Traders Are Flooding Morgan Stanley With Calls To Explain Why Bitcoin Is Soaring

First it was Goldman succumbing to hedge funds and "due to popular demand" providing its first ever "technical" take on where Bitcoin will go from here. Now it's Morgan Stanley's turn.

In a report on the "Blockchain, Unchained" - in which it advocates for regulation of the blockchain as part of its evolution as well as providing a "master key" to a regulator, in effect killing the very premise behind such a decentralized infrastructure (more on that later) -  Morgan Stanley writes that "the rapid appreciation of cryptocurrencies has elicited many inbound phone calls to both our banks and tech teams."

It responds that possible explanations for the dramatic moves include investors in search of uncorrelated risk assets and technologists looking for incremental security. But, the bank writes, "governmental acceptance, would be required for this to further accelerate, the price of which is regulation." We doubt many supporters of cryptos will agree with this.

In any event, here are some further details from Morgan Stanley, but first, a quick primer: as MS explains, for many, Bitcoin and blockchain are often thought of synonymously. In reality, blockchain is primarily a messaging and bookkeeping method, whereas Bitcoin is a store of value that makes use of blockchain methodology to transfer value. Bitcoin and other cryptocurrencies have shown rapid appreciation, as shown in Exhibit 23 and Exhibit 24, with the pace of appreciation showing rapid acceleration since the beginning of 2017. While Bitcoin grabs the headlines, Ethereum, another cryptocurrency that attempts to address some of the echnical shortcomings of Bitcoin, has been gaining value at an even faster rate. The rapid appreciation of blockchain-based currencies and the proliferation of new cryptocurrencies is further raising blockchain’s technological profile.

MS then gives a detailed "explanation" on why Bitcoin and other cryptocurrencies have appreciated rapidly, saying "key possible drivers of cryptocurrency appreciation. It is not clear why cryptocurrencies are appreciating so rapidly (apart from the appreciation itself drawing in more speculation against a potentially inefficient ability to sell). But, in conjunction with our FX Strategy team we identify several key potential contributors:"

  • ICOs—initial currency offerings. Rapid appreciation of cryptocurrencies is encouraging speculative formation of new currencies (see Exhibit 25 ). Many of these new currencies don’t actually have use cases yet, but are intended to be exchange mediums for everything from virtual goods in games to banking mechanisms for products like marijuana where legal implications are not yet fully clear. ICOs are funded with existing cryptocurrencies, hence driving an appreciation circle—e.g., to support/invest in a new currency, one must buy and trade an existing cryptocurrency.

  • Moving funds in China. Up until the last few days, a disproportionate share of Bitcoin mining was taking place in China (where there is cheap access to servers and cheap electricity). First on this website in 2015, and subsequently on many other outlets such as the Wall Street Journal (November 5, 2016) and Fortune (January 5, 2017) have noted that Bitcoin was being used to help avoid monetary controls in China, which explains why the Chinese government has cracked down on Bitcoin mining recently.
  • Increased demand from Korea and Japan. Bitcoin appreciation seems to have been heavily driven in recent months by increased buying from Korea and Japan. In Japan, the recent legalization of Bitcoin has led to an increase in activity, including the recent opening of new Bitcoin exchanges. In Korea, however, there is not a clear explanation for the surge.

While there is no one specific explanation for the surge in cryptos, Morgan Stanley is surprised because the rapid appreciation it taking place despite clear hurdles, to wit:

The rapid appreciation of Bitcoin and others is somewhat surprising in light of some developments that seemingly would have put downward pressure on the currency, including plateauing trading volumes (see Exhibit 23 ), the SEC’s decision not to allow the listing of a Bitcoin ETF, and China's shutdown of several Bitcoin mining operations (without those miners, transaction time for Bitcoin could increase substantially)."

MS then notes that bitcoin, ethereum et al, are acting more like an asset than currency.

Most regulators and investors view cryptocurrencies more as assets than actual currencies. Their values are too volatile and too hard to actually use for payment for most to consider them currencies. Our conversations with some merchants indicate that, while cryptocurrencies might actually be attractive for them to operate their businesses, they find that the cryptocurrencies are far too volatile to be used.

MS slams Bitcoin which it reminds clients, scales poorly, helping alternatives (especially those based on Ethereum). The blockchain underpinnings of most cryptocurrencies scale too poorly for most currency-like uses. Scaling challenges includes increasing electricity consumption as shown in the chart below, and that time to clear single transactions can often be from 10 minutes to more than an hour, and even that with no guarantee. Ethereum and others have addressed those scaling challenges by centralizing more of the blockchain function, although such increased centralization leads to increased hacking risk, as Ethereum found out the hard way last almost exactly one year ago.

Finally, going back to the most controversial point in the report, according to Morgan Stanley further price gains in cryptos may not be possible unless there is further regulation over the crypto space, which includes giving up autonomy. Which is ironic because as Ryan Vlastelica writes, "proponents of the digital currencies frequently cite their decentralized nature as one of the primary attributes that excites them about the technology."

Morgan Stanely didn’t specify what types of regulation might be necessary to further push bitcoin higher, noting that the specific changes needed may be different for different cryptocurrencies, all of which use blockchain technology. For blockchain overall, “regulators are involved and watching closely,” Morgan Stanley writes.

“Some have suggested privacy could be improved. Regulators are looking to have a master key so all transactions are visible to them.”

And while handing a master key may indeed streamline costs, it would likely also sacrifice Satoshi Nakamoto’s original intention of blockchain technology, which was to put banking inside the hands of the individual.

In the White Paper, Satoshi said, “Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model.”

This is what Satoshi’s envisioned, but it remains to be seen whether Morgan Stanley’s idea of the master key in blockchain technology will trump the idea of bypassing third parties. Some in the ecosystem still hope Satoshi’s original vision will prevail in the end. Others, those who hope for further gains in the price of bitcoin, ethereum and others, may be willing to sacrifice decentralization if it means further gains. For now, the jury is out even as both bitcoin and ethereum continue to trade just shy of their all time highs of $3,000 and $410, respectively.


nuubee Wed, 06/14/2017 - 15:57 Permalink

Damn, how do I get a consulting job like that? I'm pretty sure I would sound smarter about that subject than anyone at Morgan Stanley.

Croesus ParkAveFlasher Wed, 06/14/2017 - 16:05 Permalink

"But, the bank writes, "governmental acceptance, would be required for this to further accelerate, the price of which is regulation." We doubt many supporters of cryptos will agree with this."

- Yeah, "We know we've caused some economic problems, but if you allow us to control these, we won't do it this time...promise".

The Crypto crowd would be out of their minds to allow regulation without putting up a fight. Cryptos don't need Wall Street, or the SEC, or anybody else.

I don't even own any, but if I did, I'd tell the banksters to fuck off.

In reply to by ParkAveFlasher

Croesus Jubal Early Wed, 06/14/2017 - 17:01 Permalink

I love this quote from the article:

"Others, those who hope for further gains in the price of bitcoin, ethereum and others, may be willing to sacrifice decentralization if it means further gains."

So the original intention of BTC was "individual empowerment", but the speculators in crypto say "who cares, as long as I got mine?".

Let's hope the "individual empowerment" camp wins; at least that crowd is Liberty-minded. the speculators would only gut it, and make it like every other soulless 'investment product' out there.

In reply to by Jubal Early

Jubal Early Drimble Wedge Wed, 06/14/2017 - 16:15 Permalink

"The popular online Bitcoin wallet Coinbase has been routinely seizing accounts of users in Hawaii and Wyoming, effectively “stealing” their Bitcoins by locking them out of their accounts. A Natural News investigation confirms that Coinbase is citing obscure state laws in its decision to seize accounts of users in both states, yet the online wallet refuses to allow users to log in and change their state of residence if they move to another state. In effect, Coinbase is “stealing” Bitcoins from users by locking them out of their own accounts, preventing them from accessing their Bitcoin balances even if they move to another state. Users are raging against the “ripoff” and the “theft” in user comments (see some examples below). When Wyoming-based users attempt to log in and see their Bitcoin balances, they are greeted with a Coinbase blocking message that says, “Unable to create account.”  Although we strive to provide continuous access to Coinbase services, Coinbase has indefinitely suspended its business in Wyoming and we regret that we cannot currently support services in Wyoming. You can find a further explanation of our account suspension policy We hope to restore service in Wyoming soon, so please check back again. Coinbase explains, “we apologize that we cannot currently project if or when our services may be restored.”"…

In reply to by Drimble Wedge

Croesus nuubee Wed, 06/14/2017 - 17:08 Permalink

@ Nuubee:

Despite being a Goldbug, don't think I don't root for you guys. Anybody or anything that's telling banksters and politicians to 'fuck off' can't be bad...

I still stand by the comments I write regarding cryptos, but none of it is usually said with malice, or ill-will.

In reply to by nuubee

Jubal Early nuubee Wed, 06/14/2017 - 17:23 Permalink

Nope, the vast majority of BTC and all Crypto speculators are surfing the ponzi.  Just like Tesla, FB, Apple and the rest of the fang/unicorn speculators.  There is no due dilligence, no consideration of investing for the common good, just greedy momentum chasing. It is pure, unadulterated greed.  Just look at the arguments these speculators make for why "bitcoin is going to a gazillion".Why do you think the Chinese and other asians are going bezerk over this shit, because they "read the source"?  fuck no.  It is in their DNA to speculate and if you read a little you will realize it has been that way for millenia.

In reply to by nuubee

Praetorian Guard magnetosphere Wed, 06/14/2017 - 16:35 Permalink

Has anyone stopped to think of the monetary risks to the global fiat system cryptos impose? If their equivalent monetary market share is around $100 billion, and this bitch ramps higher.... what happens if for some reason there is a mass exodus from crypto to fiat or vice versa basically triggering a  massive bank run?  Come join us for FREE at financials, charts, blogs, etc. ALL are welcome!!!!

In reply to by magnetosphere

WhosJohnGalt magnetosphere Wed, 06/14/2017 - 16:38 Permalink

Agreed.Anyone using either Goldman Sachs or Morgan Stanely for their more "traditional" investing, should be shitting their pants right about now.If these places can't get the basic facts correct about something as simple as cryptos like Ethereum and Bitcoin, how in the world can they get trading analysis correct with more traditional instruments such as stocks, bonds, ETFs, etc.?And BTW -- Ethereum wasn't "hacked".A buggy application running on top of Ethereum was exploited.  It's no different than an application running on Linux or Windows.  Just because some shitty developer wrote a poorly constructed app, does not mean the underlying OS (Linux, Windows, or Ethereum in this case) is suceptible to "hacking".  Derp!!P.S. ETH & BTC are on sale today, for those who've been hoping for the chance to average down.

In reply to by magnetosphere

hongdo magnetosphere Wed, 06/14/2017 - 17:48 Permalink

I also call "sell your book" bullshit on this article.  They are just trying to wiggle their camel nose into the tent with fake technical analysis to baffle potential investors they can scam.   Take a look at the power consumption curve. 1) I pay $200/month average for electricity for a small condo with electric heat so I'll use $100/month.  That's @1,200 per year.  1,000,000 houses consumption would be $1,200,000,000 per year to run the mining servers if you believe them.2) I've seen 2 estimates of how many bitcoins are mined each day - 2000 and 3600.  So 720,000 to 1,296,000 per year.3) So according to them the electric cost (without equipment, space, manpower) results in a mining cost of $926 to $1667 per bitcoin very conservatively.Not really feasible considering mining is going to get harder as the available to be mined bitcoins decrease and the number of transactions increases.If I'm wrong feel free to correct me. 

In reply to by magnetosphere

kliguy38 Wed, 06/14/2017 - 16:01 Permalink

Hello this is Bob from Morgan Stanley......may I help you.......Oh! Bitcoin?.....sure.......No problem. You may buy it as a safe haven but just don't EVER buy physical gold or silver..........have a good day.....

Mr. Pain Wed, 06/14/2017 - 16:01 Permalink

Why Bitcoin Is Soaring? Because the politicians of Amerika have trashed the currency! That's why! Political instability is growing and a civil war is just off in the horizon. The liberal revolution is beginning in order to save Karl Marx's lame ass vision. 

HRClinton Voice of insanity Wed, 06/14/2017 - 16:43 Permalink

PM would also be soaring, were it not for blatant price suppression by banks.Bankers are now getting overtly worried about the Substitution effect of Crypto currencies: Currency going into crypto, instead of PM. Moral: you can defy gravity and fundamental market forces only for so long and in so many ways - but not forever or in every way. Proclaiming to be "doing God's work", does not give you the Power of God.

In reply to by Voice of insanity

Al Huxley Wed, 06/14/2017 - 16:02 Permalink

I think this is going to be one of those rare times where a parabolic blow-off spike just normalizes and keeps going up.  Not like gold in 79, or tech stocks in the 90s or BreEx, or housing into 2007, or tulips, or ....   This one is DEFINITELY different, I can just feel it.

wains explosivo Wed, 06/14/2017 - 18:15 Permalink

Not saying you're wrong but care to elaborate on why you think it won't? Someone is going to have to stand up to us and make us back down. I'm pretty sure we are a paper tiger but we still have some big-ass bombs and certainly some sociopaths that aren't afraid to use them, the world population be damned.

In reply to by explosivo

GoldenDonuts Wed, 06/14/2017 - 16:04 Permalink

Because the dollar, pound, euro, canadian dollar, yen etc etc etc are dead.  The vast majority actually seem to believe that those little pieces of paper or those digits in their "savings" acocunt are wealth.  IT BLOWS MY MIND.

rphb Wed, 06/14/2017 - 16:06 Permalink

Okay one key thing to point out is that bitcoin is not a store of value. Its chart alone proves that, its price fluctuates wildly. Bitcoin is a decentralised fiat currency backed by nothing. And the pundits that think that it don't need backing are forgetting one very important thing. We can't eat bitcoin, and we can't do anything else with it either.If nobody wants to buy it it is worthless. That is not the case for a commodity like silver, or a real finansial asset like stocks or bonds that pays interest and dividents.