JPMorgan Has Some Bad News For Bitcoin Bears

Just over two months ago, JPMorgan CEO Jamie Dimon said he considered bitcoin to be a "fraud" that "will not end well," and would fire any JPM trader trading it. The very next day, one of JPM's most respected analysts, quant wizard Marko Kolanovic wrote a lengthy report to substantiate his boss' anger and skepticism, concluding that cryptocurrencies are most likely pyramid schemes and "that the future for cryptocurrencies will likely not be bright."

Predictably, since then the price of bitcoin has tripled, ensuring that virtually all retail (and most institutional) investors are far more interested in trading highly volatile bitcoin, ethereum, and other cryptos than stocks, and JPM has been dragged - kicking and screaming - into reversing its position on cryptos, and at the end of November the WSJ reported that the bank was willing to help clients trade bitcoin (for a hefty fee) even as the bank's CEO explicitly called the digital currency a fraud, effectively violating its fiduciary obligation.

And now, with just two weeks until December 18 when bitcoin futures will start trading on the CME and CBOE, JPM's reversal has gone so far as prompting one of the bank's top strategists, "Flows & Liquidity" author Nikolaos Panigirtzoglou to predict that the "introduction of bitcoin futures has the potential to elevate cryptocurrencies to an emerging asset class." Which sounds quite different from "Bitcoin is a fraud."

In "The emergence of cryptocurrencies", Panigirtzoglou's thesis is simple: the more widely accepted bitcoin becomes and the more widely traded especially on regulated trading platforms, the greater the cryptocurrency's credibility, making it more appealing to both institutional and retail investors:

With bitcoin reaching the $10000 mark this week (Figure 1) partly fuelled by the prospective launch of bitcoin futures contracts by established exchanges such as CME and CBOE, the question that arises is about whether a new asset class is emerging, potentially competing with other more traditional asset classes. The prospective launch of bitcoin futures contracts by established exchanges  in particular has the potential to add legitimacy and thus increase the appeal of the cryptocurrency market to both retail and institutional investors.

In slamming his boss' skepticism, the JPM strategist also writes that the perceived value of bitcoin would rise over time if more people use bitcoin and other cryptocurrencies as a store of wealth and more merchants accept it as a means of payment in exchange for goods or services. Panigirtzoglou goes so far as to suggest that crypto may be a better architecture than fiat: "one could even argue that the soundness of the technology on which bitcoin or other cryptocurrencies run makes them even more attractive as a means of payment." We hope Jamie Dimon is paying attention here. "Cryptocurrencies are easily transferred and are not easily counterfeited because blockchain, which serves as the public ledger for all transactions without the need of a central server, avoids the risk of double spending."

But wait, more praise from JPM is forthcoming: the Flows & Liquidity report list numerous other reasons why the price of "cryptocurrencies jas the potential to grow further from here" among which:

  • The total market capitalization for the cryptocurrency market has exceeded $300bn for the first time this week. In particular, data from shows that the market capitalization for all cryptocurrencies stands currently at roughly $302bn with bitcoin’s market cap accounting for more than half at about $168bn as of Nov 30th. Ethereum, the second-largest cryptocurrency, has a market capitalization of $42bn followed by Bitcoin Cash at $23bn.
  • This rapid rise in the market cap of the cryptocurrency market, which has tripled in terms of AUM since June, is at first glance making it comparable to other competing asset classes such as gold. In fact, the rise in market cap above $300bn means that the AUM of the cryptocurrency market greatly exceeds the total size of gold ETFs at $90bn. Does this mean cryptocurrencies have grown in size well beyond competing asset classes such as gold? Not necessarily.
    • First, gold ETFs is not the main way wealth is stored via gold. Wealth is mostly stored via gold bars and coins the stock of which, excluding those held by central banks, amounts to 38,000 tonnes or $1.5tr. In other words, the market cap of cryptocurrencies would have to rise five times from here to match the total private sector investment to gold via ETFs or bars or coins.
    • Second, in theory, the market value of cryptocurrencies could eventually rise beyond what could be justified by only valuing them as store of wealth. As mentioned above, cryptocurrencies derive value not only because they serve as store of wealth but also due to their utility as means of payment. The more economic agents accept cryptocurrencies as means of payment the higher their utility and value.

Naturally one way to gauge public adoption and interest, and thus future price appreciation, is by observing daily trading volumes: how much money changes hands every day in cryptocurrencies vs. competing asset classes such as gold?

According to publicly available data monthly volumes of Bitcoin traded has sharply increased in dollar terms around $140bn in November while volumes of Ethereum, the second largest cryptocurrency in terms of market capitalization, rose to around $30bn (Figure 3). The surge in Bitcoin volumes was largely a function of price appreciation, however, as in terms of units of the respective cryptocurrencies the increase simply brought trading volumes of Bitcoin back to levels seen in May, while trading volumes of Ethereum were some way below their peaks earlier this year (Figure 4).

By comparison, JPM notes that "monthly trading volumes in gold futures have averaged nearly $900bn in recent months, while gold ETF volumes have averaged around $30bn (Figure 5). This means that that  trading volumes in the two largest cryptocurrencies would also need to rise by more than five times to match volumes of gold traded on via futures and ETFs."

That said, JPM correctly predicts that bitcoin trading volumes will most likely increase further once futures contracts are introduced on bitcoin in the coming weeks, especially once those eager to short bitcoin finally have an instrument that allows them to do so. Then again, the (potential) shorts may want to re-evaluate, if only for one key reason...

While all of the above has been covered on Zero Hedge previously, and is hardly news, the JPM report revealed one particular piece of very bad news for bitcoin shorts.

Consider that as of this moment the market cap of all cryptos is $330 billion: a respectable number, if well below the total value of wealth stored via gold bars and coins the stock of which,  excluding those held by central banks, amounts to 38,000 tonnes or $1.5tr, as noted above. What is striking, however, is not how large the market cap is for an asset which so many say has no intrinsic value, or is a bubble, but how it got there. Because due to the unique features of bitcoin - which still remains a relatively illiquid asset - while its market cap may be $186 billion, or just over half that of the total crypto space, what is stunning is how it got there.

As JPM explains, "high trading volumes or market cap does not mean that the net flow directed into cryptocurrencies has been equally big."

Here is the bank's punchline: "The net flow into cryptocurrencies is very much a function of coin creation which is controlled by computer algorithms and in the case of bitcoin is diminishing over time. Figure 6 shows the net amount of money invested every year since 2009. The cumulative amount has totaled around $6bn since 2009, well below the current market cap of $300bn." For Ethereum, the number is just as stark: with a market cap of $45 billion, net inflows have been under $2 billion in the past two years. This is shown in the chart below:

If JPM is right, the implications are staggering:  contrary to expectations that bitcoin's market cap is a rough reflection of its inflows, JPM's calculations reveal that a mere $6 billion in net inflows since 2009 has resulted in a market cap of $330 billion. This goes to what Mike Novogratz said last week when he said that cryptos are unique, because unlike all other asset classes, there is no corresponding increase in supply when prices surge.

This also means that as new capital flows into the crypto space as more retail and institutional investors scramble for "a piece of the pie", the potential market cap gains are unprecedented.

Putting this number in context, so far in 2017, there has been $283BN in global equity inflows ($402BN in ETF inflows and $120BN in mutual fund outflows), and $346BN in bond inflows, as this BofA table reveals:

If only a fraction of these institutional and retail flows were redirected toward bitcoin, then the next, and even more parabolic leg higher would be upon us, inviting even more bubble comparisons, even more skeptics and even more converts... just like none other than Jamie Dimon humself. In other words, shorts, beware, especially now that shorting - and short squeezes - is about to get much easier thanks to bitcoin futures.


Anteater Sat, 12/02/2017 - 18:32 Permalink

No, it means the holders of $330B in vapor CC chips willbe fighting over $6B in cash, that's already disappeared.The greatest phishing expedition in human history. WIN!!

hedgeless_horseman IntercoursetheEU Sat, 12/02/2017 - 18:43 Permalink

 Apparently, the IRS has never heard of HODLing BTC.

The ruling by U.S. Magistrate Judge Jacqueline Scott Corley, calls for Coinbase to provide the tax agency with the name, birth date, address and taxpayer identification number of customers who had the Bitcoin equivalent of $20,000 or more in their accounts in any one year between 2013 and 2015.   According to Coinbase, the order will only affect its highest transacting clients, roughly 1 percent of its total customer base of roughly 6 million account holder. The IRS originally demanded records of all Coinbase customers.  ...   when an analysis the agency did of millions of tax records found that
only 800 to 900 taxpayers had filed the required form 8949 to declare
capital gains or losses from Bitcoin.…

In reply to by IntercoursetheEU

38BWD22 Schmuck Raker Sat, 12/02/2017 - 19:05 Permalink

  Bitcoin is now in the $10,500 - $11,000 range I earlier identified as a possible selling point (to trade BTC for more gold).  I have not made up my mind yet, its price is roughly $10,800 now.  I'll look again later tonight or tomorrow, and decide then.Anyone sitting on large gains should be thinking about this and making these kinds of decisions.*  *  *Re the IRS and Coinbase (etc.), my *guess* is that such efforts by .gov will become more aggressive.  It's important to keep records of your buying prices ("Cost Basis") as well as what you get when you sell.  My numbers are ready for our tax accountant to amend 2015 and should have a BIG SMILE when I turn over my Capital Gains Tax for 2017.

In reply to by Schmuck Raker

greenskeeper carl 38BWD22 Sat, 12/02/2017 - 19:11 Permalink

Smart of you, what you said at the end. I think things like this are going to be a big reason .gov starts trying to crack down and/or destroy this stuff. All they have to do is start saying "rich people are using this new method to make gadgillions of dollars and aren't even paying their FAIR SHARE" and half the country will be demanding bitcoin be destroyed.

In reply to by 38BWD22

BeanusCountus IH8OBAMA Sat, 12/02/2017 - 20:11 Permalink

IMHO, they are not scams. They are what they are. Scams pop up when a Mt Gox, etc., who holds these things goes poof. To me, cryptos are trading sardines. Stores of value? Tougher sell. Futures exchanges will add new element. Will allow naked shorting without "physical" settlement. Which I guess is okay with these things since they don't exist in the physical sense in the first place (unlike commodities). Short take: the value of these things are in people's heads at any particular point in time.

In reply to by IH8OBAMA

Ramesees 38BWD22 Sat, 12/02/2017 - 19:12 Permalink

Coinbase is going to send the IRS a 1099 that concludes every transfer is a sale of BTC. You will have to prove to the IRS if audited that you still own the Bitcoin. How is anyone’s guess. They’re not going to send an auditor to your house and watch you move the BTC (to prove that you still have the private keys). You could theoretically just take a screenshot of a random wallet with the correct amount of BTC in it and send it in...

Bitcoin is going to be a major PITA for my taxes this year and for the IRS going forward.

In reply to by 38BWD22

adr Ramesees Sat, 12/02/2017 - 19:57 Permalink

The IRS doesn't have to audit you fully to send you a tax bill. If a 1099 shows up with your SS number, you're screwed. I've had the IRS send me a tax bill for $57 on interest I made off a savings account I completely forgot about. I had to pay a $2800 penalty for supposed income my wife made in Texas even though she has never been there. One of her bosses used her SS number for an illegal when he moved his business there. I eventually got that one reversed but it was a pain in the ass. I had no idea a reimbursement check would be counted as income, but thanks to the 1099 rule for everything, it got 1099'd. God my sales reps were pissed when the Japanese sent 1099's for the $500 gift cards they gave out as a bonus. Some basement dwelling crypto miners are going to be in for a rude awakening when six figure IRS bills show up out of the blue. 

In reply to by Ramesees

Yellow_Snow adr Sat, 12/02/2017 - 20:33 Permalink

I only HODL crypto's so not an issue for me.  But...Unfortunately for the IRS, when the reality of the true situation hits them, there is nothing they can do...The monies going into Bitcoin and the like, are forever lost OUTSIDE THE MATRIXYou are trying to apply logic of your 'fraudulent dollar debt system' to crypto'sThere are countless ways that the average investor, without even trying, will make it a major feat for government to follow your 'dollars' around crypto-sphere. It could take years with even full participation of foreign exchanges, and unraveling privacy coins transactions  !!!Good luck on your quest to promote  IRS policies  !!!

In reply to by adr

Shift For Brains adr Sun, 12/03/2017 - 15:56 Permalink

You can always provide a corrected 1099. If I'm not mistaken, the generator of the 1099 has to prove up the numbers, not the one who claims it is inaccurate.BTW one of the few shields you have against the IRS is that they are not allowed to attribute so-called naked claims of income against you. IOW, the IRS has to show with a reasonable amount of certitude that the income they claim you got, you actually got. I would wait for the audit and then start the appeals process. There are so few people who even understand crypto you very well may be able to BS your way out of it rather than their risking losing a a  court appeal based on the facts and then setting a precedent for future cases. They would rather let one fish get away than lose the trawler.

In reply to by adr

38BWD22 Brazen Heist Sat, 12/02/2017 - 19:33 Permalink

  My understanding (which might be wrong, but probably not) is that any gains from sales of Bitcoin are considered as Capital Gains.The two companies I have bought gold from keep records of who they ship too, as does Bitpay (their BTC to CA$H service provider).Careful re messing with the Big Rhino.  If you have big gains, the IRS will come looking for you, sooner or later.  They use advanced blockchain tracking software ("Chainalysis" is one).Unless you are very tricky re mixing BTC, hiding your tracks with TOR and VPNs, not to mention being careful with whom you buy & sell your BTC with, you could get into trouble.Just sayin'

In reply to by Brazen Heist

Killtruck hedgeless_horseman Sat, 12/02/2017 - 19:03 Permalink

 "This means that trading volumes in the two largest cryptocurrencies would also need to rise by more than five times to match volumes of gold traded on via futures and ETFs."I see no problem with this. Easily achievable. BTC at this point has an institutional problem. Up until now, it's mostly been the realm of computer nerds and the 30's and younger crowd. But hardly any of those poor bastards have any money. The real money is with their parents, and the Boomers - but those people don't have the technical know-how to buy BTC or LTC or ETH on their smartphone. So once you start bridging that gap - such as I believe the futures market will do - then you're going to see some real fireworks. Remember that this is global. A retiring businessman in South Korea is competing with an oil magnate in Texas for the same slice of pie, being sold to them by some pimply-faced early adopter...the article said it correctly - the price goes up, but supply is controlled. So when I hear talk about BTC being in a bubble, I have to laugh, because this thing hasn't even seen the real horsepower get involved yet. Of course, God only knows what I would be doing right now if that damn boat hadn't taken that encoded hard drive down to Davy Jones' locker. Damned if I can buy a decent boat. That's like the third one that's sank on me...

In reply to by hedgeless_horseman

greenskeeper carl hedgeless_horseman Sat, 12/02/2017 - 19:05 Permalink

I still question bitcoin/ETH's long term viability, but I do not think we are near the top of this yet, not even close. I go off how many people even know what any of this is. I, personally, know 1 single person that owns any bitcoin(a person I actually know, not internet "friends" I BS with on places like this). When I start hearing work collegues, etc, start talking about buying BTC, I might start thinking about selling. But, I do consider myself 'dumb money' where cryptos are concerned. I thought it was BS a couple years ago when people on here started talking it up, and I only bought a little after watching it go parabolic, so I very well may be the last bagholding dumbass.I do thing its got a while to run, though. A nice market spook or two, who knows what could happen. That said, I do think we are passed the 5000% or whatever gains in a year, at least with these big ones. But, who the hell knows. I consider this to be gambling, and Im not gambling with anything Im not prepared to lose. I plan on riding this out a good, long while, and seeing how this plays out. Will I regret not just buying boring old silver with this money? Quite possibly. Sure is fun as hell to watch, and participate in, even if only a little bit.

In reply to by hedgeless_horseman

Antifaschistische hedgeless_horseman Sat, 12/02/2017 - 19:12 Permalink

as a crypto investor, this is NOT what you want to hear.   First, it's not news.  It's  reality.  A 1/50 ratio of inflows/market = easily manipulated upward.  Which is fine if all you want to do in look at your balance at the end of the month, but if you want your crypto's to actually be USED as a legitimate alternative to .gov fiat this ratio is horrible.   Our crypto's need a very high velocity to ever be anything other than a collectible.

In reply to by hedgeless_horseman

HRClinton hedgeless_horseman Sat, 12/02/2017 - 19:52 Permalink

Oh my, what am I to do as a 2013 HODLer?Whatever BTC/CC I choose to trade, will be an Exchange in Kind -- Assets for Assets. I.e.   - CC for CC,   - CC for AU bullion   - CC for IGD* (Investment Grade Diamonds -- top end of the 4C scale),   - CC for offshore RE.   - CC for fiat?  Hell, NO! Honeypot death trap.    * IGD are not for Sheeple. You need the money, the knowledge and the (((connections))).What you then do with your Real Assets, is a completely different ballgame. Especially as long as said Real Assets remain offshore, stored safely. And no sovereign power is able or has ever tried to "confiscate" your offshore RE.Then there's the additional firewall of choosing to convert Real Assets into fiat in TFJ (Tax Friendly Jurisdiction) -- IFF, for some crazy reason, you were to convert into a large amount of fiat currency, which you'd declare for tax purposes. In this scenario you'd also be "burning" a CC gateway, for TPTB to track going forward. The US taxman has enough problems on his plate, to go after the low-IQ criminals and tax cheats (evasion), than to go after high-IQ, law-abiding peeps who know how to lawfully evade.Hell, they can't even get basic criminals to comply with drugs, guns and income.There is a bigger Game afoot anyway...TPTB are only posturing, because secretly they want CC to succeed. It's Reverse Psychology: rather than forcing peeps to adopt CC, they are letting them get hooked on it by themselves, by making it too irresistible and beneficial to the 2010-2018 adopters.The real fear is not them going after peeps now (that's just chicken feed). Their intent is to muscle in when the CC Adoption Rates hit a critical level, at which point they get in on the action -- as they have always done. Until then, they will tolerate some Friction Losses as a tactic to achieve their Strategic Goal: One CC for the whole world that they own, and controls in real time.When TPTB get into CC, then Beware!  The Global Plantation will be complete.Got clarity?

In reply to by hedgeless_horseman

Laowei Gweilo hedgeless_horseman Sun, 12/03/2017 - 00:04 Permalink

>>> "mere $6 billion in net inflows since 2009 has resulted in a market cap of $330 billion" <<< the other way to look at this is that a mere $6 billion has masterbated itself to $330 billion you caaaaan say, woah look how much money hasn't entered BTCbut by the same token, it highlights how little financial value BTC actually was created from. $6billion got flipped back and forth until he went up over 5000% based on relatively low volume and low cash inflows it's undervalued based on potential inflows but incredibly overvalued based on current inflows

In reply to by hedgeless_horseman

aurum4040 Anteater Sat, 12/02/2017 - 21:31 Permalink

This is the first piece of mainstream analysis that is actually spot on with its assessment. I and others here including Tmosley have been saying the same thing for quite some time. The longer that idiots on ZH and elsewhere remain on the sidelines, the higher it goes. Wake up, admit you're wrong, take the crypto pill, and improve you life. Or dont. 

In reply to by Anteater

HRClinton dasein211 Sat, 12/02/2017 - 20:54 Permalink

"Crypto. Just. Got. Started."Ab-so-lute-ly!  CCs are:- Not a mere Asset Class.- Are a New Financial Ecosystem For this reason, "Asset Bubble Analysis" is an inadequate and inappropriate tool.That would be like calling emerging paper money of the late 1600s a "bubble", because it leaves Tally Sticks behind.

In reply to by dasein211