With Bitcoin hitting a new all time high again today, rising above $48,000 before easing back a little, it was clearly time for JPMorgan to publish its latest hit piece against the cryptocurrency.
In its now fourth attempt to talk down bitcoin in the past two months (see here for failed attempt #1, attempts #2, and attempt #3), JPMorgan has published a new report, this time aimed at all those bitcoin fans who buy the currency because other major corporations or funds may follow in Tesla's footsteps , and purchase millions (or billions) of the cryptocurrency because "while bitcoin got another boost with Tesla’s announcement this week, the 8% allocation of its cash reserves to bitcoin is unlikely to be followed by more mainstream corporates".
We disagree completely not least of all because one month ago we predicted exactly that not only would Tesla buy bitcoin following the brilliant example set by Microstrategy, but that many more companies would follow in Elon Musk's footsteps. As a reminder, this is what we said:
One such company which we are convinced will announce it is converting billions of its existing cash into bitcoin, is none other than Tesla, whose CEO Elon Musk was urged by MSTR CEO Saylor to make a similar move with Tesla’s money. And since Musk, already the world's richest man thanks to the most aggressive financial engineering on the planet, has never been one to shy away from a challenge, we are absolutely confident that it is only a matter of time before Tesla announces that it has purchased a few billion in bitcoin.
But before we demolish the latest joke of an argument presented by JPMorgan, we would like to remind readers of the joke of a thesis that JPM laid out just over two weeks ago, when Bitcoin rose above $40,000 for the first time, and when the largest US bank once again tried to convince its clients that it would not go any higher. In a nutshell, the company warned that because bitcoin now correlates with risk assets, it does not provide "diversification" to investors who seek a safe haven from conventional risk exposure.
To this our counterargument was simple:
... so bitcoin sells off as much as or more than stocks do during risk off periods. But why is that any news? And why does JPM even care about bitcoin's diversification abilities, when instead one should look at it from a very different lens: bitcoin - and all crypto - are merely extremely volatile, ultra-high beta assets which rise much more than stocks during times of massive liquidity injection and drop at or near the pace that stocks drop when liquidity is withdrawn. Over the long run, this means that bitcoin will always win. There is no advanced calculus that one needs to figure this out.
Indeed, if one want a truly diversified and safe asset one would just buy gold. But that's not why anyone is buying bitcoin, least of all corporate CFOs and Treasurers, who have made their case for the crypto very clearly: in a world in which just under 1% of US GDP enters the market in the form of newly created central bank liquidity, bitcoin is becoming an asset that while not safe from high beta correlation to other risk assets, is certainly a hedge to not just infinite monetary dilution but to outright fiat and monetary collapse. Ironically, it was JPM itself that admitted this:
Relative to any other asset class or portfolio hedge, cryptocurrencies would uniquely protect portfolios against a simultaneous loss of faith in a country’s currency and its payments system, because they are produced and they circulate outside conventional and regulated channels.
Well... yeah, that's exactly the point guys. And the in the biggest headscrather, JPM itself admitted what Elon Musk just did, namely that "as insurance (or a lottery ticket) against dystopia, some exposure to these assets could be always justified irrespective of liquidity and volatility concerns."
Our conclusion was simple:
Well, in this insane world where everyone should be seeking insurance against "dystopia", we would be delighted to own as much of the cryptocurrency as we possibly can, "irrespective of liquidity and volatility concerns". So just like your boss back in 2017, thanks for making the decisive case for bitcoin yet again, John.
But the clearest and simplest reason why JPM was dead wrong is that since JPM's latest hit piece was written on Jan 21, bitcoin is up a whopping 50% and anyone who shorted it on bitcoin's latest "advise" has suffered terminal losses.
That particular JPM report was written by the head of the bank's cross-asset strategy, John Normand. A similar bitcoin hitpiece was written just days prior by one of the bank's quants, the author of the popular Flows and Liquidity newsletter, Nick Panigirtzoglou, whose argument was more technical: with bitcoin failing to breach $40K, CTAs, trend followers and momentum-chasing algos and quants would no longer pursue it. Needless to say that argument was also absolutely dead wrong because while momentum-chasing quants may or may not have been long, bitcoin did find enough marginal buyers to push it up from the $30,000 level to just shy of $50,000. Not only that, but in the process it forced short-covering amid what was until recently a record short base...
... with much more squeeze pain coming (incidentally those short bitcoin, are the same people who listened to JPM in the past three months when the megabank was bashing crypto at every opportunity). Which is sad because it was Panigirtzoglou that first came out with the (quite credible) forecast that bitcoin would hit $140,000 as it becomes the millennials' "digital gold" and keeps rising until the value of gold and bitcoin reach rough parity. Clearly, since then JPM's Greek quant got the infamous tap on the shoulder, although it remains unclear why: because he truly believes that bitcoin should be lower (why, when even his colleague Normand made the case that bitcoin is the ultimate "dystopia insurance"), or because JPM's prop traders are hoping to get in and are eager to buy anything that JPM's clients will sell.
In any case, fast forwarding to today, when the same Nikolas Panigirtzoglou switched places with John Normand to became the latest JPM banker tasked with sparking at least a model selloff in bitcoin. His argument: try to build a persuasive case against the latest prevailing narrative - as laid out yesterday by Mike Novogratz who in turn took it verbatim from us one month earlier, when we explained that this is the way bitcoin hits $100,000 - that an avalanche of companies will follow in Tesla's footsteps and buy bitcoin. This is how the JPM quant lays out his argument:
Tesla’s announcement this week that it has invested $1.5bn 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.
It may have surprise you, Nick, but our readers were warned one month in advance that this is precisely the next key catalyst that will send bitcoin much higher. As for expectations that "other corporates" will buy bitcoin, that's precisely what they will do. But not according to JPM because...
... In our opinion, the main issue with the idea that mainstream corporate treasures will follow the example of Tesla is the volatility of bitcoin. 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%.
This to JPM implies that even small allocations of 1% to bitcoin "would cause a big increase in the volatility of the overall portfolio. For example, if a corporate treasurer allocates 1% of her 1% vol portfolio to bitcoin, the overall portfolio volatility will rise from 1% to 8%. This is because of the large 80% annualized vol of bitcoin."
On its surface this argument - which comes from the man who recently predicted that bitcoin would run out of buying power because it had somehow lost momentum when it was down for a day or two - is reasonable unfortunately it is also dead wrong, because no corporate treasurer is buying (or not buying) bitcoin because of its potential volatility. The reason why they would be buying bitcoin is also the main reason why corporate officers do anything: to boost their stock price. And as the case of MicroStrategy (MSTR), which was the first company to convert most of its cash into bitcoin demonstrates so vividly, there is a lot of stock price upside once companies load up on bitcoin.
In fact, we are certain that this is one of the two key reasons behind Musk's decision to buy bitcoin, especially after he and MSTR CEO Michael Saylor had a conversation in late December, in which Saylor told Musk "If you want to do your shareholders a $100 billion favor, convert the $TSLA balance sheet from USD to #BTC . Other firms on the S&P 500 would follow your lead & in time it would grow to become a $1 trillion favor."
Are such large transactions even possible?— Elon Musk (@elonmusk) December 20, 2020
While Panigirtzoglou clearly missed this exchange, Musk did not... and did precisely as instructed. And it's only a matter of time before countless other companies do precisely as Musk has done, now that he has shown that it is perfectly acceptable to convert as much as 8% of one's cash reserves into the cryptocurrency.
There is another reason why companies will want to buy bitcoin and it is precisely the one mentioned by the JPM quant, only for a diametrically opposite rationale. By having such a volatile asset on their books, whose mark-to-market swings have to be captured in the net income line, it gives companies enough of a diversionary buffer which, when applied to some creative accounting, will allow them to either always beat bottom line estimates, or otherwise blame any miss on "one-time" bitcoin volatility. Meanwhile, thanks to having bitcoin on their books, not only do CFOs stand to benefit greatly from its appreciation (see the price of MSTR), but it makes them publicly traded proxies for bitcoin.
Yes, in a country in which there is still no bitcoin ETF, companies who are loaded to the gills with bitcoin are a perfectly acceptable, DTCC-validated proxy for bitcoin exposure! It wouldn't surprise us if Musk announced another $1.5 billion bitcoin purchase, and then another... as he hopes to make TSLA a company that becomes a publicly-traded proxy for bitcoin. And that's why countless other companies will follow suit, perhaps even Apple, which RBC predicted yesterday could buy as much as $5BN in bitcoin as part of launching an "apple exchange" where bitcoin is one of the permitted currencies.
In short: buying bitcoin is a win-win for all companies involved.
* * *
Perhaps knowing in the back of his head that his latest attempt to hammer bitcoin will crash spectacularly (again), Panigirtzoglou concedes that his previous skepticism was wrong, and that perhaps he is wrong this time too...
there is no doubt that this week’s announcement changed abruptly the near-term trajectory for bitcoin by bolstering inflows and by helping bitcoin to break out above $40k. This reduces one downside risk that we saw previously with bitcoin, i.e. 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.
Yes, Nick, precisely the opposite of what you predicted is now happening. And we suggest you get used to saying that if you plan on continuing to bash bitcoin. As for what this particular "opposite" is...
With bitcoin breaking out above $40k, momentum traders are forced to amplify the current up move by rebuilding their long bitcoin futures positions.
Not only that but those shorts who built up a record bearish position in bitcoin futs as recently as the end of 2020 are now forced to cover at ever higher prices in a market in which the bitcoin float keep shrinking day after day (because every incremental institutional purchase just leaves less tokens freely traded). JPM admits this as well:
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 this week pointing to intense buildup of futures positions.
Obviously, the above observation does not help his case, so the JPMorganite needs to goalseek at least one argument in his behaf which he did by pulling the "flow" pace in the GBTC (grayscale bitcoin trust), the closest thing to an ETF, and which according to the JPM quant has seen a much "subdued" inflow of "$300m per week relative to the torrid $500m per week pace seen in December." This to Panigirtzoglou suggests that "the additional flow impulse that helped bitcoin to break out above $40k came from more speculative institutional investors like those behind bitcoin futures rather than the ones behind the Grayscale Bitcoin Trust."
Well that... and also major corporations like Tesla, which bought bitcoin outright and not via the GBTC and in fact, the whole point of the argument is that as more companies buy bitcoin - as in tokens, not trusts or paper futures - they themselves become bitcoin proxies for others.
In fact, we are shocked that Panigirtzoglou fails to grasp this simplest counterargument to his entire narrative. It's shocking because even retail investors now get it, as the JPM analysts points out as well: "In addition, there appears to have been an increase in the flow impulse by retail investors also this week, as suggested by the spike in volumes at itBit i.e. the exchange via which retail purchases via Paypal are routed."
So momentum chasers are buying, Elon Musk is buying, retail is buying, companies such as MSTR buy it and see their stock price explode 10 fold but... other companies won't buy it. Well, that's pretty much the gist of JPM's argument:
In all, while bitcoin got another boost with Tesla’s announcement this week, the 8% allocation of its cash reserves to bitcoin is unlikely to be followed by more mainstream corporates.
At this point it makes the most sense to just agree to check back in a month and see just how off the JPMorgan strategist was... again. Amusingly, at the very end of his note, the quant himself realizes that his entire argument is as hollow as the Marriner Eccles building, and does a "yes but...":
Irrespective of how many corporates eventually follow Tesla’s example, there is no doubt that this week’s announcement changed abruptly the near-term trajectory for bitcoin by bolstering speculative institutional flows via bitcoin futures as well as retail flows. How sustained this week’s price surge becomes would depend in our opinion on whether less speculative institutional flows like those behind the Grayscale Bitcoin Trust follow suit.
No, Nick, you are painfully wrong again... just like you were wrong the last time you looked at your favorite GBTC as a proxy of... something... and predicted that bitcoin would drop. It did not. Furthermore, it's not "irrespective of how many corporates follow Tesla's example" - that's precisely the ballgame right there. Once we get two more companies, then 4, then 8, well even quants know what sequences that is.
But while we have no question that many more companies - including blue chip names like Apple - will eventually buy bitcoin, the real question we have is when JPM's biggest clients, like Bridgewater for example, will announce that they too have bought bitcoin. And Bridgewater will. And since Nick completely missed the Tesla purchase of bitcoin when he could have simply read our post on the matter (as a reminder, JPMorgan analysts, you guys are paid to predict the future, as in what will happen, not explain the past and yet that's all you've been doing here for the past three months) we will be helpful and point Mr. Panigirtzoglou to what Ray Dalio said just two weeks ago:
“I and my colleagues at Bridgewater are intently focusing on alternative storehold of wealth assets and expect Bridgewater to soon offer an alt-cash fund and a storehold of wealth fund in order to better deal with the devaluation of money and credit that we consider to be a major risk and opportunity, and Bitcoin won’t escape our scrutiny.”
And the punchline:
"It seems to me that Bitcoin has succeeded in crossing the line from being a highly speculative idea that could well not be around in short order to probably being around and probably having some value in the future....To me Bitcoin looks like a long-duration option on a highly unknown future that I could put an amount of money in that I wouldn't mind losing about 80% of."
Translation: in the next few weeks, Bridgewater will announce on its own or in response to external prodding...
Dear @RayDalio how much bitcoin has Bridgewater bought so far?— zerohedge (@zerohedge) February 10, 2021
... that it has bought billions worth of bitcoin, and that will be the catalyst that sends the crypto above $50,000, $60,000 or perhaps even $100,000. Meanwhile, JPM will still be looking at the GBTC and scratching its head wondering how it could give its clients such terrible advice... again.