Global Research
18 February 2021
. Morgan Perspectives
Digital transformation and the rise of fintech:
Blockchain, bitcoin and digital finance 2021
See page 79 for analyst certification and important disclosures, including non-US analyst disclosures.
US Fixed Income Strategy
Joshua Younger AC
@
. Morgan Securities LLC
Cross-Asset Fundamental
Strategy
John Normand AC
@
. Morgan Securities plc
Global Markets Strategy
Nikolaos Panigirtzoglou AC
@
. Morgan Securities plc
Chair of Global Research
Joyce Chang AC
@
. Morgan Securities LLC
. Mid and Small Cap Banks
Steven Alexopoulos, CFA AC
@
. Morgan Securities LLC
Banks and Financial Services
Katherine Lei AC
@
. Morgan Securities (Asia Pacific)
Limited/. Morgan Broking (Hong
Kong) Limited
Asia-ex Banks
Harsh Wardhan Modi AC
@
. Morgan Securities Singapore Private
Limited/. Morgan Securities (Asia Pacific)
Limited/. Morgan Broking (Hong Kong)
Limited
Long-term Strategy
Jan Loeys AC
@
. Morgan Securities LLC
Payments, Processors and IT
Services
Tien-tsin Huang, CFA AC
@
. Morgan Securities LLC
Banks
Rie Nishihara AC
@
JPMorgan Securities Japan Co., Ltd.
Internet
Alex Yao AC
@
. Morgan Securities (Asia Pacific)
Limited/. Morgan Broking (Hong Kong)
Limited
Strategic Research
Kimberly Harano AC
@
. Morgan Securities LLC
. Morgan Perspectives
Digital transformation and the rise of fintech:
Blockchain, Bitcoin and digital finance 2021
2
Global Research
. Morgan Perspectives
18 February 2021
Joyce Chang
(1-212) 834-4203
@
Jan Loeys
(1-212) 834-5874
@
Kimberly Harano
(1-212) 834-4956
@
. Morgan’s Approach to Blockchain
. Morgan is a leader in blockchain technology and has been building innovative solutions for clients since 2015. This
innovation has spanned from protocol-level development to new payment-specific networks and applications.
In 2020, . Morgan launched a new business unit called ‘Onyx by . Morgan’ that houses the firm’s blockchain efforts.
In doing so, . Morgan became the first global bank to create a dedicated unit to develop and scale blockchain-based
products. Onyx’s mission is to reimagine how businesses can be built, run, and transformed with the new infrastructure,
networks, and services enabled by distributed ledger technology.
Onyx has a significant portfolio of new products, including: a blockchain-based intraday repo application where . Morgan
executed the first live intraday repo trade on a blockchain; Liink by . MorganSM, the world’s largest blockchain-based
institutional network with increasing membership and offerings; and JPM Coin, a blockchain-based payment rail and
account ledger.
. Morgan plans to continue increasing its investment in blockchain technology as many of these efforts mature and achieve
scale at a global level. . Morgan is excited to make progress on several of the highest impact blockchain initiatives in the
industry:
Liink by . Morgan: First piloted in 2017 as the Interbank Information Network® (IIN), Liink is the first bank-led
production-grade, scalable, and peer-to-peer blockchain-based network. It addresses the longstanding challenges of sharing
payments-related information across institutions. More than half of the world’s largest banks have signed up to join the new
paradigm, using blockchain to simplify information exchange around how money moves. Liink also enables banks to
monetize their data assets by sharing information on and developing applications for the network.* Current applications on
Liink include:
Confirm, which allows participants to exchange information to validate account information prior to payment initiation
across geographies and most common payment types;
Resolve, which allows participants to exchange information to resolve compliance-related inquiries; and
Smart check routing to streamline the processing of checks, as . Morgan enables check originating financial service
providers to directly transmit check transactions to lockbox providers using digital means.*
Digital Assets & Intraday Repos: Onyx Digital Assets is a new Onyx platform for digital asset transaction use cases. At
the end of 2020, . Morgan launched Onyx Digital Assets, along with its first live application for the execution of intraday
repurchase transactions or ‘repos,’ which allowed for the simultaneous exchange of cash for securities on blockchain
without physical movement of securities.
. Morgan recognized the opportunity to build new financial technology with the initial goal of significantly enhancing
active intraday liquidity management and reducing reliance on unsecured funding. By more efficiently securing a portion of
liquidity provision to . Morgan clients with intraday collateral, . Morgan aims to reduce counterparty credit risk related
to intraday liquidity financing and the resulting market risk.
Project Ubin: Onyx has been partnering with the Monetary Authority of Singapore (MAS) on a multi-year, multi-phase,
collaborative project to explore the use of blockchain and Distributed Ledger Technology (DLT) for clearing and settlement
of payments and securities. . Morgan is now in the process of commercializing the learnings from Project Ubin. Our
initial focus is on building a platform – being developed with two world-leading partners – that is expected to launch in
Singapore with availability to banks in that country. The initial focus will be on domestic multi-currency payment clearing,
with many other services to follow.*
The pipeline of R&D projects at Onyx is equally as exciting, including Digital Identity and quantum resistant networks.
. Morgan fervently believes that the financial services industry is still just barely scratching the surface of blockchain use
cases and that as far as blockchain is concerned, the best is yet to come.*
– Onyx by . Morgan
* Future products and services under development; features and timelines are subject to change at . Morgan’s sole discretion.
Offering as live products subject to completion of internal review and obtaining any required consents.
3
Global Research
. Morgan Perspectives
18 February 2021
Joyce Chang
(1-212) 834-4203
@
Jan Loeys
(1-212) 834-5874
@
Kimberly Harano
(1-212) 834-4956
@
Contributing Authors
US Fixed Income Strategy
Henry St John
@
. Morgan Securities LLC
Colin W Paiva
@
. Morgan Securities LLC
Economic and Policy Research
Michael Feroli
@
JPMorgan Chase Bank NA
Cross-Asset Fundamental Strategy
Federico Manicardi
@
. Morgan Securities plc
Global Markets Strategy
Mika Inkinen
@
. Morgan Securities plc
Nishant Poddar, CFA
@
. Morgan India Private Limited
Emerging Markets Asia, Economic and Policy
Research
Haibin Zhu
@
JPMorgan Chase Bank, ., Hong Kong
European Equity Research
CEEMEA Financials, Conglomerates & Strategy
Naresh Bilandani
@
. Morgan Securities plc
CEEMEA Banks
Samuel Goodacre
@
. Morgan Securities plc
Mehmet Sevim
@
. Morgan Securities plc
Neha Rai
@
. Morgan India Private Limited
US Equity Research
Payments, Processors & IT Services
Reginald L. Smith, CFA
@
. Morgan Securities LLC
Andrew Polkowitz
@
. Morgan Securities LLC
Puneet Jain
@
. Morgan Securities LLC
Hitesh Malla
@
. Morgan India Private Limited
. Mid and Small Cap Banks
Alex Lau
@
. Morgan Securities LLC
Janet Lee
@
. Morgan Securities LLC
Anthony Elian, CFA
@
. Morgan Securities LLC
Nikhil Potluri
@
. Morgan India Private Limited
Asia Equity Research
Banks & Financial Services
Daqi Jiao
@
. Morgan Securities (Asia Pacific) Limited/ . Morgan
Broking (Hong Kong) Limited
Peter Zhang
@
. Morgan Securities (Asia Pacific) Limited/ . Morgan
Broking (Hong Kong) Limited
Allen Li
@
. Morgan Securities (China) Company Limited
Banks and Conglomerates
Daniel Andrew Tan, CFA
@
. Morgan Securities Philippines, Inc.
India Financials and Real Estate
Saurabh Kumar
@
. Morgan India Private Limited
ASEAN TMT
Ranjan Sharma, CFA
@
. Morgan Securities Singapore Private Limited
Insurance
MW Kim
@
. Morgan Securities (Asia Pacific) Limited/ . Morgan
Broking (Hong Kong) Limited
4
Global Research
. Morgan Perspectives
18 February 2021
Joyce Chang
(1-212) 834-4203
@
Jan Loeys
(1-212) 834-5874
@
Kimberly Harano
(1-212) 834-4956
@
Table of Contents
Executive summary ............................................................................................................................. 5
Bitcoin is an economic side show – the rise of digital finance is the real post-COVID-19 story.............. 6
The rally in Bitcoin: A side story of COVID-19
A review of the past year for Bitcoin: Competition with gold as “alternative” currency is
here to stay ....................................................................................................................................16
What cryptocurrencies have and haven’t done for multi-asset portfolios: Mainstreaming is
reducing diversification benefits and leading to failure during a crisis ............................................22
Only as strong as the foundation: Risks inherent in the microstructure of Bitcoin markets..............30
The rise of digital currencies: Not yet transformational
You say you want a revolution: Who is permissioned to utilize digital currencies?...........................35
China’s CBDC: Constrained by capital controls and slow progress in RMB internationalization ........46
The Japanese case: Two moves toward establishment of Digital Currency and the impact
on payment flow.............................................................................................................................49
The rise of digital finance: The real transformational story of COVID-19
Payments & Processors: Modern providers gained ground over legacy with consolidation
to come ..........................................................................................................................................53
US regional banks positioned as endgame winners in the digital age ..............................................55
China Banks: Going Mobile – Evaluating Banks’ Digital Push............................................................60
FinTech in ASEAN: Going mainstream .............................................................................................63
UAE Digital Banks: Non-banks are growing fast compared to the rest of MENA...............................68
CEEMEA Banks: COVID-19 catalyzing digital banking acceleration ..................................................72
Appendix ........................................................................................................................................75
5
Global Research
. Morgan Perspectives
18 February 2021
Joyce Chang
(1-212) 834-4203
@
Jan Loeys
(1-212) 834-5874
@
Kimberly Harano
(1-212) 834-4956
@
Executive summary
COVID-19 accelerates the rise of digital finance
The rise of digital finance and demand for fintech is the real financial transformational story of the COVID-19 era, not
the rally in Bitcoin prices…
…but the recent announcements of greater acceptance and adoption by Tesla, BNY Mellon and Mastercard confirm the
increased investor demand and interest in transacting payments in cryptocurrencies.
Competition between banks and fintech is intensifying, with Big Tech possessing the most potent digital platforms due to
their access to customer data.
‘Co-opetition’ between ‘Fin’ and ‘Tech’ players lies ahead, with banks stepping up investment to narrow the technology gap,
and the battle between US banks and non-bank fintech is also playing out on the regulatory front.
Asia continues to drive third-party (noncash) global growth in payments.
Traditional banks could emerge as endgame winners in the digital age of banking due to their advantage from deposit
franchise, risk management and regulation.
The rise of Bitcoin is an economic side show but Bitcoin is here to stay as an “alternative” currency
Bitcoin prices were boosted by Tesla’s $ investment with momentum traders amplifying the up move, but current
prices are well above our most recent estimates of fair value based on mining costs and risk capital equivalence with gold.
In the long term, we estimate that theoretically Bitcoin prices would need to rise to $146k for the market cap to match the
total private sector investment in gold via ETFs or bars and coins.
Crypto assets continue to rank as the poorest hedge for major drawdowns in Equities, with questionable diversification
benefits at prices so far above production costs, while correlations with cyclical assets are rising as crypto ownership is
mainstreamed.
Watch the tail risk to Bitcoin markets as a sudden loss of confidence in USDT would likely generate a severe liquidity shock,
jeopardizing access to the largest pools of demand and liquidity.
Financial innovation has outpaced regulation with global financial stability concerns rising as Global
Stablecoins (GSCs) are developed
Regulation has been outpaced by innovation, creating an uneven playing field, as it is easier and cheaper for fintech to
offer similar products and services.
A return of antitrust is a risk, mostly to Big Tech, and future regulation will focus on who is permissioned to use Global
Stablecoin arrangements and gain access to the Federal Reserve’s payments system as well as the appropriate level of
oversight, supervision and regulation.
Central banks representing 20% of the world’s population are likely to issue Central Bank Digital Currencies (CBDCs) in
the next three years, but transformative impact is unclear given restrictions based on jurisdiction.
. Morgan Perspectives brings together thematic and strategic views across . Morgan’s Global Research franchise,
examining big ideas and critical global issues transforming investment markets. This is our annual update on the latest
developments covering the adoption and evolution of Blockchain technology, Cryptocurrencies, Central Bank Digital
Currencies, Global Stablecoins and digital finance. We also highlight regulatory issues that lie ahead as innovation has
outpaced regulation, creating an uneven playing field. We hope this series will both inform and foster debate on evolving
economic, investment and social trends.
– Joyce Chang, Chair of Global Research
6
Global Research
. Morgan Perspectives
18 February 2021
Joyce Chang
(1-212) 834-4203
@
Jan Loeys
(1-212) 834-5874
@
Kimberly Harano
(1-212) 834-4956
@
Bitcoin is an economic side show
– the rise of digital finance is the
real post-COVID-19 story
Fintech has gone mainstream, and we highlight
the rise of digital finance in the COVID-19 era in
our annual review of blockchain technology,
Bitcoin and other digital currencies.
Bitcoin prices have continued their meteoric rise
with Tesla, BNY Mellon and Mastercard’s
announcements of greater acceptance of
cryptocurrencies...
…but fintech innovation and increased demand
for digital services are the real COVID-19 story
with the rise of online start-ups and expansion of
digital platforms into credit and payments.
Expect ‘co-opetition’ between ‘Fin’ and ‘Tech’
players with banks focused on narrowing the
technology gap, while Big Tech benefits from a
large customer base and access to their data.
Investor and regulatory shifts will play out as Big
Tech looks to issue Global Stablecoins (GSCs)
and regulation has been outpaced by innovation,
creating an uneven playing field.
Traditional banks could emerge as endgame
winners in the digital age of banking due to their
advantage from deposit franchise, risk
management and regulation.
Bitcoin prices boosted by momentum traders, but
current prices are well above our most recent
estimates of fair value based on mining costs and
risk capital equivalence with gold.
In the long term, we estimate that theoretically
Bitcoin prices would need to rise to $146k for the
market cap to match the total private sector
investment in gold via ETFs or bars and coins.
Crypto assets rank as the poorest hedge for
major drawdowns in Equities, and diversification
benefits are unclear at prices so far above
production costs, while increased ownership is
raising correlations with cyclical assets.
Watch the tail risk to Bitcoin markets as a sudden
loss of confidence in USDT would likely generate a
severe liquidity shock, jeopardizing access to the
largest pools of demand and liquidity.
Some central banks are likely to issue Central
Bank Digital Currencies (CBDC) in the next 3
years but transformative impact is still
questionable given restrictions based on
jurisdiction.
COVID-19 accelerates the rise of digital
finance and retail investment
COVID-19 has accelerated digitalization and
technological change in the finance industry, with
rising concerns that disruptive technologies could
emerge as a threat to global financial stability, when
combined with excess liquidity and an undefined
regulatory framework. In our annual round-up of the
latest developments in blockchain technology, Bitcoin,
and other digital currencies, we expand our analysis to
include a broader discussion of the rise of digital banking
(see Blockchain, digital currency and cryptocurrency:
Moving into the mainstream?, J. Chang et al., 21
February 2020). In this publication, 35 strategists,
analysts, and economists examine the latest trends in
blockchain technology, the Bitcoin market, digital
currencies and the rise of digital banking. Cash use was
already on the decline before COVID-19, and the
pandemic has fueled demand for fast and convenient
digital payments. The pandemic has boosted demand for
digital services and also for “alternative” currencies as
multiple rounds of stimulus, accommodative monetary
policy, and excess savings have boosted money supply,
leading to record inflows into Bitcoin investment
vehicles. The 27% rise in Bitcoin prices in the week of
Tesla’s February 8th announcement follows a 300%+
meteoric rise in Bitcoin prices during 2020. In addition,
the higher-than-usual retail stock market participation
that fueled the recent small-cap short squeeze have raised
concerns that asset bubbles are forming.
We have long argued that while there is a temptation
to point to the COVID-19 crisis as new and
unprecedented, we see COVID-19 as an accelerant,
amplifying paradigm shifts that were already in
motion after the 2008 Global Financial Crisis (see
Pandemic Accelerates Paradigm Shifts, J. Chang et al., 8
July 2020). The shift in market structure and the decline
in liquidity exacerbated the sell-off in March/April 2020,
resulting in the severity and speed of financial market
moves that were without precedent. The US equity
market moved from a record peak to a trough over 14
days compared to 14 months during the GFC. Multiple
rounds of fiscal stimulus have amounted to roughly %
of global GDP, while G-4 Central Bank balance sheet
expansion at $8trn is more than triple the level seen
during the GFC, fueling the most rapid equity market
recovery ever, with the S&P 500 returning to record
levels in just 6 months. The rally in Bitcoin and increase
in retail participation in US equities are manifestations of
record low rates. The JPMorgan Chase Institute finds
7
Global Research
. Morgan Perspectives
18 February 2021
Joyce Chang
(1-212) 834-4203
@
Jan Loeys
(1-212) 834-5874
@
Kimberly Harano
(1-212) 834-4956
@
that the COVID-19 shock to the economy, which
strongly dampened consumer spending, resulted in a
large spike in transfers to investment accounts, especially
for men, consistent with the aggregate increase in the
personal savings rate starting in March Retail
investors ramped up stock market participation
beginning in March, when the US recorded its highest
ever savings rate of 34%. In Bloomberg’s latest survey
of what Americans plan to do with next relief payment,
6% indicated that they intend to invest more in the stock
market, compared to 5% indicating that relief would go
to support child care, while 3% indicated that they would
invest in The savings rate has been
declining gradually, but the latest reading is elevated at
13%, and our US equity strategists estimate a ~$390bn
decline in consumer spending since the January 2020
peak (see US Equity Strategy: Growing Retail
Participation, Short Squeeze, Rotation into Value, D.
Lakos-Bujas et al., 29 January 2021). Policymakers are
no longer stressing the temporary nature of extraordinary
programs given nearly 80% of fixed-rate DM sovereign
bonds trading below % and the 16% of GDP rise in
sovereign debt levels. Implied volatility has also come
down dramatically in a low yield world.
Some market segments are most likely in a bubble
due to excessive speculation, and Bitcoin prices
rallied by 27% in the week of Tesla’s February 8th
announcement that it had spent $1. 5bn of its cash
reserve on Bitcoin. Although we are skeptical that Tesla
is a typical corporate and that its example will be
followed by more mainstream corporates, we recognize
that Tesla’s announcement broadens corporate
sponsorship, after a gap of five months with no corporate
treasury announcements beyond MicroStrategy and
Square last August. Tesla is not alone in exploring
greater acceptance of Bitcoin. In the same week of
Tesla’s announcement, a variety of payment providers
and custodians announced their expansion into accepting
crypto payments. Mastercard announced a plan allow
merchants to receive payments in cryptocurrency later
this year. BNY Mellon, the world’s largest custodian
bank with ~$41trn of in assets, announced the formation
1 See “Finding Four” here:
markets/the-stock-market-and-household-financial-behavior
2
11/stimulus-checks-americans-plan-to-save-not-spend-covid-
relief-money
3
of a new unit to build a multi-asset custody and
administration platform for traditional and digital assets.
PayPal announced that it is considering adding
cryptocurrency as a payment option through
Canada’s financial regulator also approved the first
publicly traded Bitcoin exchange-traded fund (ETF) in
North America. The receipt of approval from the Ontario
Securities Commission (OSC) was filed under a
Multilateral Instrument passport system in multiple
Canadian
Despite the current spotlight on the growing
acceptance of cryptocurrencies, we find the real
financial transformation story of the COVID-19 era is
the increase in demand for digital services as the shift
away from in-person interactions is a lasting legacy
from the pandemic. The ongoing progress in digital
technology has made new forms of digital money
cheaper and faster than traditional electronic instruments,
especially for cross-border The past year was
marked by the rise of online start-ups without a banking
background and the expansion of social media and
digital platforms into credit and payments. A number of
breakthroughs played out during the course of 2020,
including scaling up digital solutions in third-party
payments, advances by digital finance into retail lending
and insurance, and the emergence of partnerships
between Big Tech and banks.
Although the market has fixated on the rally in
Bitcoin, the real economic and exciting action is in the
new battle for digital supremacy between the banks
and fintech, which is likely to lead to renewed
competition and innovation with major IT capex
forthcoming on both sides. The playing field is uneven
as financial regulations have not kept pace with fintech
innovation, and it is easier and cheaper for fintech to
offer similar products and services. Big Tech firms have
an informational advantage over banks to privileged
customer data. At the same time, their platforms’ activity
can be viewed as “match-making,” which does not
require risk-taking, since they do not need to provide
financial services themselves, as discussed in a recent
welcomes-tesla-mastercard-bny-mellon-venmo-to-the-
cryptocurrency-party/
4
approved-by-canadian-securities-regulator
5
Papers/Issues/2020/10/17/Digital-Money-Across-Borders-
Macro-Financial-Implications-49823, p. 9
8
Global Research
. Morgan Perspectives
18 February 2021
Joyce Chang
(1-212) 834-4203
@
Jan Loeys
(1-212) 834-5874
@
Kimberly Harano
(1-212) 834-4956
@
report published by the IMF. Big Tech companies could
also bundle their social media services with payment
services through the issuance of .
Morgan estimates that there are about 58 fintech
companies with a market cap greater than $1bn, and
fintech companies have not yet experienced a systemic
liquidity test. As the Center for Financial Stability points
out, the migration of financial activities to non-bank
financial institutions was in many ways created by
regulators themselves as full-service brokerage firms
were rendered less competitive with non-traditional,
tech-based securities firms like Robinhood, with
investors incentivized to move their accounts to firms
offering lower cost trading, coinciding with more
information derived from social media rather than
traditional regulated Asia continues to drive
digital solutions in scaling up third-party payments, and
our Asia equity analysts estimate over $ total
addressable market for the ASEAN 6 countries (Indonesia,
Thailand, Singapore, Malaysia, Philippines, and
Vietnam), with tremendous scope for growth as
penetration remains low (2%) (Modi, Sharma, Kim,
Yao).
Like many other themes, COVID-19 intensified and
accelerated the underlying retail investment trend, as
evidenced by record retail brokerage volume (retail
at ~30% of US stock/ETF equity volume in June/July
2020), non-institutional ownership, and use of
leverage via margin and derivatives (highest recorded
single-contract option volume) (see US Equity
Strategy: Growing Retail Participation, Short Squeeze,
Rotation into Value, D. Lakos-Bujas et al., 29 January
2021). Active retail participation growth is a secular
trend that will introduce opportunities and risks and is
not close to exhausted. Beyond excess liquidity from
fiscal and monetary stimulus, the low consumer debt
service ratio and rising home equity, along with the
scarcity of substitutes to spend cash, will translate into
the riskiest and most shorted areas of the equity market
seeing renewed interest by retail, supported by liquidity
and social media’s influence. Retail investors have
historically been attracted to consumer products / service
companies with broad brand awareness, new-tech IPOs,
and high social media chatter / rising volumes. The
recent episode of “gamefication” demonstrated how
6
nancial-Intermediation-and-Technology-Whats-Old-Whats-
New-49624
7
quickly this retail impulse can propagate via social media
platforms, which in turn shows the importance of using
social media platforms in gauging retail.
Although legal and regulatory frameworks are still
being developed, central banks are also beginning to
consider digital currencies as a way to modernize
payments in the digital age. There is no “one size fits
all” CBDC, but the universal driver for exploring a
general purpose CBDC is its use as a means of payment,
with some governments now exploring CBDCs as a fast
and direct mechanism to provide fiscal assistance in the
event of a shock such as a pandemic. In a report
published by the Bank for International Settlements
(BIS), seven major central banks assess the feasibility of
publicly available CBDCs in helping central banks
achieve their public policy The
transformational impact of CBDC remains to be seen, as
its usage for cross-border transactions remains
questionable, particularly for China’s CBDC, as capital
controls and slow progress in RMB internationalization
remain key constraints (Lei et al.). The global financial
stability risks that could be introduced in any scenario in
which stablecoins have a global and systemic footprint
are now being considered by policymakers and
regulators. In June 2019 the G20 mandated the Financial
Stability Board (FSB) to examine regulatory issues
raised by GSCs and to advise on multilateral
Whether cryptocurrencies are judged eventually as a
financial innovation or a speculative bubble, Bitcoin
has already achieved the fastest-ever price
appreciation of any must-have asset to which it is
often compared, such as Gold (1970s), Japanese
Equities (1980s), Tech stocks (1990s), Chinese Equities
(2000s), Commodities (2000s) and FANG stocks (2010s)
(Normand). We estimate about $11bn of cumulative
institutional flows into Bitcoin since the end of
September (see Flows & Liquidity: The retail impulse
remains strong, N. Panigirtzoglou et al., 16 February
2021), but we believe that a significant component of
institutional flows into Bitcoin reflects speculative
investors seeking to front run other more real-money
institutional investors. We believe Bitcoin, at current
market prices, has already surpassed gold in risk capital
terms (Panigirtzoglou et al.). Tesla’s recent
8
9
9
Global Research
. Morgan Perspectives
18 February 2021
Joyce Chang
(1-212) 834-4203
@
Jan Loeys
(1-212) 834-5874
@
Kimberly Harano
(1-212) 834-4956
@
announcement that it has invested $ in Bitcoin or
8% of its corporate cash reserves surprised markets by
the magnitude of the purchases and re-invigorated
expectations that other corporates will follow with their
cash reserves.
Irrespective of how many corporates eventually
follow Tesla’s example, their announcement abruptly
changed the near-term trajectory for Bitcoin by
bolstering inflows, although the longer-term
implications for Bitcoin prices remain unclear. Our
strategists note that their position proxy based on CME
Bitcoin futures, the preferred vehicle of momentum
traders and other speculative investors, saw a sharp
almost $1bn increase after Tesla’s announcement, but
their second proxy for the institutional flow into Bitcoin,
. the flow into the Grayscale Bitcoin Trust (GBTC),
has not exhibited a similarly strong impulse. According
to Panigirtzoglou et al., one can argue that, in terms of
risk capital, Bitcoin has more than equalized with gold
already. Thus, they believe that Bitcoin’s current price of
~$51k looks unsustainable, unless Bitcoin volatility
subsides quickly from here. We also highlight that while
on-screen liquidity in Bitcoin markets has continued to
improve and outpace more traditional asset classes on a
relative basis, more than 90% of visible depth has been
provided by HFT-style activity over the past few months,
which often ends up disappearing when volatility picks
up (Younger et al.).
The IMF has laid out a tree featuring the different forms
of digital money and different means of payment,
mapping the type, value, backstop and technology for
digital currencies. We find this mapping useful for
understanding the framework for digital money before
analyzing the practical hurdles and potential market
implications (Figure 1).
Figure 1. Money Trees: Mapping the New Payment Technologies
Note: CBDC = central bank digital currency. Since this chart was originally published, Libra has been renamed as Diem.
Source:
The rise of digital banking: The real financial
transformational story of COVID-19
Digital banking licenses are allowing competition
from players without a banking background, which is
a powerful driver of innovation. The move to
everything online triggered by COVID-19 has led to
an avalanche of fintech start-ups. Many fintechs, such
as Chime and Robinhood, are seeing valuation levels
soar, and the common denominator is that these new
entrants are seeing a surge in customer acquisition.
Fintechs have offered a cutting edge experience for
customers, and a key point of differentiation is that many
fintechs don’t charge customers fees for products and
services that the legacy bank industry has become reliant
on. For example, pure-play fintech banks such as Chime
and Varo do not charge industry standard nuisance fees
such as for overdrafts (Alexopoulos et al.).
Type
Value
Backstop
Technology
Examples
Types of
Money
Claim
Fixed value redemptions Variable value redemptions
Government Private
Centralized Decentralized Centralized Decentralized Decentralized Decentralized Decentralized(De)centralized
Object
Unit of
account
Other
Public coins
(Bitcoin)
Managed coins
(Basis)
CryptocurrencyCentral Bank money
Cash CBDCGold-coins
Libra?
I-money
Paxos
USD-Coin
TrueUSD
AliPay
WeChat Pay
M-Pesa
None
prominent
Debit card
Cheque
Wire
E-moneyB-money
10
Global Research
. Morgan Perspectives
18 February 2021
Joyce Chang
(1-212) 834-4203
@
Jan Loeys
(1-212) 834-5874
@
Kimberly Harano
(1-212) 834-4956
@
Banks have been sleepy, but we do not subscribe to
the most extreme arguments that technological
progress may lead to the vertical and horizontal
disintegration of the traditional bank business model.
The overall structure of the financial industry with banks
at its core has remained remarkably robust through many
waves of technological innovation, including the rise of
passive investing, securitization revolution, and
innovations in communications, as well as through the
Global Financial Crisis. As the IMF notes in a recent
report, standalone providers of specialized services rarely
possess deep balance sheets, while large digital platforms
have deep pockets but their reach in financial services is
constrained by their focus on serving retail
We would not underestimate banks forming tech
partnerships to combat share loss, even if relegated to a
wholesale model, which could be a boon to the winning
bank tech partners of choice (Huang et al.). Banks have
stepped up investment to narrow the technology gap or
create strategic partnerships, such as the alliances
between Apple and Goldman Sachs as well as Google
and Citigroup. . Morgan launched Onyx Digital
Assets, a platform for digital asset transaction use cases.
At the end of 2020, . Morgan executed its first
intraday repurchase transactions or ‘repos’ on Onyx
Digital Assets, which allowed for the simultaneous
exchange of cash for securities on blockchain without
physical movement of securities. As part of Onyx by .
Morgan, JPM Coin is aimed at driving innovation within
the financial services industry. In 2019, . Morgan
became the first global bank to design a network to
facilitate instantaneous payments using blockchain
technology, with the unveiling of JPM Coin. JPM Coin is
essentially a deposit account ledger built on a
permissioned blockchain system, enabling participating
. Morgan clients to transfer US Dollars held on
deposit with . Morgan.
. Morgan bank equity analysts believe that
regional banks are in a strong position to emerge as
the winners in the digital age as they have the support
of the regulators, still have the real client franchise,
and are superior in risk management. In the US,
Alexopoulos et al. highlight the advantage that regional
banks bring to customers in the digital age as a model of
high tech meets high touch, where empowered
employees serve as a competitive advantage. Looking
ahead, many banks will likely use M&A of fintech to
10
inancial-Intermediation-and-Technology-Whats-Old-Whats-
New-49624
defend their market share. We expect banks to leverage
their balance sheets and offer more competitive lending
products as a way to compete versus fintechs that might
fear taking on too much credit revenue to the detriment
of valuation (Huang et al.).
Figure 2: US Big Tech market cap increased by $ over 2018-
20, while big banks’ market cap shrunk by $340bn
Cumulative change in market capitalization for US Big Tech companies* and
KBW Bank Index from 1/1/2018; $bn
* Sum of the market capitalization for AAPL, AMZN, Alphabet Inc., FB, and MSFT
Source: Bloomberg Finance ., . Morgan
Among US regional banks, Alexopoulos et al. highlight
that Signature Bank is now a top bank of choice for
digital asset clients and is positioned to ride the digital
asset wave. The digital asset market has seen an influx of
interest from corporate treasurers and institutional
investors over the past several months given the rally in
Bitcoin prices in 2020. As more corporate treasurers and
institutional investors look to increase exposure to digital
assets such as Bitcoin, this represents a potentially very
large runway ahead for Signature to acquire new
customers as the ecosystem expands. Moreover, as new
customers join the network, this could translate into much
more significant deposit growth at Signature beyond the
$10bn of deposits held today from digital asset clients, as
well as the opportunity to expand fee revenue from this
vertical over time. However, they note this story is not
without its risks as SBNY deposit balances (as well as
stock price) may fluctuate with the interest in digital assets
such as Bitcoin, which is directly linked to the value of the
asset. Even considering this risk factor, however, given the
possible reward of Signature potentially becoming one of
the key banks (if not the bank) of the digital asset
ecosystem, they maintain their Overweight rating and
added SBNY shares to the . Morgan US Equity Analyst
Focus List (see Signature Bank: Banking Bitcoin:
-1000
0
1000
2000
3000
4000
5000
Jan 18 Jan 19 Jan 20 Jan 21
Big Tech KBW Bank Index
11
Global Research
. Morgan Perspectives
18 February 2021
Joyce Chang
(1-212) 834-4203
@
Jan Loeys
(1-212) 834-5874
@
Kimberly Harano
(1-212) 834-4956
@
Positioned to Ride the Crypto Wave; Digital Asset Deep
Dive; Add to Focus List, S. Alexopoulos et al., 9 February
2021).
Transformation is occurring most rapidly in Asia,
where we estimate the total addressable market for
third-party payments in the ASEAN 6 countries at
$, with tremendous scope for growth as
penetration remains low (2%). Lending and
insurance are emerging opportunities in fintech,
while non-life insurance players may scale up more
easily due to simpler product structure (Modi,
Sharma, Kim, Yao). In China, the COVID-19-led
lockdown induced wider acceptance and usage of mobile
banking, leading to a strong rebound in mobile banking
MAU (monthly active users) and transaction volume in
2Q and 3Q20 when activity levels recovered. The
potential upside from digitalization is on offering cash
management services in order to lower deposit costs,
driving sales of high-margin products to improve fee
income, and lowering credit costs by leveraging fraud
detection technology and big data analytics (Lei et al.).
In Japan, private sector-led digital currencies are
expected to be issued as early as 2022, while the BoJ
plans to begin Proof of Concept for CBDC early this
year, although it currently has no specific plans for
issuance (Nishihara).
As internet infrastructure has expanded within
emerging markets and digital literacy has improved,
the penetration of internet banking in CEEMEA
markets has increased significantly, up threefold on
average in the last ten years compared to in the
EU. Turkey and Greece have seen penetration gains of
7x over ten years, and further gains there look most
promising (Goodacre et al.). In the MENA region,
neobanks, which are fully mobile/web-only banks with
no physical presence, are growing fast in the UAE
compared to the rest of the region which is seeing a rapid
shift to digital (Bilandani).
The rally in Bitcoin: A side story of COVID-19
Bitcoin’s appeal and competition with gold as an
“alternative” currency will likely continue as
millennials become a more important component of
investors’ universe and have shown their preference
for “digital gold” over traditional gold (Panigirtzoglou
et al.). The demand for an unconventional and high-
volatility hedge has been driven by record-rich Equity
and Credit valuations, while conventional hedges like
DM Bonds barely serve as insurance when US 10Y rates
are near 1%; and shocks such as materially higher
inflation, economically-debilitating cyberattacks or
climate catastrophes could favor an asset that operates
outside conventional financial channels. As a stand-alone
asset, cryptocurrencies remain several times more
volatile than core asset markets, with 3M realized
volatility of 90% compared to about 20% on US Equities
and Gold. This high level of volatility is likely to prevent
corporates from following Tesla’s example as the typical
portfolio of a corporate treasury consists of bank
deposits, money market funds and short-dated bonds. As
a result, the annualized vol of a typical corporate treasury
portfolio is around 1% (see Flows & Liquidity: Did Q4
rebalancing flows materialise?, N. Panigirtzoglou et al.,
10 February 2021).
But coupled with extraordinary returns in some
years, crypto has often generated a much higher
Sharpe ratio on average than core markets like
Equities or hedge assets like Commodities in general
and Gold specifically (Normand). However, our
strategists believe that Bitcoin’s current price of ~$51k
looks unsustainable, unless Bitcoin volatility subsides
quickly from here. Moreover, they note an argument can
be made that the $25k price that equalizes Bitcoin with
gold in risk capital terms could be considered as an upper
bound of its fair value range as this price already
frontloads (at current levels of volatility) any long-term
upside for Bitcoin stemming from real money
institutional adoption (Panigirtzoglou et al.).
In the long term, our theoretical price target of $146k
is conditional on Bitcoin vol converging to that of
gold, which is not only likely to be a multi-year
process but would also depend on Bitcoin ownership
becoming more institutional and less retail over the
coming years. For the Bitcoin market cap to match the
total private sector investment in gold via ETFs or bars
and coins, we estimate that mechanically Bitcoin prices
would need to rise to $146k (Panigirtzoglou et al.).
The diversification benefits of Bitcoin remain
questionable at prices so far above production costs,
while the mainstreaming of crypto ownership is
raising correlations with cyclical assets. Normand
finds that small (up to 2%) allocations to
cryptocurrencies can improve portfolio efficiency due to
high returns and moderate correlations, but mean-
reversion lower in returns is a recurring concern at
current prices, while correlations with cyclical assets are
increasing, potentially converting crypto assets from
insurance to leverage. Over shorter intra-month and
12
Global Research
. Morgan Perspectives
18 February 2021
Joyce Chang
(1-212) 834-4203
@
Jan Loeys
(1-212) 834-5874
@
Kimberly Harano
(1-212) 834-4956
@
intra-quarter horizons, crypto assets continue to rank as
the poorest hedge for major drawdowns in Global
Equities, particularly relative to the fiat currencies like
the dollar which they seek to displace. To the extent that
Bitcoin remains an investment vehicle rather than a
funding currency, it will always lack the short base that
sponsors USD (and JPY and CHF) strength during
periods of acute market stress. A more unique macro
shock related to much higher US inflation or a
breakdown of the payments system could alter this
pattern.
Younger et al. consider what potential catalyst, aside
from idiosyncratic flows, could generate a shock to
Bitcoin and discuss why a sudden loss of confidence
in USDT would likely generate a severe liquidity
shock to Bitcoin markets, as they would lose access to
by far the largest pools of demand and liquidity. A
critical lesson of last March is no asset class, including
even US Treasuries, is ‘safer’ than the ability to
exchange it for fiat cash at a reasonable cost. Most
Bitcoin trading occurs, not against fiat USD, but USDT,
which is a stablecoin issued by Tether Ltd and pegged
1:1 to the US dollar. Data collected by NYDIG suggests
that since 2019 around 50-60% of BTC trades for USDT.
USDT is engaged in a classic liquidity transformation
along the lines of traditional commercial banks, but is
not subject to the same strict supervisory and disclosure
regime, and certainly does not have anything like deposit
insurance. Tether Ltd. claims reserve assets of cash and
equivalents equal to their outstanding liabilities, but has
famously not produced an independent audit and has
claimed in court filings that they need not maintain full
backing. Thus, were any issues to arise that could
affect the willingness or ability of both domestic and
foreign investors to use USDT, the most likely result
would be a severe liquidity shock to the broader
cryptocurrency market which could be amplified by
its disproportionate impact on HFT-style market
makers which dominate the flow.
The rise of Central Bank Digital Currencies
(CBDCs): Not yet transformational
CBDCs are entering the “advanced stages” of
engagement around the world, and a recent survey by
the Bank for International Settlements (BIS)
indicates that 86% of global central banks are
11
actively exploring CBDCs. While the majority remain
unlikely to issue a digital currency in the foreseeable
future, a sizable minority are moving ahead. Roughly
60% of central banks are experimenting with digital
currencies, while 14% are moving forward with
development and pilot programs. The BIS highlights that
central banks representing roughly a fifth of the world’s
population are set to introduce a “general purpose CBDC
in the next three years.”11 However, the IMF notes that
there will be challenges to using digital money across
borders as policymakers will call for harmonization of
legal and regulatory frameworks governing data use,
consumer protection, digital identity and other policy
issues. Safety, liquidity, trade links, financial connection
and geopolitical factors explain why some currencies are
disproportionately used in cross-border
The transformation across borders will occur more
slowly, but the advancement of CBDCs can be viewed
as an exercise in geopolitical risk management,
brought on in part by the US-China conflict (Younger,
Feroli, St John). The massive advantage the US has on
maxi-QE and the weaponization of the dollar have
prompted both China and Russia to develop CBDC for
cross-border payments, with the ultimate objective to
dampen dollar hegemony. The Fed is slowly monitoring
these developments, but sees no first mover advantage as
the US dollar remains the reserve currency. China is also
likely unwilling to truly open its financial markets and
eliminate capital controls, which is required to
significantly raise the internationalization of the RMB
(Lei et al.).
The adoption of Global Stablecoins (GSCs):
FSB calls for greater regulatory oversight
Our economists and strategists see a case to be made
for CBDCs, and a way to introduce them at a
minimum of disruption while preserving their
benefits, but there are greater questions around the
regulation, supervision and oversight of so-called
Global Stablecoin (GSCs) arrangements (Younger,
Feroli, St John). While CBDCs are a digital form of fiat
money issued by a central bank subject to issuance and
design regulations that are determined by each sovereign
jurisdictions, the monetary and private law status of
GSCs is unclear. The IMF notes that GSCs could range
from money, electronic money, a commodity, a security,
12
Papers/Issues/2020/10/17/Digital-Money-Across-Borders-
Macro-Financial-Implications-49823
13
Global Research
. Morgan Perspectives
18 February 2021
Joyce Chang
(1-212) 834-4203
@
Jan Loeys
(1-212) 834-5874
@
Kimberly Harano
(1-212) 834-4956
@
or a combination of those. GSCs are stablecoins, a type
of digital money that could be issued by Big Tech with
the potential to be widely adopted. To the extent that
GSCs aren’t considered deposits, they may not be
required to be insured by deposit guarantee schemes,
such as Federal Deposit Insurance Corporation (FDIC)
insurance. Future regulation will focus on who is
permissioned to issue GSC arrangements and gain access
to the Federal Reserve’s payment system as well as the
appropriate level of oversight, supervision and
regulation. In FY20, 10 companies filed for bank
charters with the Office of the Comptroller of the
Currency, the most since FY10, with the applications
coming from “new” tech companies that are challenging
“legacy” Given the wide variance in the design
of private digital money and stability of value, our
strategists believe that all digital currency should
include liquidity savings mechanisms as part of their
liquidity designs (Younger, Feroli, St John).
As the IMF notes, the most potent digital platforms
are the ecosystems of Big Tech firms, which can draw
on data from large customer bases with non-financial
core activities to exert market power, with a clear
edge over banks in both communication and
information. While the involvement of non-financial
firms in financial services is not new, it has historically
been confined to project finance, leasing, loans for
consumer durables and facilitated trade The
Facebook-backed stablecoin project, Diem, is being
closely watched and has faced numerous legal and
regulatory challenges since it was proposed in June 2019.
Press reports indicate that Diem, which was previously
named Libra, may simply launch as a single coin backed
1:1 by the US dollar, pending approval from the Swiss
regulator, FINMA, abandoning original plans to be
pegged to a basket composed of multiple fiat
Big Tech might propose initially pegging
their GSCs to fiat currencies to ensure confidence in the
stability of their value, but concerns have been raised
that GSCs might be de-linked from fiat currencies over
time if their adoption becomes widespread.
Central banks have made it clear that they are not set
up to be technological innovators and the private
13
bank-charters
14
ancial-Intermediation-and-Technology-Whats-Old-Whats-
New-49624, p. 18.
sector will be the greater driver, but they realize that
a global framework for digital currencies needs to be
established given the potential impact on domestic
and cross-border payments. The Financial Stability
Board (FSB) is leading a global initiative to create
architecture around digital currencies that will take
advantage of new technologies, while increasing
financial inclusion and lowering the cost of finance. The
FSB issued 10 high level recommendations for the
regulation, supervision and oversight of “global
stablecoin” arrangements in October 2020, including
ensuring that GSC arrangements have appropriate
recovery and resolution Policy makers have
raised concerns about the potential challenges in using
digital money across borders given the distinct regulatory
requirements of particular jurisdictions. The FSB report
calls for completion of international standard-setting
work by December 2021 and the establishment of
national-level regulatory, supervisory and oversight
frameworks by July 2022, with international standards
set by July 2023.
Biden’s priorities: Greater focus on regulation
of digital finance, non-bank financial
intermediation and financial inclusion
The battle between US banks and non-bank fintech
will be fought not just in the field of technology, fees,
and convenience, but also on the regulatory field. The
latter is quite uneven with fintech companies subject to a
lot fewer regulations, based more on their tech than
financial activities. Banks, in contrast, benefit from their
access to the Fed and the deposit insurance that their
customers receive. As long as there is no crisis or major
scandals in fintech, their much lower regulatory burden
probably creates an uneven playing field versus banks.
But this is unlikely to last. Changes could come in two
areas: consumer protection and antitrust.
The Consumer Financial Protection Bureau, created as
part of Dodd-Frank and the brainchild of Senator
Elizabeth Warren, is tasked with promoting fairness and
transparency in consumer financial products. It has been
relatively inactive over the past four years, but under the
Biden administration it should become a lot more
15
january-2021
16
14
Global Research
. Morgan Perspectives
18 February 2021
Joyce Chang
(1-212) 834-4203
@
Jan Loeys
(1-212) 834-5874
@
Kimberly Harano
(1-212) 834-4956
@
proactive and in our view will likely focus on the
relatively unregulated world of non-bank finance.
A return of antitrust is a second risk to look out for
but is mostly a threat to Big Tech (more details in
“Business concentration: Consequences of winner-takes-
all for tech,” J. Loeys, in The Credit Crisis that Wasn’t:
The Returns Crisis that Looms, J. Chang et al., 21
September 2020). Just weeks before the November 2020
elections, President Trump’s Justice Department filed an
antitrust suit against Google. The origin of antitrust in
America from 1890 on tells us that it was not based on
concerns about monopoly profits, but on the perception
that holding companies—then called trusts—had become
too powerful relative to government and other social
groups. The Chicago School revolution that brought free
markets and globalization to the world also changed the
focus of US antitrust from company size to consumer
benefits. The massive rise in business concentration, the
growth of Big Tech over the past two decades, and the
perceived political, economic and social power of Big
Tech are now recreating interest, on both sides of the
aisle, to critically review perceived non-competitive
behavior as well their attempts to make inroads into
consumer banking.
Beyond greater oversight of stablecoins and Bitcoin,
Biden’s platform could potentially impact Big Tech in
many regulatory dimensions, including stricter rules
surrounding digital identity issues and data privacy,
taxation on the revenue from digital ads, and
removing the immunity that tech companies now
receive from lawsuits over what people post on their
websites. The January 6 riots on Capitol Hill could also
expedite greater regulation on Big Tech, specifically
repealing or overhauling Section 230 of the
Communications Decency Act, as they have not done
enough to stop misinformation and hate speech. Section
230 has been called the “legal liability shield” for Big
Tech as it provides tech companies with protection from
lawsuits over what people post to their The state
of Maryland voted on February 12 to place a tax on the
revenue from digital advertisements sold by companies
17
valley-tech-biden-democrats/
18
19
20
Policy-Papers/Issues/2020/06/29/The-Promise-of-Fintech-
like Facebook, Google and Amazon, becoming the first
state to approve such a measure, which could generate up
to $250mn for schools in the first year. The tax mirrors
policies put into place by European countries, and similar
proposals are under consideration by Connecticut and
Finally, while we have focused on the challenges that
lie ahead, we highlight the potential benefits that
digital financial services ultimately bring to low-
income households and small Financial
inclusion as a result of these services can also boost
economic growth, as noted in a recent IMF This
study builds on the blueprint laid out in the Bali Fintech
Agenda, which was launched in October 2018 and laid
out 12 policy elements to harness the benefits and
opportunities of rapid advances in financial technology
for the estimated adults in the world without
access to financial In their recent report, IMF
researchers introduced an index of digital financial
inclusion that measures the progress in 52 emerging
market and developing economies and found that
digitalization increased financial inclusion between 2014
and 2017, even where financial inclusion through
traditional banking services was declining. Previous
studies found that extending traditional financial services
to low-income households and small firms is associated
with increasing economic growth and reducing income
inequality due to lower transaction costs, ease of access
and the ability to provide access to complementary
services or This analysis found that digital
financial inclusion is also associated with higher GDP
growth. During the COVID-19 lockdowns, digital
financial services enabled governments to provide quick
and secure financial support to “hard-to-reach” people
and businesses, and broadening the financial access of
low-income households and small businesses could also
support a more inclusive recovery.
However, the paper also warns that the pandemic could
accelerate pre-existing risks of financial exclusion and
lead to new risks to the fintech sector itself. The
researchers note that fintech appears to be closing gender
Financial-Inclusion-in-the-Post-COVID-19-Era-48623 and
the-times-of-covid-19/
21
/media/Files/Publications/PP/2018/pp101118-bali-fintech-
22
Papers/Issues/2020/10/17/Digital-Money-Across-Borders-
Macro-Financial-Implications-49823, p. 14
15
Global Research
. Morgan Perspectives
18 February 2021
Joyce Chang
(1-212) 834-4203
@
Jan Loeys
(1-212) 834-5874
@
Kimberly Harano
(1-212) 834-4956
@
gaps, but they also note that special attention needs to be
paid to ensure that women are not left behind during the
COVID-19 crisis. Stakeholders interviewed for the paper
highlighted several barriers to digital financial inclusion
such as access to resources (mobile phone, internet),
cultural or social norms, and digital and financial
literacy, may be higher for women.
Joyce Chang AC
@
. Morgan Securities LLC
Jan Loeys AC
@
. Morgan Securities LLC
Kimberly Harano AC
@
. Morgan Securities LLC
16
Global Markets Strategy
. Morgan Perspectives
18 February 2021
Nikolaos Panigirtzoglou
(44-20) 7134-7815
@
Mika Inkinen
(44-20) 7742 6565
@
Nishant Poddar, CFA
(91-22) 6157-3255
@
A review of the past year for
Bitcoin: Competition with gold
as “alternative” currency is here
to stay
Bitcoin’s competition with gold as an
“alternative” currency will likely continue as
millennials become a more important component
of investors’ universe and given their preference
for “digital gold” over traditional gold.
We believe Bitcoin, at current market prices, has
already surpassed gold in risk capital terms. In
fact an argument can be made that the $25k price
that equalizes Bitcoin with gold in risk capital
terms could be considered as an upper bound of
its fair value range as this price already
frontloads (at current levels of volatility) any
long-term upside for Bitcoin stemming from real
money institutional adoption.
We view the current mining cost of $11k as a
lower bound of Bitcoin’s fair value range.
While Bitcoin got another boost with Tesla’s
announcement, the 8% allocation of its cash
reserves to Bitcoin is unlikely to be followed by
more mainstream corporates.
Irrespective of how many corporates eventually
follow Tesla’s example, there is no doubt its
announcement changed abruptly the near-term
trajectory for Bitcoin by bolstering speculative
institutional flows via Bitcoin futures as well as
retail flows.
How sustained the price surge post Tesla’s
announcement becomes would depend, in our
opinion, on whether less speculative institutional
flows like those behind the Grayscale Bitcoin
Trust follow suit.
In the long term, our theoretical price target of
$146k is conditional on Bitcoin vol converging to
that of gold, which is not only likely to be a multi-
year process but would also depend on Bitcoin
ownership becoming more institutional and less
retail over the coming years.
The virus crisis, by boosting money supply as well as
demand for an “alternative” currency, has supported both
gold and Bitcoin over the past year. The older cohorts
preferred gold, while the younger cohorts preferred
Bitcoin as an “alternative” currency. Both gold and
Bitcoin investment vehicles have experienced strong
inflows over the past year, as both cohorts saw the case
for an “alternative” currency. This simultaneous flow
support has caused a change in the correlation pattern
between Bitcoin and other asset classes, with a more
positive correlation between Bitcoin and gold but also
between Bitcoin and the dollar (Figure 1). In addition,
the simultaneous buying of US equities and Bitcoin by
millennials has increased the correlation between Bitcoin
and S&P500 since last March, so it is more appropriate
to characterize Bitcoin as a “risk” asset rather than a
“safe” asset, also given its still very high 70% realized
volatility. To some extent, this is also true with gold.
Gold’s correlation with the S&P500 has been
predominantly positive over the past year and its
volatility at close to 20% is more similar to that of
equities than to currencies or bonds (Figure 2). In other
words, both Bitcoin and gold could be more
characterized as “risk” rather than “safe” assets based on
their behavior over the past year and investors’
preference for them is likely more of a reflection of a
need for an “alternative” currency rather than a need for
a “safe” asset or “hedge.”
Figure 1: Correlation between Bitcoin and other asset classes
3-month rolling correlation of daily returns
Source: Bloomberg Finance ., . Morgan
-60%
-40%
-20%
0%
20%
40%
60%
80%
17 18 19 20 21
correl with SPX
correl with DXY
correl with Gold
17
Global Markets Strategy
. Morgan Perspectives
18 February 2021
Nikolaos Panigirtzoglou
(44-20) 7134-7815
@
Mika Inkinen
(44-20) 7742 6565
@
Nishant Poddar, CFA
(91-22) 6157-3255
@
Figure 2: Gold vs equity correlation
3m and 6m rolling correlation between daily returns of Gold futures (GC1
Comdty) with S&P 500 Index
Source: Bloomberg Finance ., . Morgan
In the second half of 2020, Bitcoin started receiving
more support via corporate adoption, initially with
Square and MicroStrategy and last October with Paypal.
Paypal’s adoption of Bitcoin was a big step toward
corporate support for Bitcoin, which in turn appears to
have triggered demand for Bitcoin by institutional
investors such as family offices, hedge funds and even
insurance companies such as MassMutual. Some of that
institutional impulse into Bitcoin likely came at the
expense of gold based on the more than $4bn of inflows
into the Grayscale Bitcoin Trust and the more than $7bn
of outflows from Gold ETFs since mid-October (Figure
3). There is little doubt that this competition with gold as
an “alternative” currency will continue over the coming
years given that millennials will become over time a
more important component of investors’ universe and
given their preference for “digital gold” over traditional
gold. Considering how big the financial investment into
gold is, any such crowding out of gold as an “alternative”
currency implies big upside for Bitcoin over the long
term. As we had mentioned previously in the Oct 23rd
Flows & Liquidity, “Bitcoin’s competition with gold,”
private gold wealth is mostly stored via gold bars and
coins, the stock of which, excluding those held by central
banks, amounts to 42,600 tonnes or $ including
gold ETFs. Mechanically, the market cap of Bitcoin at
$900bn currently would have to rise by 3x from here,
implying a theoretical Bitcoin price of $146k, to match
the total private sector investment in gold via ETFs or
bars and coins.
Figure 3: Cumulative Flows in Bitcoin Trust & Gold ETF holdings
Both the y-axes in $bn
Source: Bloomberg Finance ., . Morgan
We mentioned previously this long-term potential upside
based on an equalization of the market cap of Bitcoin to
that of gold for investment purposes is conditional on the
volatility of Bitcoin converging to that of gold over the
long term. The reason is that, for most institutional
investors, the volatility of each asset class matters in
terms of portfolio risk management, and the higher the
volatility of an asset class, the higher the risk capital
consumed by this asset class. Thus, it is unrealistic to
expect that the allocations to Bitcoin by institutional
investors will match those of gold without a convergence
in volatilities. A convergence in volatilities between
Bitcoin and gold is unlikely to happen quickly and is in
our mind a multi-year process. This implies that the
above $146k theoretical Bitcoin price target should be
considered as a long-term target, and thus an
unsustainable price target for this year.
In fact, an argument can be made that, in terms of risk
capital, Bitcoin has more than equalized with gold
already (see Jan 4th Flows & Liquidity, “Has Bitcoin
equalised with gold already?”). To see this, one could
compare the volatilities of Bitcoin and gold, or the
volatilities of the biggest Bitcoin and gold funds given
many institutional investors are only allowed or prefer to
invest in fund format. The 3m realized vol for Bitcoin
currently stands at 87% vs. 16% for gold. In other words,
the ratio of the two vols suggests that Bitcoin currently
consumes more risk capital than gold. This ratio
rises further if one looks at the biggest Bitcoin and gold
funds. The 3m realized vol for the Grayscale Bitcoin
Trust stands at 113% vs. 16% for GLD, the largest gold
ETF by AUM, ., the ratio of the two vols suggests that
the Grayscale Bitcoin Trust currently consumes
-60%
-40%
-20%
0%
20%
40%
60%
80%
06 09 12 15 18 21
3-month correlation
6-month correlation
-10
0
10
20
30
40
50
60
70
80
90
-1
0
1
2
3
4
5
6
7
8
9
Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21
BTC Trust Gold ETFs (RHS)
18
Global Markets Strategy
. Morgan Perspectives
18 February 2021
Nikolaos Panigirtzoglou
(44-20) 7134-7815
@
Mika Inkinen
(44-20) 7742 6565
@
Nishant Poddar, CFA
(91-22) 6157-3255
@
more risk capital than GLD. Taking the average of the
and ratios, suggests that Bitcoin and its biggest
fund on average consume more risk capital than
gold and its biggest fund, double the 3x ratio needed to
equalize the market cap of Bitcoin ($900bn) to that of
gold for investment purposes ($). In other words,
Bitcoin, at current market prices, has already more than
doubled relative to gold in risk capital terms. In our
opinion, unless Bitcoin volatility subsides quickly from
here, its current price of $51k looks unsustainable. In fact
an argument can be made that the $25k price that
equalizes Bitcoin with gold in risk capital terms could be
considered as an upper bound of its fair value range as
this price already frontloads (at current levels of
volatility) any long-term upside for Bitcoin stemming
from real money institutional adoption.
What about the lower bound of its fair value range? In
our opinion one way of thinking about the lower bound
of its fair value is based on the mining cost or intrinsic
value of Bitcoin. The ratio of the Bitcoin market price to
its intrinsic value is shown in Figure 4. The current ratio
is higher than its previous mid-2019 peak and matches its
end-2017 peak, again raising concerns about valuations.
This is not to say that the mining cost is driving the
market value. The opposite is likely true. In the early
years, Bitcoin’s production cost had naturally stronger
influence on the price because new coin generation was a
higher percentage of existing stock or supply. Now that
more than Bitcoins have been mined already (vs.
max supply of 21mn) and new coin generation is a
smaller percentage of the existing supply, the influence
of the production cost on the price has likely diminished.
Thus, in the current conjuncture, the market price is
likely driving the production cost rather than the other
way round. However, this causality does not mean that
the Bitcoin price would be diverging from its mining cost
on a sustained basis. Similar to gold, when the Bitcoin
market price is well above the production cost, mining
activity and mining difficulty should increase, pushing
the cost of production up towards the market price, thus
inducing some convergence. But similar to previous
episodes, some of that convergence could happen with an
adjustment in the market price also. We thus view the
acute divergence of Figure 4 as another valuation
challenge for Bitcoin and the current mining cost of $11k
as a lower bound of its fair value range.
Figure 4: Ratio of Bitcoin market price to intrinsic value
Intrinsic value estimated using the cost of production approach following
Hayes (2018)
Source: , . Morgan
What about positioning? There is little doubt that the
institutional flow impulse into Bitcoin is what
distinguishes 2020 from 2017. And there is no better
metric to capture this institutional impulse than the flow
trajectory of the Grayscale Bitcoin Trust in Figure 3.
This is because many institutional investors are only
allowed or prefer to invest in Bitcoin in fund format for
regulatory or other reasons. In fact, many of them are not
even allowed to hold restricted shares of the Grayscale
Bitcoin Trust via private placements given the 6-month
lock up period, and are thus forced to pay a premium by
buying these shares in the secondary market.
It is, however, wrong to view all these institutional flows
of last year as entirely driven by long-term investors. We
believe that a significant component of last year’s
institutional flows into Bitcoin reflect speculative
investors seeking to front run other more real-money
institutional investors. The frothy positioning in CME
Bitcoin futures is one manifestation of this speculative
institutional flow which encompasses momentum traders
such as CTAs and quantitative crypto funds. Indeed,
Bitcoin futures, the preferred vehicle of speculative
investors, saw a sharp increase in open interest in recent
months (Figure 5) pointing to intense buildup of futures
positions. This is also true with our more carefully
calculated Bitcoin futures position proxy shown in
Figure 6, which experienced a similarly steep ascent in
recent months to unprecedented territory. As a reminder
to our readers, to infer positioning in Bitcoin futures, we
use our open interest position proxy methodology that
we also apply to other futures contracts, where we look
at the cumulative weekly absolute changes in the open
interest multiplied by the sign of the futures price change
Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21
19
Global Markets Strategy
. Morgan Perspectives
18 February 2021
Nikolaos Panigirtzoglou
(44-20) 7134-7815
@
Mika Inkinen
(44-20) 7742 6565
@
Nishant Poddar, CFA
(91-22) 6157-3255
@
every week. The rationale behind this position proxy is
that when there is a price increase, the net long position
of spec investors increases also with the magnitude of the
increase determined by the absolute change in the open
interest. It does not matter whether the open interest rises
or falls, as the net long position can increase either via
fresh longs (increase in open interest) or a reduction of
previous shorts (reduction in open interest), and vice
versa. When there is a price decrease, the net long
position of spec investors decreases also, with the
magnitude of the decrease determined by the absolute
change in the open interest. It does not matter whether
the open interest rises or falls, as the net long position
can decrease either via fresh shorts (increase in open
interest) or reduction of previous longs (reduction in
open interest). Looking at Figure 5 and Figure 6 it is
difficult to not have been concerned about a buildup of
institutional speculative long futures positions in Bitcoin.
Figure 5: Open interest in CME Bitcoin futures contracts
$mn. Last obs. for 10th Feb 2021.
Source: CME, . Morgan
Figure 6: Our Bitcoin position proxy based on open interest in
CME Bitcoin futures contracts
$mn. Last obs. for 10th Feb 2021.
Source: . Morgan
How much vulnerability do these momentum traders
pose for Bitcoin at the moment? Clearly, the price surge
to above $40k had shifted our Bitcoin momentum signals
to even higher territory. This is shown in Figure 7, which
depicts our short and long lookback period momentum
signals for Bitcoin. Figure 7 shows that the short
lookback period momentum signal rose above stdevs
in early January, and the long lookback period to above
stdevs, ., to even higher levels than the previous
peaks of mid-2019. Both are well above our stdev
threshold typically associated with overbought
conditions and a high risk of mean reversion. As we
mentioned in the Jan 15th Flows & Liquidity publication,
the challenge for Bitcoin at the time was that if its price
failed to break out above $40k, the momentum signals
would keep decaying till the end of March, given a
lookback period of around 2-3 months for our short
lookback period momentum signal. Bitcoin faced a
similar challenge at the end of November when its price
was hovering just below $20k. At the time we had
argued that if the Bitcoin price had failed to break out
above $20k, the momentum signals would have naturally
decayed until the end of January creating negative
dynamics for Bitcoin. Luckily, at the time the
institutional flow impulse behind the Grayscale Bitcoin
Trust was so strong that Bitcoin managed to break out
above $20k inducing further position build up rather than
position unwinding by momentum traders in December.
At the moment the institutional flow impulse behind the
Grayscale Bitcoin Trust by itself is not strong enough for
Bitcoin to break out above $40k as the 4-week pace of
the flow into GBTC (Figure 8) appears to have peaked in
December. Luckily, Tesla’s announcement that it has
invested $ in Bitcoin, or 8% of its corporate cash
reserves, abruptly changed the near-term trajectory for
Bitcoin by bolstering speculative flows and by helping
Bitcoin to break out above $40k. This reduces one
downside risk that we saw previously with Bitcoin, .
the idea that if its price fails to break out above $40k, the
momentum signals would keep decaying till the end of
March, inducing further unwinding by momentum
traders. The opposite is now happening. With Bitcoin
breaking out above $40k, momentum traders are forced
to amplify the current up move by rebuilding their long
Bitcoin futures positions. Indeed, our position proxy
based on CME Bitcoin futures, the preferred vehicle of
momentum traders and other speculative investors, saw a
sharp almost $1bn increase after Tesla’s announcement
(Figure 6) pointing to intense buildup of futures
positions.
0
500
1000
1500
2000
2500
3000
Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20 Jan-21
-500
0
500
1000
1500
2000
2500
Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20 Jan-21
20
Global Markets Strategy
. Morgan Perspectives
18 February 2021
Nikolaos Panigirtzoglou
(44-20) 7134-7815
@
Mika Inkinen
(44-20) 7742 6565
@
Nishant Poddar, CFA
(91-22) 6157-3255
@
Figure 7: Momentum signals for Bitcoin
z-score of the momentum signal in our Trend Following Strategy
framework shown in Tables A5 and A6 in the Appendix of the Flows &
Liquidity publication. Solid lines are for the shorter-term and dotted lines
for longer-term momentum.
Source: Bloomberg Finance ., . Morgan
Figure 8: Grayscale Bitcoin Trust flow
$mn, 4-week rolling average flows
Source: Bloomberg Finance ., . Morgan
What about retail investors? The speculative mania by
retail investors characterized the Bitcoin surge during
2017. Unfortunately, there are some signs that retail
interest has also increased sharply in recent months. For
example, as we had argued previously the broadening of
corporate support for Bitcoin, ., via Paypal and
Square, has been facilitating and enhancing over time the
usage of Bitcoin by millennials. While we do not yet
have data for 4Q volumes, one way to gauge the impact
from retail purchases via Paypal is to look at volumes on
itBit. These volumes (Figure 9) had increased markedly
since Oct 21st when Paypal announced the launch of
services to enable trading and holding of
cryptocurrencies. In addition, there appears to have been
an increase in the flow impulse by retail investors post
Tesla’s announcement, as suggested by the most recent
spike in volumes at itBit in Figure 9.
Figure 9: Daily volume on itBit
In $mn per day
Source: , . Morgan
Another proxy suggesting increased retail participation is
new account openings on ‘traditional’ cryptocurrency
exchanges. Figure 10 below shows unique
cryptocurrency wallet accounts on .
While the number of accounts clearly has an increasing
trend over time, there are sharp pickups in new wallet
accounts during the retail-driven price spikes in end-
2017, as well as mid-2019. Since the start of November
2020, there has been a proportionally similar rise in new
wallet accounts to those two previous episodes.
Figure 10: Unique wallet accounts on
# of accounts in mn.
Source:
Moreover, data on the distribution of Bitcoin balances
held in wallet accounts is also suggestive of retail
participation. Figure 11 shows the percentage change in
total Bitcoin held in wallet accounts by bucket of Bitcoin
balance, . < 1 shows the % change in Bitcoin held in
wallet accounts with a balance of less than one Bitcoin. It
shows that between the start of 2020 and 2021 accounts
with less than one Bitcoin or between one and ten Bitcoin
have seen a marked increase in holdings that is more likely
Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21
Bitcoin
-100
0
100
200
300
400
500
600
Jan-19 Jul-19 Jan-20 Jul-20 Jan-21
0
50
100
150
200
250
Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21
0
10
20
30
40
50
60
70
Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21
M
il
li
o
n
s
21
Global Markets Strategy
. Morgan Perspectives
18 February 2021
Nikolaos Panigirtzoglou
(44-20) 7134-7815
@
Mika Inkinen
(44-20) 7742 6565
@
Nishant Poddar, CFA
(91-22) 6157-3255
@
to be retail driven. Similarly, there has been a significant
increase in balances held in accounts between 1,000 and
10,000 Bitcoin, which is more likely to be institutionally
driven. By contrast, balances held in accounts with more
than 10,000 Bitcoin have declined significantly,
suggesting early investors and miners have been selling
Bitcoin to facilitate the increase of new entrants.
Figure 11: % increase in Bitcoin held in wallet accounts by
bucket of wallet balance
In %
Source: , . Morgan
In all, while Bitcoin got another boost with Tesla’s
announcement, the 8% allocation of its cash reserves to
Bitcoin is unlikely to be followed by more mainstream
corporates. Irrespective of how many corporates
eventually follow Tesla’s example, there is no doubt that
Tesla’s announcement abruptly changed the near-term
trajectory for Bitcoin by bolstering speculative
institutional flows via Bitcoin futures, as well as retail
flows. How sustained the recent price surge becomes
would depend, in our opinion, on whether less
speculative institutional flows like those behind the
Grayscale Bitcoin Trust follow suit.
Nikolaos Panigirtzoglou AC
@
. Morgan Securities plc
Mika Inkinen
@
. Morgan Securities plc
Nishant Poddar, CFA
@
. Morgan India Private Limited
-15%
-10%
-5%
0%
5%
10%
15%
20%
< 1 1 - 10 10 - 100 100 - 1k 1k - 10k > 10k Total (net
supply)
22
Cross-Asset Fundamental Strategy
. Morgan Perspectives
18 February 2021
John Normand
(44-20) 7134-1816
@
Federico Manicardi
(44-20) 7742-7008
@
What cryptocurrencies have and
haven’t done for multi-asset
portfolios: Mainstreaming is
reducing diversification benefits
and leading to failure during a crisis
Whether cryptocurrencies are judged eventually
as a financial innovation or a speculative bubble,
Bitcoin has already achieved the fastest-ever
price appreciation of any must-have asset to
which it is often compared, such as Gold (1970s),
Japanese Equities (1980s), Tech stocks (1990s),
Chinese Equities (2000s), Commodities (2000s)
and FANG stocks (2010s).
Those only interested in potential long-run return
targets can review a few research notes published
earlier by . Morgan’s Research (see Kaneva
from 2018 and Panigirtzoglou from 2021). This
note instead revisits cryptocurrencies’ role in
delivering portfolio diversification for global
investors, which is an issue we have been
analyzing for a few years as this market matures.
The criteria are improvements in long-term
portfolio efficiency (do small allocations raise a
multi-asset portfolio’s risk-adjusted returns) and
mitigation of short-term drawdowns (does
Bitcoin rally during major Equity market
declines).
Why bother considering an unconventional and
high-volatility hedge? Three reasons: Equity and
Credit valuations look record-rich for a very
young business cycle; conventional hedges like
DM Bonds barely serve as insurance when US
10Y rates are near 1%; and some as-yet unseen
shocks (materially higher inflation, economically-
debilitating cyberattacks or climate catastrophes)
could favor an asset that operates outside
conventional financial channels.
On these two criteria, small (up to 2%)
allocations to cryptocurrencies still improve
portfolio efficiency due to high returns and
moderate correlations, but the persistence of this
diversification effect is questionable from both
ends. Current prices are so far above production
costs that mean-reversion lower in returns is a
recurring concern. Also, the mainstreaming of
crypto ownership is raising correlations with
cyclical assets, potentially converting them from
insurance to leverage.
Over shorter intra-month and intra-quarter
horizons, crypto assets continue to rank as the
poorest hedge for major drawdowns in Global
Equities, particularly relative to the fiat
currencies like the dollar which they seek to
displace. To the extent that Bitcoin remains an
investment vehicle rather than a funding
currency, it will always lack the short base that
sponsors USD (and JPY and CHF) strength
during periods of acute market stress. A more
unique macro shock related to much higher US
inflation or a breakdown of the payments system
will alter this pattern.
One decade’s bubble can become the next
decade’s innovation
Whether cryptocurrencies are judged eventually as a
financial innovation or a speculative bubble, Bitcoin
has already achieved the fastest-ever price
appreciation of any must-have asset to which it is
often compared (Figure 1), such as Gold (1970s),
Japanese Equities (1980s), Tech stocks (1990s),
Chinese Equities (2000s), Commodities (2000s) and
FANG stocks (2010s). Each of these predecessors began
with a compelling narrative and a tagline (“honest
money” for Gold, “Japanese economic miracle” for
Nikkei, “dot-com revolution” for Nasdaq, “a billion
Chinese consumers” for China Equities, “supercycle” for
Commodities and “secular growth” for FANGs), and
each delivered extraordinary price momentum that
challenged standard valuation models at that time. Each
also delivered at least one, high-volatility price crash
during the price discovery process that reversed more
than half the market’s previous gain, even though several
of these markets (Gold, Nasdaq, Chinese Equities,
FANGs) were later vindicated via further all-time highs.
Those only interested in potential long-run return
targets for cryptocurrencies can review a few
research notes published earlier by JPM Research
(see Examining Bitcoin’s cost structure by Kaneva from
Feb 9, 2018 and Has Bitcoin equalized with gold
already? by Panigirtzoglou from Jan 4, 2021). This note
instead revisits cryptocurrencies’ role in delivering
portfolio diversification for global investors, which is
an evolving issue we have been analyzing over the past
few years through the research notes hyperlinked in the
blue box below. The criteria are improvements in long-
term portfolio efficiency (do small allocations raise a
23
Cross-Asset Fundamental Strategy
. Morgan Perspectives
18 February 2021
John Normand
(44-20) 7134-1816
@
Federico Manicardi
(44-20) 7742-7008
@
multi-asset portfolio’s risk-adjusted returns) and
mitigation of short-term drawdowns (does Bitcoin
rally during major Equity market declines).
Why bother considering hedging with an asset as
unconventional and high-volatility as
cryptocurrencies? A few reasons. One is that
extraordinary monetary and fiscal stimulus over the past
year has created one of the broadest and earliest
valuation problems of the past 25 years (Figure 2),
which creates general concerns about portfolio
vulnerability to a macro or policy shock. These spoilers
range from somewhat familiar ones such as an inability
to tame COVID-19, a destabilizing rise in inflation, a
debt-related aftershock, significant regulatory tightening,
renewed US-China or US-North Korea conflicts; to the
as-yet unseen ones such as an economically-debilitating
cyberattack or an economically-significant climate
catastrophe in a large economy. Another is that the
collapse in DM Bond yields to negative levels in Japan
and Europe and to only 1% in the US has limited their
role as defensive hedges in global portfolios and forced
investors to focus on a range of second-best substitutes
across Equities and FICC (Quality stocks, EM Bonds FX
hedged, USD vs EM FX, JPY vs any currency, Gold),
with cryptocurrencies considered by some to be the
private and digital alternative to Gold (see Safe havens of
the past, present and future by Normand from Jul 3,
2020). Our conclusions haven’t changed much in the
three years we have been tracking this diversification
issue. Bitcoin improves long-term portfolio efficiency,
but its contribution will probably diminish as its
mainstreaming increases its correlation with cyclical
assets. And crypto continues to rank as the least reliable
hedge during periods of acute market stress.
Figure 1: The hype cycle – Bitcoin ascent has been steeper than
any other financial innovation or asset bubble of the past 50
years
Asset values indexed to 100 in Year 1 of regime change, chosen
approximately as 1970 for gold, 1985 for Nikkei, 1995 for Nasdaq, 2001
for Chinese Equities & Commodities, 2012 for Bitcoin and 2014 for
FANGs.
Source: . Morgan
Figure 2: Proportion of Equity & FICC markets trading rich to
long-term valuation metrics is unusually high for a young
expansion
Real Fed funds rate vs percentage of 70 Equity and FICC markets
trading more than one sigma above long-term average based on 1Y
forward P/Es, credit spreads, real 10Y rates, real FX rates and real
commodity prices. Bars indicate US recessions.
Source: . Morgan
Previous research notes from JPM Cross-Asset Strategy
on Cryptocurrencies
Cryptocurrencies as portfolio diversification: Still failing in high-
stress environments from January 2019 by Normand
Cryptocurrencies as portfolio diversifica
