The Breakdown - JPMorgan Discusses $600B in Potential New Bitcoin Demand

Episode Date: December 15, 2020

Today on the Brief: First COVID-19 vaccines roll out in the U.S.  Are IPOs the new ICOs? U.S. Treasury and other federal departments hacked  Our main discussion: A massive new category of bitcoin demand?  Last week, when MassMutual announced its $100 million buy, NLW explored whether it would be the beginning of a trend for other insurance companies. A recent note from JPMorgan analysts suggests that even a 1% allocation by that category of company in major markets in the U.S., Europe and Japan could represent $600 billion of new demand.  NLW also discusses recent comments from long-term institutional bitcoin and crypto bulls including Chamath Palihapitiya and Abigail Johnson. The Breakdown is produced and distributed by CoinDesk.com   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

J.P. Morgan analysts wrote, Mass Mutual's Bitcoin purchases represent another milestone in Bitcoin adoption by institutional investors. One can see the potential demand that could arise over the coming years as other insurance companies and pension funds follow Mass Mutual's example. When you have not only these big nine-figure buys, but influential analyst groups like J.P. Morgan connecting the dots to the long term, who knows what could happen next. 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 crypto.com and nexo.io and produced and distributed by CoinDes.

What's going on, guys? It is Monday, December 14th, and today we're talking about JP Morgan analysts discussing 600 billion in. potential new Bitcoin demand. First up, however, let's do the brief. First up on the brief today, the first vaccine is here. Last week, the U.S. approved Pfizer-Bio-N-Tex COVID-19 vaccine, and today the first doses started being administered. The first people to get the vaccine obviously are frontline health care workers, and this is incredibly excited even though there are still a lot of challenges, most notably kidding people to actually take it. Also, how long it takes to produce and rollout to everyone. Still, the head of the U.S. government vaccination drive said up to 80% of the population could be given the shot by next summer. I think it's worth noting just how remarkable a thing

this is in terms of how fast this came together. It really shows the potential of how much extra capacity we have, and frankly, it should make us think about what we can achieve with true moonshot efforts and focus, and I mean that both in terms of the science side and on the elimination of bureaucracy side. Markets are, of course, very happy about this. The S&P 500 halted a three-day slide and was up almost a percent at the time of recording. Nasdaq jumped more than 1.3%. Now, part of that bullishness is, of course, the vaccine, but in the short term, it's also about stimulus. A bipartisan group is introducing a 908 billion pandemic relief bill, although it could still be ways away from getting approval through Congress. What's more, the electoral college is

slated to officially elect Joe Biden president today, which ends one of the last remaining questions of instability for markets. Next up on the brief today are IPOs, the new ICOs. Last week, DoorDash and AirBO IPO IPOed to absolutely insane results. In a Wall Street Journal article titled, Sizzling Tech IPO market leaves investors befuddled, they noted that DoorDash went up 86% in its trading debut and Airbnb more than doubled a day later. Reception was was in fact so strong that video game company Roblox pulled its IPO to try to figure out what the hell was going on. Same thing with Affirm Holdings. The valuation levels are their highest since the dot-com bubble. Companies are being valued at 23.9 times previous 12-months

revenue, which is quite a bit more than the 6x revenue that was the norm during the 2010s and 4.3x for the NASDAQ composite. Of course, there is a legitimate reason behind this, which would be the sea change to digital business that accelerated this year's. so dramatically in the context of lockdowns. The bigger questions, however, have to do with asset price inflation and low interest rates and cheap debt pushing everyone farther out on the risk curve. I'm noticing a pretty significant pickup in people on FinTwit asking about this exact phenomenon. You had folks like George Gammon this weekend tweeting about the VC bubble and Ponzi scheme, which of course gets my nomination for the most overused concept in all of finance, but still the fact that

people are talking about it, I think, is notable. Some in the crypto industry are asking if this is like the shit coin waterfall that was characteristic of ICOs. And basically, the idea of the shi-coin waterfall is that early investors get to dump on later investors, and really you want to be as close to the beginning investor as you can be. The difference, of course, with IPOs is that there are real products and real companies, and early investors had to hold for 10 years. But I think there are legitimate questions about how early people are able to access wealth-generating investments and how much this pipeline serves to reinforce economic inequality. Finally on the brief today, the Treasury was hacked. So what happened? A brazen attack against U.S. agencies, including

the U.S. Treasury, Commerce Department, and others. This was part of a widespread global cyber espionage campaign that was believed to be instigated by the Russian government. It exposed up to to hundreds of thousands of government and corporate networks. Here's how the Wall Street Journal described the damage. While those familiar with the hat couldn't precisely specify its scope or the resulting damage to the U.S. government, several described it as among the most potentially worrisome cyber attacks in years, because it may have allowed Russia to access sensitive information from government agencies, defense contractors, and other industries.

One person familiar with the matter said the campaign was a 10 on a scale of 1 to 10 in terms of its likely severity and national security implications. This is a reminder and one of the reasons that privacy advocates get so up in arms about data capture, it turns these agencies into unbelievable honeypots for exactly this type of cyber attack. This episode is brought to you by crypto.com, the crypto super app that lets you buy, earn, and spend crypto all in one place and earn up to 8.5% per year on your Bitcoin. Download the crypto.com app now to see the interest rates you could be earning on BTC and more than 20 other coins.

Once in the app, you can apply for the crypto.com metal card, which pays you up to 8% cashback instantly on all purchases. Reserve yours in the crypto.com app today. Looking for the best way to stay on top of your investment game? nex0.io has you covered in three easy steps with their high-yield savings account for digital assets. Step one, create an account at nexo.io. Step two, transfer assets to your secure nexo wallet with no minimum or maximum limits on funds deposited. Step three, sit back, relax, and earn up to 12% compounding interest paid out daily on your crypto and fiat. Your passive income made simple. Get started at nexo.io.

Today's main discussion is actually a bit of a follow-up to some of our previous shows. Bitcoin is maturing in a huge way in front of our eyes, particularly in terms of public perception and moreover, perception within financial institutions. So I wanted to check in on a few examples of this that have recently come up. First, let's look at Fidelity. Fidelity has obviously been one of the fastest institutions to get the potential of Bitcoin and digital assets more broadly. They launched Fidelity digital assets a couple years ago to custody Bitcoin and other digital assets and just have a bigger footprint in the space. And that was a huge deal. I recently hosted a webinar with Tim McCourt from the CME and Joshua Lim from Genesis and Brian Kelly from CNBC, and Brian

specifically noted Fidelity getting into the market as a watershed moment in his conversations with investors and their attitudes towards the space. Fidelity alums are also some of the best in this crypto market, including Matt Walsh and Nick Carter over at Castle Island Ventures. In an interview recently with Barron's chairman and CEO Abigail Johnson talked extensively about cryptocurrencies and Bitcoin. She shouted out the Lightning Network. She discussed how things that had been promised for years were actually becoming real. But she also acknowledged that the big thing right now, at least for Fidelity, was connecting the dots between the legacy financial world and the new world, and in that they were focused on these offerings like custody. Let's listen to a quick clip of that

conversation. Some of these distributed finance capabilities are really, um, This is an area that has been talked about from early on, but it's really starting to pick up. And, you know, things like the Lightning Network that we're going to help facilitate that are actually starting to become reality. But at the same time, I think in terms of bringing the world along in terms on digital currencies in general, what we're really, from a commercial perspective, putting our efforts around, is trying to connect the legacy world with the future of digital currency. And so right now, our custody business around Bitcoin has been incredibly successful. We've got a tremendous pipeline, and it's been really exciting to watch. And if you had asked me in the beginning if we or anybody was going to be

prioritizing custody of Bitcoin, I would have said, no way. I mean, that's kind of the opposite of what it's all about. But the reality is that you do need it. Because if you're an individual who engages an advisor and you want to make an estate plan, you actually need somebody. to custody your Bitcoin, just as a simple example. So building those on and off ramps around facilitating trading between theauch currency and cryptocurrency is something that's happening now, and I'm glad it's moving along. And so you kind of have those two ends of the spectrum, the connecting to the legacy world

and the really new advanced thinking that's going on. Another perma bull in the crypto space, but who also has a large footprint in regular traditional finance, is Chamath Palahapatia. I actually read his 2013 piece on Bitcoin a couple weeks ago for Longreed Sunday, but it seems like he's updated his thesis a little bit. He was recently in a conversation with Howard Linson on Howard Howard's podcast, and I'm just going to read a few quotes about how Chimoth is thinking about Bitcoin right now.

I've tried to temper my excitement. I do think that I'm going to become a little bit more vocal around my support for it. I was an early owner. I've owned it for a very long time. I think my dollar cost average is $120, something like that. My first purchase was $80 and I stopped purchasing at $130. I think it's a hedge. I always viewed it as a sort of schmuck insurance against exactly this orthodoxy that you just talked about. But I think in other countries it's more than a hedge. becoming a principal mechanism of value storage and exchange. I'm going to spend a little bit more time now. I kind of set it and forget it. A bunch of my coins went to a bunch of different companies to stand up a bunch of different businesses for them, lending, ETFs, trading, etc. Because I didn't want to own

the coins. I just wanted shares because it was easier for me to tax structured shares. But I'm going to pay a lot more attention going forward, and I'm going to make this one of these four or five things that I now become an expert in again. Chimoth went on to also discuss the macro backdrop, saying the level of intermingling between fiscal and monetary policy, I've never seen that before. I think we won't really know what that hangover feels like for another decade. The thing, obviously, that's the most exciting about that to me is that line. I'm going to pay a lot more attention going forward, and I'm going to make this one of those four or five things that I now become an expert in again.

Chamath, consider this your open invitation to the breakdown, and we will do our best to help you get there, not that you necessarily need it. Last up, though, let's talk about a response to the mass mutual buy that we've talked about on the show over the weekend. For those who haven't listened to my show, NIDIG, the New York Digital Investment Group, helped Mass Mutual a 169-year-old insurance firm by $100 million worth of Bitcoin. Mass Mutual as part of the deal also took a $5 million stake in Nidig. This is significant because this is a very different risk profile than other types of institutional investors. Indeed, the language that we use around institutional investors is way too imprecise.

Mass mutual and high net worth individuals are lumped all in this same category, but really represent totally different risk profiles. Still, in that conversation, one of the things that we discussed explicitly was precedent and how much that precedent might matter. We heard from sources even that other investment companies like New York Life and Star had done similar deals in size and scope with Nidig. The precedent question is key and was the key discussion of a J.P. Morgan analyst note from last week. J.P. Morgan analyst wrote, Mass Mutual's Bitcoin purchases represent another milestone in Bitcoin adoption by institutional investors. One can see the potential demand that could arise over the coming

years as other insurance companies and pension funds follow Mass Mutual's example. If pension funds and insurance companies in the U.S., euro area, UK, and Japan allocate 1% of assets to Bitcoin, that would result in additional Bitcoin demand of $600 billion, the strategist said. The cryptocurrency's current market capitalization is about $356 billion today. Of course, before we get too excited about this, this is classic VC deck math. If we can just capture 1% of this huge market, et cetera, et cetera, et cetera. Also, it's worth noting that mass mutual's investment is meaningfully less than 1% of their assets. Still, you're talking about 600 billion being just 1% of assets for this one category of investor.

This is the beginning of a narrative crescendo, and what matters is the through line, not the specifics. I expect in the coming months we're going to have confirmation of many more of these deals, which could open up a significant amount of additional buying pressure. And remember, this is the asset class where the more expensive it gets, the more that people want it. When you have not only these big nine-figure buys, but influential analyst groups like J.P. Morgan connecting the dots to the long term, who knows what could happen next? Anyways, guys, I hope your week is off to a great start. I appreciate you listening and hanging out here. Until tomorrow, be safe and take care of each other. Peace.