JPMorgan Publishes The "Bitcoin Bible"

Five months after Jamie Dimon's infamous outburst, in which the JPM CEO called Bitcoin a fraud, and threatened any JPMorgan trader caught trading cryptocurrencies with immediate termination "for being stupid", which was followed by JPM's head quant alleging bitcoin was a pyramid scheme, the largest US bank has released what can only be called the "Bitcoin Bible": 71 pages of excruciating detail on everything from the technology of cryptocurrencies, to their applications and challenges. 

While there is too much in the report - which was published on the same day that the NY Fed admitted that in "A Dystopian World, Bitcoin Would Dominate Payment Methods" which of course is the whole point behind cryptos which as a contingency plan to the collapse of fiat currencies - to be summarized in one post, and instead we will focus on the key points over the next few days, below we republish the Executive Summary from the report, highlighting the key sections.

Executive Summary

Introduction

  • J.P. Morgan researchers from across a wide range of expertise analyze various aspects of Cryptocurrency (CC) to gain insight on this market and its potential evolution in this report. CCs’ extremely rapid growth, and then fall, both in terms of number of CCs and prices and their challenge to the current financial infrastructure, are forcing all market participants to closely monitor and understand this new market.
  • Cryptocurrencies are virtual currencies that are created, stored and governed electronically by an open,  decentralized, cryptography system. CCs can be used to exchange money, to buy certain goods/services or as an investment. There are over 1,500 cryptocurrencies with a market cap of some $400bn as of February 8, 2018, with Bitcoin being the largest representing a third of the market according to CoinMarketCap.
  • Launched in early 2009, Bitcoin (BTC) is the dominant cryptocurrency with a market cap of $140 billion (representing one-third of the CC market) and nearly 17 million BTC units in circulation (capped at 21 million). Bitcoin was the first major cryptocurrency and has spawned many competing CCs and technologies, many of which still fall back to Bitcoin as a support currency. Bitcoin itself has split into two cryptocurrencies, Bitcoin and Bitcoin Cash, to improve liquidity.

Technology

  • Cryptocurrencies are the face of the innovative maelstrom around the Blockchain technology that is bringing both massive price volatility and a constant trial-and-error of new product try-outs and failures.
  • CCs are unlikely to disappear completely and could easily survive in varying forms and shapes among players who desire greater decentralization, peer-to-peer networks and anonymity, even as the latter is under threat. The underlying technology for CCs could have the greatest application in areas where current payments systems are slow, such as across borders, as payment, reward tokens or funding systems for other Blockchain innovations and the Internet of Things, as well as parts of the underground economy.

Applications

  • There are over 1,500 CCs with a market cap of $400bn. Transactions in the three largest CCs average $550bn per month and come mostly from individuals. Ownership is highly concentrated. The opportunity set around direct CC trading appears relatively limited for banks, while the two Bitcoin futures recently launched are seeing only $140mn in daily trading.
  • Blockchain saw its first expression through Bitcoin – the first CC – but is more likely to ultimately see its greatest application outside of CCs across other financial and non-financial transactions, even as Blockchain itself looks set to evolve fast as the market learns about what works best.
  • There is the potential for increased usage of Blockchain in cross-border payments, settlement/clearing/collateral management as well as the broader world of TMT, Transportation and Healthcare but only where any cost efficiencies offset regulatory, technical and security hurdles.
  • Hedge funds have been moving into this market making up most of the 175 CC funds but AUM remains only a few billion dollars. Asset managers are experiencing limited success in bringing products to market and have not been able to launch CC funds or ETFs without support from the SEC or major distributors.
  • While about half of the early CC transactions happened in the underground economy, the share of this is declining,  with investing and speculation now taking a much larger share.

Challenges

  • It will be extremely hard for CCs to displace and compete with government-issued currencies, as dollars to euros and yuan are virtual natural monopolies in their regions and will not easily give up their seigniorage profits.
  • CCs are experiencing heightened volatility and will face challenges from both technology (such as rising mining costs and hacking) and regulators who are concerned about anti-money laundering and investor protection, as CC payments are irreversible and there is no recourse.
  • Security concerns have mounted in Bitcoin exchanges as hackers have infiltrated a number of CC exchanges generating large losses, while regulators are challenging anonymity.

Below are some of the JPM team's observations on what the future could bring for cryptos, with highlights, however the most notable admission is JPM stating that cryptocurrencies "could potentially have a role in diversifying one’s global bond and equity portfolio", a far cry from Jamie Dimon's emotional appeal that all cryptos are a giant fraud.

In the early stages of innovation, usually set off by new technology — in this case Blockchain — the market experiments with many different approaches to see what shape and form will stick and end up offering the most economic value-added. We would note that it is not pre-ordained that cryptocurrencies will succeed as there are valid concerns about what economic value they really contribute. But in a time of rapid innovation, many new products will are often-and-errored. We believe the potential disruption from Blockchain cannot be ignored.

The excitement of innovation typically also leads to price booms and then crashes among the early movers, before more realistic prices emerge among the eventual survivors. Much of this is what we see today with exponential price gains and losses, growth and diversity among cryptocurrencies. Given the amount of speculation in these markets, technical signals can be very useful in gauging market direction and they have been sending the right signals in recent months. Fundamentals are a lot less informative here, although it can be useful to look at the cost of mining CCs, even as one must also account for the elasticity of supply.

Cryptocurrencies are both a new technology — Blockchain — and a new currency (many new ones). The new shape and form of the CC market in the future will likely ultimately depend on what economic value they are perceived to add. We would expect the marketplace and regulators to ultimately weed out what are perceived the negative, less useful characteristics of CCs and retain the positive elements that add economic value.

As discussed more in detail below, the Blockchain technology driving CCs offers transparency to transactions and allows them to be virtual and peer-to-peer. Distributed ledger technology has the potential to offer regulators greater degrees of transparency, higher levels of resiliency and shorter settlement times, reducing counterparty and market risk.

Allen similarly discusses various efforts under way with, for example, a number of payment processing firms increasingly partnering with technology firms/Blockchain providers to offer an alternative settlement engine to various payment participants. We expect various Blockchain-based ecosystems to coexist and compete with each other (similar to Payments networks in the current environment), with success predicating on technology capabilities (such as API features), number of participants on the network and ease of adoption. Given the hurdles, CCs are more likely to be used as ancillary payment methods rather than gaining traction as a primary source of exchange.

While seeing a potential for the deployment of the underlying Blockchain technology in payments, we do not see cryptocurrencies competing with central bank-issued money for lawful transactions. We note that CCs have not attained the relative stability of value to make them useful as money for everyday transactions. The current set of government-issued fiat currencies — such as the dollar and the euro — provide efficient media of exchange, stores of value and units of account. Some of the early buyers of CC were clearly dismayed by ballooning balance sheets of the major central banks in the aftermath of the global financial crisis (GFC), but the lack of any meaningful inflation since, in both developed markets (DM) and emerging markets (EM), has surely reduced concerns about fiat (legal tender issued by a central bank) money.

In addition, we find that local legal tender money tends to be a natural monopoly with only extreme hyperinflation leading people to seek out a monetary alternative. To add, we do not find that CCs are currently meeting the standards of what constitutes money as the huge volatility of CC has made use of it as a unit of account impractical. Finally, given the huge returns from running a central bank (seigniorage), governments will be quite possessive of their legal tender role and will likely put up a fight if CCs were to gain broader traction domestically.

Some EMs, such as Venezuela and Russia, appear to be considering issuing CCs as a way to improve international funding and evade US sanctions. Aziz is quite dubious about whether any of this will work as CCs face regulatory headwinds and are neither better than fiat money in establishing policy credibility nor in providing liquidity during crises.

Several central banks, as discussed in Feroli, are investigating whether they should issue CCs in their own currency, but are very far from actually doing so, as any increased efficiency in payments technology does not appear to be that obvious. In addition, the issuance of crypto dollars, for example, would give non-banks access to the Fed balance sheet, and thus could endanger the economically and socially important financial intermediation function of commercial banks.

In market economies, commercial banks manage the largest part of what we call money through their deposit
base that they in turn lend out to the economy, after holding back a fraction as reserves at the central bank. If cryptocurrencies were seen as superior to bank deposits, prompting a wholesale shift into cryptocurrencies, then a much larger share of savings would go to the central bank's assets (government debt) and less to commercial banks loans, thus potentially dramatically increasing private credit risk premia and reducing the flow of credit to the private sector. Fractional reserve banking was a tremendous innovation that surely contributed greatly to global growth over the last two centuries, and we would expect that central banks would think twice before disturbing this source of capital to the private sector.

We examine the potential role of CCs in terms of offering diversification in a global portfolio, given both their high returns over the past several years and their low correlation with the major asset classes, offsetting some of the cost of high volatility. If past returns, volatilities and correlations persist, CCs could potentially have a role in diversifying one’s global bond and equity portfolio. But in our view, that is a big if given the astronomic returns and volatilities of the past few years. If CCs survive the next few years and remain part of the global market, then they will likely have exited their current speculative phase and would then have more normal returns, volatilities (both much lower) and correlations (more like that of other zero-return assets such as gold and JPY). Based on its historical performance, CCs can be 10 times more volatile than core assets like stocks, or than portfolio hedges, like commodities. Liquidity is also well below most other potential hedges. Extraordinary returns can be generated in the price discovery phase, only to be followed by several years of mean-reversion toward the eventual, long-term average level. In the current market conditions, we do not believe that an allocation to Cryptocurrencies as insurance should be a portfolio’s main or only hedge. Note that even though CCs have improved risk-adjusted returns over the past several years, they have not prevented portfolio drawdown during periods of acute market stress, like the equity flash crashes of August 2015 and February 2018.

Below we highlight some of the key charts from the JPM "cryptobible":

What a typical bitcoin transaction flow looks like:

Cryptocorrelation with other asset classes: virtually nil, i.e., a perfect diversifier.

Cryptocurrency liquidity in the context of all other major asset classes.

Current state of cryptocurrency regulation around the globe.

Market liquidity: average bid/ask spread to buy 10 BTC:

Cryptocurrency concentration of hodlers:

Monthly trading volumes by market cap:

Speed and cost per transaction:

Bitcoin ETFs pending approval:

Bitcoin mining cost-curves, i.e, where should you mine for bitcoin:

Comments

Nature_Boy_Wooooo Sun, 02/11/2018 - 21:32 Permalink

CCs are unlikely to disappear completely and could easily survive in varying forms and shapes among players who desire greater decentralization, peer-to-peer networks and anonymity, even as the latter is under threat.

Lester is not gonna like that.

zebra77a Exponere Mendaces Mon, 02/12/2018 - 05:34 Permalink

People do not seek out the investment instruments with the greatest reserves status (there are none found on the planet) - people seek out the instrument with the least fraud and depreciation!

Offshore Exchanges had to make a virtual crypto that could trade instantly and represent true blockchain crypto - so exchanges can even function. So everything you buy on a exchanges is all faked and totally worthless.  I noticed the fanatic enthusiam of its investors even though they are clearly informed of what they are buying.

They don't care, I'd call the the Church of Cryptology, it's turned into a fanatic frenzy to flee the fiat.

But if the currencies fail, and all that's left is the exchanges one would expect to see the exchanges become the future central banks!! 

Which is a scary thought.

JPM is clearly figuring out who the winners are which they are gate herding into Ripple which is just a bank currency!

 

 

In reply to by Exponere Mendaces

lookslikecraptome zebra77a Mon, 02/12/2018 - 06:08 Permalink

You make many valid points.   

It is interesting to me that the BTC promoters here do not cognate on the following. I am highly anarchistic and do not like the banks but I value my money, in any form to include bitcoin. 

There are many issues pointed out in the article that are favourable to BTC. Then there is this:

"

  • It will be extremely hard for CCs to displace and compete with government-issued currencies, as dollars to euros and yuan are virtual natural monopolies in their regions and will not easily give up their seigniorage profits.
  • CCs are experiencing heightened volatility and will face challenges from both technology (such as rising mining costs and hacking) and regulators who are concerned about anti-money laundering and investor protection, as CC payments are irreversible and there is no recourse.
  • Security concerns have mounted in Bitcoin exchanges as hackers have infiltrated a number of CC exchanges generating large losses, while regulators are challenging anonymity."

I am at a loss how any person can blindly trump up a blatantly positive spin on BTC from this article. 

 

When you see the order book with over two hundred coins to trade, the big boys are out to trade, wash trade and or spoof. Those folks and the people that have more coin than that own the market place. The distribution of wealth in the Crypto world is no different than it is in any other financial or business enterprise.  The article is highly favourable about the future of block chain but maybe not coin

In reply to by zebra77a

pods lookslikecraptome Mon, 02/12/2018 - 10:01 Permalink

idk about anyone else, but a major banking institution spending the $$ to put together a 70+ page report on something doesn't to me seem like they are thinking it is something that is going to be gone in 6 months.

The thing that you have to do now is to try and think about what the ecosystem will look like a year or two from now, and then find a way to get behind that.

I have a small mining setup, but that is to support the current system.  But with many coins going PoS, it might be worth actually setting up and running a node.  Just have to determine which coins will allow profitability of running a node.  There is a TON of interest in Ether.  Insane amounts of hashing power behind it.  If and when it goes PoS, the majority of the hashing power will be moved to other coins, making profitability drop like a stone for them. Most new coins are all pre-mined or scam tokens, so mining seems to have a cloudy future.  At least I can repurpose my setups.

pods

In reply to by lookslikecraptome

lookslikecraptome Exponere Mendaces Mon, 02/12/2018 - 06:01 Permalink

I do not see it as him being salty. Maybe he read this piece of the document. "

  • "It will be extremely hard for CCs to displace and compete with government-issued currencies, as dollars to euros and yuan are virtual natural monopolies in their regions and will not easily give up their seigniorage profits.
  • CCs are experiencing heightened volatility and will face challenges from both technology (such as rising mining costs and hacking) and regulators who are concerned about anti-money laundering and investor protection, as CC payments are irreversible and there is no recourse.
  • Security concerns have mounted in Bitcoin exchanges as hackers have infiltrated a number of CC exchanges generating large losses, while regulators are challenging anonymity."

We all read and see that which supports our perceptions. I do not like banks but I value my pesos BTC or not

I highly doubt that you are one of the people that has ten or more coins. When you see the order book with over two hundred coins to trade, the big boys are out to trade, wash trade and or spoof. Those folks and the people that have more coin than that own the market place. The distribution of wealth in the Crypto world is no different than it is in any other financial or business enterprise.  The article is highly favourable about the future of block chain but maybe not coin

In reply to by Exponere Mendaces

pods lookslikecraptome Mon, 02/12/2018 - 10:10 Permalink

Bitcoin is 1st gen crypto.  It has done much better than anyone probably has ever imagined. Probably due to the amount of funny money created by central banks. If there was a tight money policy, it would probably be still trying to get someone to accept 10k of them for a couple of pizzas.

That being said, if things can progress, the use of cryptos can really be advantageous for the commoner.  A way of moving or protecting their excess capital from money hungry governments. We have not solved the problems from 2008 (or 2001 even), just papered over them with more debt.
When and if that finally blows, there will be much more hatred for central bank issued currencies.  That is when crypto (and G&S) can shine and move us towards a future free of the central bank scam of fractional reserve banking and debt bondage.  I see crytpo as viable for cross border trade, G&S for in country trading.

You like your pesos now because they are still viable for trade. But a time might be coming soon where they all implode.  The math says it will. It's just a timing issue.  So what happens afterwords?  Tough to tell, but people are going to go on trading. And that means a means to do so will have to be there. With so much global (cross border) trade happening, the chance is there and open for a non-central bank derived currency to be used as a means of exchange for that.

pods

In reply to by lookslikecraptome

The_merovingian Yellow_Snow Mon, 02/12/2018 - 07:44 Permalink

JP Morgan is in “Blockchain” technology much longer than most people think. Remember Blythe Masters? She was the head of Global credit at JPM and also notoriously the one who shilled CDS before they blew up in 2008. Well since then, after building and re-selling the commodities arm for a nice profit at JPM, she went all-in on cryptos. JPM has setup a Blockchain division as early as 2014. No doubt she has still connection with Jamie after she left in 2014. 

In reply to by Yellow_Snow

. . . _ _ _ . . . Sun, 02/11/2018 - 21:32 Permalink

About as credible as the original.

...other Blockchain innovations and the Internet of Things...

Blockchain will put an end to the IOT.

Bitcoin (BTC) is the dominant cryptocurrency with a market cap of $140 billion (representing one-third of the CC market)

Before Christmas, BTC accounted for about half of the CC market cap; now it's a third.
What does that tell you, oh wise and powerful Oz?

Cryptocorrelation with other asset classes: virtually nil

Tight correlation with VIX, until the crash.

Applications
The opportunity set around direct CC trading appears relatively limited for banks...

Every central bank already uses them, and the entire insurance industry has already gone with Hashgraph DLT.

These 'smart money' morons still think of cryptos as a speculative investment vehicle.
Clueless.

blentus . . . _ _ _ . . . Mon, 02/12/2018 - 11:37 Permalink

Nothing is coming down the pipes.

The only ones that have been tested, in a very very limited way, are Bitcoin and Ethereum. And they both couldn't properly survive even the most basic of tests and are being worked on to get improved. Ethereum is, also, piece of shit, since they displayed, in early stages, willingness to ignore 'blockchain immutability' requirement of crypto currency, if it suits them. Next time they'll do it for government, bank, friends, highest bidder, ...

And we're maybe 5% through testing. Decentralization is the most important aspect of any crypto currency, and barely any of them can pass that test. Let alone proper security or scalability tests.

LTC might survive because it shares so much tech with Bitcoin. Dash / Monero - fuck knows, but at least they have some developers who know what they're doing.

Everything else is shit. IOTA is shit, XRP is shit... big majority of crypto currencies I have invested in are shit. I made money on them, but fuck if I would ever have faith in their technologies and/or teams behind them.

 

In reply to by . . . _ _ _ . . .

Exponere Mendaces . . . _ _ _ . . . Sun, 02/11/2018 - 23:38 Permalink

If you think shitcoins are going to rule the roost - you haven't been paying attention.

But given the average commenter IQ around here, I'm not too surprised.

Oh - don't tell me, you believe marketcap -- the most easily gamed metric in the history of market metrics when it comes to crypto, is some valid measuring stick. Any fucking idiot can make a crypto-coin and issue 100 billion units at 1 buck each - making it MARKETCAP WINNER.

But its utility will be bullshit.

Correlation with other markets? Yeah, right -- we made all time highs and retraced, and every fucking moron is saying its part of the Dow complex. Spurious correlations are NOT causation, dumbshit.

 

Seriously, can't wait for some of these grandpas to kick off - they have nothing better to do but opine from their drywalled huts of suburbia.

 

In reply to by . . . _ _ _ . . .

. . . _ _ _ . . . Exponere Mendaces Mon, 02/12/2018 - 01:13 Permalink

Ignorant, lazy, and rude is no way to go through life, son.
-Caddy Shack - paraphrased

If you think shitcoins are going to rule the roost - you haven't been paying attention.

I have been paying close attention, but that is not what I've been saying about crypto. In fact, I have said that DLTs will change the world, that cryptos are not speculative investment vehicles, and that they are more akin to crowd-funding than anything else. If you don't know the difference between cryptos and DLTs, that's on you.

But given the average commenter IQ around here, I'm not too surprised.

What is it they say about glass houses and stone-throwing?

Oh - don't tell me, you believe marketcap

I was refering to a trend, not that the metric had value in and of itself. I have said that the measures used by traditional economists/traders/analysts have no place in crypto... repeatedly.

Any fucking idiot can make a crypto-coin

Let us know what you plan on calling yours.

Spurious correlations are NOT causation, dumbshit.

Did I say they were? I can not be held responsible for your idiotic inferences. The article mentioned no correlations. I simply pointed one out, one which appeared in a different ZH article. See the link below.
. . . _ _ _ . . . Fri, 02/09/2018 - 16:30 Permalink
"Interestingly Bitcoin and VIX decoupled as the stress remained in equity markets... "

Thanks, Tyler for putting this chart up.
BTC (and the rest of the crypto space) just said to the markets, "I'm not like the rest of you. See ya'."

grandpas
drywalled huts of suburbia

Don't you people ever grow tired of being wrong. My middle finger is getting a boner.

Listen, you have a right to your ignorance, you have a right to mis-read and to mis-represent what I have written, you even have a right to say what you like about me, that's all fine. But if you think that insults are a good substitute for reasonable discourse, then you need to work on your debating skills, as well as brushing up on your reading comprehension.

I am so sick of having to explain everything I write, especially since I try to write at a high school level, and over-punctuate, just to dumb it down for those who can't handle the big words, not to mention metaphors. They are numerous. This used to be a place for intelligent discussion, but now it has been degraded down to the lowest common-denominator type of shit that plays on tv and passes for education in our schools (there are some notable exceptions.) I'm really sorry you got the short end of the educational stick (or was it the evolutionary stick,) but that very simply is not my fault/problem. You certainly don't have to put it on display for all to see. Then again, you're owning it, and that's a good thing, right?

While we do agree about the deteriorating quality of comments on ZH, the problem is, and here's the important part, semi-literate statistician-cum-economist false intellectuals spouting off at the mouth before thinking like yourself are not helping.

In reply to by Exponere Mendaces

. . . _ _ _ . . . bombdog Mon, 02/12/2018 - 12:33 Permalink

DDoS attacks can be made to happen through bot-nets.
Printers, dishwashers... any sort of small computer connected to the internet can be made a part of a bot-net.
The IoT makes it possible by flooding the internet with millions of these little devices.

DLTs will put an end to the ability for bot-nets to form.
Phone networks are also prone to spoofing. DLTs will put an end to that, as well.
Spam can be eliminated, too.
Leemon Baird calls it a 'trust layer' built on top of the insecure internet.

In reply to by bombdog