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Daily Intelligence Briefing

Wednesday, January 6, 2021

Identifying Change-Driven Investment Themes – Five sections, explained here.

The Daily Intelligence Briefing is published by McAlinden Research Partners. The report is provided to Hedge Connection blog readers once per week for free. Below is just one of the five sections that delivers Change-Driven Investment Themes everyday.

I. Today’s Thematic Investment Idea

A deep dive into a market driver with alpha generating potential.

New Blockchain Breakthroughs Underlie the Trendsetting Crypto Market Boom

Summary: Bitcoin and the broader cryptocurrency market is on fire, overshadowing some of the most critical developments in blockchain technology happening at major financial firms like JPMorgan. News of JPM’s stablecoin, JPM Coin, being used in commercial transactions preceded a new statement from the OCC this week, clearing the utilization of stablecoins and INVNs by financial institutions of any legal uncertainty.

Crypto markets continue to undergo a institutional and generational transition into the future. Firms like Square and Microstrategy are buying so much BTC that liquid supply is becoming constrained to less than 25%. Meanwhile millennial investors are proving they have a much stronger interest in crypto than physical assets like gold.

Related ETFs: Grayscale Bitcoin Trust (GBTC), Amplify Transformational Data Sharing ETF (BLOK), First Trust Indxx Innovative Transaction & Process ETF (LEGR)

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Blockchain Breakthroughs Charging Up Institutional Interest

Overnight, the price of Bitcoin (BTC) broke through its latest astronomical landmark: $35,000. While that will undoubtedly be the big crypto news of the day, many outlets have neglected to report on the advances in the blockchain technologies underlying cryptocurrencies.

Earlier this week, the Office of the Comptroller of the Currency (OCC) published an interpretive letter addressing whether national banks and federal savings associations could participate in independent node verification networks (INVNs, otherwise known as blockchain networks) or use stablecoins, minimum-volatility blockchain tokens, often linked 1:1 with the value an underlying fiat currency. The letter said that these financial institutions can participate as nodes on a blockchain and store or validate payments.

“Our letter removes any legal uncertainty about the authority of banks to connect to blockchains as validator nodes and thereby transact stablecoin payments on behalf of customers who are increasingly demanding the speed, efficiency, interoperability, and low cost associated with these products,” Acting Comptroller of the Currency Brian Brooks said in a statement.

That approval is the latest crypto-friendly move from the Treasury Department office, removing any legal uncertainty, and, potentially putting blockchain networks on an equal level as global financial networks such as SWIFT, ACH and FedWire. In a tweet, lobbyist group The Blockchain Association called the OCC’s interpretation “a giant advance for crypto because it paves the way for these networks to be a formal part of the U.S. financial infrastructure.”

The OCC’s recent guidance on stablecoins and blockchains follows another interpretive letter it issued in July, which clarifies national banks are allowed to provide cryptocurrency custody services, and hold unique cryptographic “keys” associated with cryptocurrency on behalf of customers.

Though a price spike across crypto exchanges following the news was relatively short-lived for most of the major coins (save Ethereum, which enjoys dominance in the stablecoin payment settlement protocol), this kind of regulatory acceptance of blockchain at the federal level is huge for institutions that are increasingly piling into blockchain technologies.

It is critical to note that the OCC’s letter is likely a direct response to what banks are working on behind the scenes. Stablecoins do not make big headlines in the financial media like the BTC bull run, but one could argue that the largest banking institutions are much more interested in stablecoins than they are in standard cryptocurrencies.

MRP has been covering the rise of stablecoins since the Spring of 2019 when IBM’s Blockchain World Wire (BWW) and JPMorgan’s JPM Coin, the first US-bank backed cryptocurrency, launched. Each of those projects have been focused on using stablecoins to facilitate wholesale or interbank fund transfers.

In October 2020, JPMorgan announced JPM Coin was being used in commercial transactions. The bank then launched a new subsidiary, Onyx, to handle its bank settlement blockchain platform, Liink. Cointelegraph reports that Goldman Sachs, one of several financial institutions to sign on to JPMorgan’s custom blockchain service, will reportedly sign on to Onyx for repo trades early next year.

Though the OCC letter is explicit in stating that banks may issue stablecoins as they might debit cards or checks, and exchange them for fiat, JPMorgan has not announced any plans to distribute their stablecoin to the public.

BTC-Gold Correlation Gradually Fades From Autumn Highs

As MRP noted last month, a decoupling between Gold and Silver was a marked departure from the overall trend of gold becoming more correlated with BTC over the last decade.

In late October, AMBCrypto wrote that, at the end of Bitcoin’s 1st halving in 2012, it was 2% and around 11% during the end of 2nd halving in 2016. After the 3rd cycle in 2020, the BTC-Gold correlation had jumped to 43%. The BTC-Gold correlation hit its highest level on record back in September, according to data from financial newsletter The Daily Shot. The correlation registered about 0.6, with data from other sources showing that the correlation has hit new peaks in the weeks following.

However, that relationship has faded in recent months as Bitcoin’s outperformance has actually proven to be more correlated with the S&P 500 than many other stock indexes are.

As per our December report on BTC, some have argued that we are even seeing outflows from gold going straight into BTC. According to JPMorgan, a theoretical ceiling for BTC could be around $146,000 if its market cap were to grow as large as gold’s. Bitcoin’s market cap currently stands at more than $575 billion. Per JPM, it would have to climb by 4.6 times to match the $2.7 trillion of private sector gold investment.

Some could argue, however, that a growing gap between gold and Bitcoin performance could be a generational trend. In December, financial advisory firm deVere released the results of a survey of over 700 of its millennial clients, which showed two-thirds of them prefer bitcoin to gold as an investment. This means any new savings entering the market may be almost 70% more likely to be put in bitcoin than into gold.

In recent weeks, some have predicted Bitcoin will begin running into a level of supply-side tightness.

About 900 new Bitcoins are mined daily, and three market participants alone ― PayPal, Square, and Grayscale Bitcoin Trust ― purchase considerably more than 900 BTC a day because of high investor demand. If this dynamic continues, MarketWatch reports that much higher prices lie ahead for the dominant cryptocurrency. Software firm MicroStrategy, which recently raised $650 million from the sale of convertible bonds to finance more BTC purchases on top of the over $734 million it was already sitting on, will certainly be another major institution responsible for sucking up huge swathes of BTC.

Unlike USD, BTC has a fixed supply at 21 million, making the currency deflationary. Though that leaves room for the current circulation of 18.5 million BTC to grow, the higher the circulation goes, the more difficult and time-intensive it becomes to mine blocks on the network. For a long time, it has been calculated that it would take until 2140 to mine the last Bitcoin block. Even if a rush of computational power speeds that process up marginally, we are still stuck with a very small amount of new BTC trickling onto the market.

Additionally, new research indicates 78% of the circulating supply may be illiquid. According to analysts Kilian Heeg and Rafael Schultze-Kraft at Glassnode, increased perception of Bitcoin as a store of value is reducing liquid bitcoin. That leaves about 4.2 million BTC in constant circulation and available for buying and selling.

Though that short list of major institutions is playing a huge role in driving up BTC prices, most institutional trading in Bitcoin is being done through derivative products like the Grayscale Bitcoin Trust (GBTC), as well as futures contracts to avoid the risk and regulatory scrutiny associated with owning BTC outright. As we noted in November, CryptoRank data showed Bitcoin futures accounted for more than 75% of all Bitcoin trade volume, with $31.1 billion worth of futures contracts being traded each day.

Going forward, we believe blockchain technologies will continue to be adopted in new and disruptive ways by huge players in tech and finance. Investors can gain exposure to blockchain via the Amplify Transformational Data Sharing ETF (BLOK) and First Trust Indxx Innovative Transaction & Process ETF (LEGR).


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