A Banker, A Hedgie, and Satoshi Walk Into a Bar …
I normally try to write something timeless, like a snarky view from the back seats, or to talk about Tri-Party Repo changing the world, or maybe why we ought to take a first principles look at regulation. This note, however, is dedicated to two separate but important news headlines that warrant special attention. We all know that cryptography and Bitcoin are based on math but humans are humans. They need socialized permission to act.
And, no, this is not about the halving. At all.
The first is Paul Tudor Jones buying Bitcoin as an inflation hedge and the second is JP Morgan providing banking services for Gemini and Coinbase. These are big headlines. I mean, in the milieu of Crossing the Chasm, this has the potential to mark a transition from early adopters to early majority. Beyond being a bit of semantics about where we may be in some cycle of technology adoption, the early majority period is the section of the growth cycle where the real big sustainable growth occurs. That has the potential to mean that the money that has been coming into the system up until now has been small as compared to what will be. And that the refrain “the institutions are coming” might actually begin to mean something.
Knowledgeable people will note that JP Morgan is not offering banking services to just any cryptocurrency exchange, let alone any random cryptocurrency related business. In fact, Coinbase and Gemini are two institutions that have gone out of their way to follow the regulatory regime in place. Of particular note is their following the “travel rule” (h/t Emma Channing) which is a rule by FinCen (in the US) to push along customer information related to a transaction between financial institutions. I acknowledge this and, to me, this is the point! Now that other crypto related businesses can see that there is actually something to be gained by engaging the existing system, they are far more likely to do so.
The biggest boost though is behavioral. Finance is, in the aggregate, very conservative and regulated. That has a tendency to have CYA (cover your butt) as a major motivation. Career advice (really critique of the industry) is that you won’t get fired for failing with the crowd but you can easily lose your job scampering off into new and exotic territory (and even when successful). Seeing Tudor and JPM move into cryptocurrency are big forces in defining the status quo. When firms write about the argument for adding cryptocurrency to a portfolio as a diversifier, the math might be spot on, but until the industry has received “permission” from OGs like Tudor & JPM, it is moot.
In addition to being a long term move up the adoption chasm, there are some actionable observations. Of course, “not investment advice” and “do your own research”. First, Tudor has been reported to have executed his position entry on the CME, and second, it is specific to Bitcoin rather than cryptocurrency more generally.
Again, knowledgeable observers note that this is a cash settled futures product and not actual Bitcoin. That means that the sellers of the futures to Tudor either were long holders of Bitcoin that exited via cash futures or were arbitrageurs trading the price between futures and spot Bitcoin (the basis). And we can see the footprint of a large trade in the basis (just the price difference between futures and spot) from being quite tight a couple of weeks ago to widening out. At the time of this writing, if one has the infrastructure, there is the potential to earn a 16% yield selling futures and buying spot (at least in theory).
Secondly, the implication of potential institutional money coming into cryptocurrency is that Bitcoin will benefit far more than its other cryptocurrency brethren. That’s because the institutions will likely follow one of two tactics. The first is to do exactly what Tudor did and buy futures: it is easy, it is regulated, and they don’t need to run afoul of regulators regarding holding cryptocurrency outright. The second is to invest in vehicles that are indexed. Most of these indexes are far more heavily weighted to BTC and therefore far more money will flow to Bitcoin than anything else. And that is for the “majors” meaning BTC, BCH, ETH, LTC, and a couple of others. My guess is that alt-coins will be actively avoided.
In conclusion, the news that Tudor and JPM moving into cryptocurrency are good for the industry is an obvious take. Agreed. The math was already there; now the narrative and CYA is in place, too.
Sometimes the obvious take is the correct one.
