest development is that the North American Equity Research Group has launched not one but two monthly newsletters. One is the cryptocurrency markets monthly, and one is Bitcoin mining monthly. I think they create a really interesting opportunity, not just to see a top-tier research team discussing trends that they see in this space, but also in terms of getting a pulse monthly for how traditional market participants are watching Bitcoin and Crypto as a whole. Let's discuss their market's newsletter first, and here are their four key bullets. First, sentiment rebounds in March and the case for crypto as a store of value

Starting point is 00:04:10 improves. There are two key points in this bullet. The first is that although we're still far away from November highs, crypto has been having moments of outperformance relative to traditional markets, including equities. Second, on top of that, Bitcoin has been outperforming other cryptocurrencies, which they say, quote, adds some credibility to Bitcoin as a store of value during periods of market volatility. We're going to talk about that more in just a minute when we come to their discussion of gold. Second, high-level bullet growth of the crypto ecosystem. They notice, as we have on the show, the significant growth of NFTs as a part of the industry in the first quarter of 2022. However, they also mentioned Defi, which is going to be an interesting theme throughout this newsletter.

Starting point is 00:04:55 Bullet 3, trading activity falls despite higher volatility. They note that trading volume in quarter 1 of 2022 was down 33% from quarter 4 of 21, but still up 70% year over year. Again, reinforcing Bitcoin's role in these times of volatility, quote, the greatest volume activity continues to be in Bitcoin, where volumes appear to have increased meaningfully in Q1. Finally, speaking of Bitcoin, they look at the fundamentals of the network, saying network hash rate up in March. The network hash rate, they say, a proxy for industry competition, continues to rise as additional mining equipment is deployed. While increasing hash rates should drive minor profitability down, they say, quote, most of the publicly traded miners are reporting record

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Starting point is 00:07:23 Download the FTCX app today and use referral code Breakdown to support the show. So let's talk about some of the other interesting details from in here. And one that I really want to highlight is the overall vibe of this thing. This does not read like an equities research firm trying to understand and do their one-time report about the crypto industry. Instead, what it feels like is a crypto industry report for people who want the regular updates on that, but through the lens of traditional markets. For example, as they discuss sentiment improvements, they say, quote,

Starting point is 00:07:59 Cryptocurrency market sentiment recovered slightly in February and further in March as measured by token price appreciation and by public crypto company market capitalization. With Coinbase such a big part of the market capitalization of the crypto markets, Coinbase's quarter 1-22 decision to invest more heavily has been met with some skepticism and has driven its stock to underperform in 2022, down 25% in Q1, although it has performed in line with the broader market in March. So the point that I'm making here is that so much of what they're discussing, is Coinbase's public market performance, where Coinbase and miners really become proxies for how traditional markets are looking at the industry as a whole. Interestingly, I think that

Starting point is 00:08:39 they're noting that Coinbase is now, being a public company, subject to other types of considerations and is not necessarily just a proxy for the crypto industry. They point to skepticism of a specific corporate decision to invest more heavily, as the reason the price underperformed versus any larger skepticism of the crypto industry. And I may be belaboring the point here a little bit, but it just feels so different than past types of reports on the industry. It feels in short like the beginning of an ongoing thing where this is just a part of the world that they now have to understand. Another big theme that they really dug into that was frankly kind of surprising to me was the idea of defy actually doing something. And this isn't a knock on defy per se, it's just that I think

Starting point is 00:09:23 there's been a broad sense that for a long time, that section of the crypto industry just hasn't been where the energy is. It hasn't been where builders are, especially as NFTs and the metaverse have gotten hotter. And it certainly hasn't seemed like a place where a lot of market emphasis has been. However, one of their points is, quote, defy token prices are flat on the year at 160 billion, but have thus outperformed other crypto asset classes and volume has picked up. They show that the Ethereum DeFi market cap is suggesting that. that defy continues to grow as a percentage of ETH capitalization. Defy's percentage of ETH market capitalization is currently just under 40%.

Starting point is 00:10:01 The highest it's ever been was in April of last year at around 46%. Finally, they share defy to total crypto market cap ratio indicates defy is a growing part of crypto. The defy to total market cap ratio is right around 8%, which is near its all-time highs. Now, I'm not sure exactly what they include in this, and obviously the devil's in the detail, when it comes to specific assertions of crypto market segments, and I think there's a lot of room to have different definitions. However, it's interesting how much of an emphasis they put on defy as something that people should be paying attention to. A couple more from the No Surprises

Starting point is 00:10:37 here category. They note that the stablecoin market cap overall continues to rise and that although Tether is still the largest stablecoin, USDC has been growing the fastest this year. Likewise, the NFT market continues to grow. And I think here the interesting, note was to see their view of the breadth of the industry. They put the market cap of NFTs now at 19 billion spread across 2.1 million distinct holders and 25 million unique NFTs. For something that has such a huge amount of airtime, it's interesting how few people there really still are who have actually interacted with NFTs at all, just 2.1 million, according to JPMorgan. One other trend within the crypto space that they look at is Ethereum versus Ethereum killers.

Starting point is 00:11:21 That's their words, not mine. This is something I'm noticing a lot on Twitter. You're seeing the Ethereum community start to push a narrative that there has been a shift away from the interest in things like Avalanche and Solana and a feeling that they haven't lived up to their promise. And so there is a return from investor sentiment standpoint to ETH and Layer 2 solutions when it comes to scaling. I don't necessarily think the market shows that dramatically, but you have seen a phenomenon over the last three quarters where in quarter three of last year, the market capitalization of the Alt-Layer-1s was higher than Ethereum, at a little over $400 billion to Ethereum's $350 billion,

Starting point is 00:11:58 moving into quarter four, where Ethereum once again took the lead, but just by a little bit, between $400-450 billion, to the Alt-Layer-1s just around $400 billion. And that spread has now grown. It's basically the inverse of quarter three, where Ethereum is now over $400 billion, and these Alt-Layer-1 chains are just over $350 billion. Now, this might not take into account recent gains and protocols like Salon, but it's still a pretty interesting pattern that sort of gives some amount of validity to a narrative that's emerging. Shifting back over to Bitcoin, they look at gold versus Bitcoin and say that

Starting point is 00:12:32 gold remains a better store of value in times of stress. They say, quote, Bitcoin has been gaining status as a store of value compared with gold in recent years when comparing the market capitalization of gold with that of the market capitalization of Bitcoin. But with the global equity and fixed income market selling off in Q1, with interest rates rising in global supply chains disrupted, with the war in Ukraine, gold depreciated 5.5% in 2022, where Bitcoin is essentially flat in Q1. While Bitcoin has outperformed most other cryptocurrency tokens this year, as well as equities and fixed income, it was essentially flat in Q122. Now, my view of Bitcoin as a store of value has always been as this weird hybrid where it has a long-term store of value type of

Starting point is 00:13:14 capacity based on its supply dynamics, but also the upside of a risk asset because it is not get a fully mature asset. In other words, the total number of people who are going to be interested in Bitcoin is still much larger than the total number of people who are invested in Bitcoin now. That's why so many people are so excited about it. It represents something that is gold-like because of its mathematically determined supply limitations, but that also still has upside to grow and other really valuable properties like liquidity, transferability, finality. I think it's going to be some time before we really start to separate Bitcoin from gold in the eyes of the market, but I have a hard time believing that especially Bitcoin holders,

Starting point is 00:13:55 even in institutions, don't understand how it is and isn't different. A last trend which JPMorgan notes is crypto-permeating gaming. They talk about more tokens, more unique wallets, so that's something maybe to watch in the months to come. Now let's shift over and talk about the Bitcoin Mining Monthly. Here's their summary. On balance, Bitcoin mining was slightly more profitable in March versus February as Bitcoin price appreciation outpaced global hash rate growth. However, Bitcoin mining profitability as measured by daily block reward revenue per X-a-Hash remains 46% lower than peak levels achieved in November 21, due to the sharp increase in the global hash rate, i.e. competition and decline in Bitcoin. That said, many of the publicly

Starting point is 00:14:34 traded miners are reporting record revenue as their own hash rate growth has outpaced the broader market. Now, the thing that I wanted to note here, in addition to just those interesting dynamics of it getting more competitive, but still these publicly traded miners doing really well, is how much education is inherent in this Bitcoin mining monthly. It's not setting itself out as a first primer or anything on Bitcoin mining, but by nature of assuming that it's for a general traditional finance audience, it has to define how it sees things like global hash rate, i.e. competition. And just like we talked about before in terms of this being a traditional market asset that's coming at the Bitcoin industry, this is as much about Bitcoin mining stock performance as it is about on-chain fundamentals. Some number of episodes ago that I can't even remember now, I said that we had moved into the post-narrative institutional era of Bitcoin, and I think these two reports are case and point of what I was trying to say. It's not that there isn't a slow, steady accretion of institutions and individual institutional investors, moving from the traditional financial space into the Bitcoin

Starting point is 00:15:38 and crypto space. It's that it's no longer about big headline-making moves. It's just a thing that people are doing. This asset class has moved into the mainstream such that it can no longer be ignored, such that it is now part of the general JPMorgan Equities Research portfolio. I think the fact of these things existing as well as the nature of their content says a ton about where institutional Bitcoin and Crypto are. So welcome to the boring phase of institutionalization, where Bitcoin and crypto are just part of the conversation. I want to say thanks again to my sponsors, nexus.io, Arculus and FTX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other.

Starting point is 00:16:16 Peace. Hey, breakdown listeners. Come join CoinDesk's Consensus 2020, the festival for the decentralized world this June 9th through the 12th in Austin, Texas. This is the only festival showcasing and celebrating all sides of blockchain, crypto ecosystems, Web 3, and the Metaverse,

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The Breakdown - JPMorgan: ‘Bitcoin Shows Some Merit as a Store of Value’

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