RockDen Advisors

Wealth advisory & investment management

JP Morgan

By

SEC delays Bitcoin ETF but Bitcoin adoption momentum accelerates

Dispatch #14 -2021

May 7th, 2021

The Dispatch starts with SEC delaying the Bitcoin ETF application by Van Eck. Then, we will delve into the accelerating momentum on Bitcoin adoption. Perhaps the most important story is the possibility of multiple banks offering their customers access to Bitcoin with the help of NYDIG. The FT story on Citibank supporting crypto services also ranks high. The full list of discussion items includes:  

  • NYDIG solution to allow banks to offer clients access to Bitcoin
  • Private sector Digital Dollar projects coming
  • Citi weighs offering crypto services
  • JP Morgan to offer Bitcoin fund to wealth management clients
  • NFL’s #1 draft pick (Trevor Lawrence) to invest in crypto
  • Insurer Metromile to accept premiums and pays claim in Bitcoin
  • Latam e-commerce giant MercadoLibre reports Bitcoin purchase
  • IRS wins court case to access Kraken’s customer data
  • Debt to GDP doesn’t matter!
  • BITCOIN SCHOOL goes Ethereum: What’s driving Ether outperformance?

For a PDF of the Dispatch click here.

SEC delays Bitcoin ETF approval decision

The SEC has pushed back a decision on the Van Eck Bitcoin ETF application to June, 2021, extending the 45-day window that expired on May 3rd. This CNBC article has more details. Part of the official SEC release is captured below.

The market is expecting a favorable ruling because the new SEC commissioner – Gary Gensler – was previously the head of the Commodity Futures Trading Commission, which approved the CME listed Bitcoin future back in December 2017.  However, the CFTC regulates venues and instruments that are mostly geared towards sophisticated institutions, while the SEC deals with products aimed at retail investors.

This CNBC article/interview of Gary Gensler from May 7th provides the most recent view from the SEC Chairman. In the interview, has say that there’s a gap in Bitcoin/crypto regulation in the US, which lead to lack of investor protection.

The lack of easy access to crypto, I would argue, leads to this next story illustrating the almost unstoppable network effect of the larger digital assets.

NYDIG to facilitate Bitcoin access for bank customers

NY Digital Asset Group (NYDIG) via a partnership with bank software provider FIS will offer a solution that would allow commercial banks to offer Bitcoin to their end customers. NYDIG is not a household name, but well respected within bitcoin circles. Insurance company Mass Mutual invested in NYDIG earlier this year and made their high profile Bitcoin purchase through NYDIG. Additionally, the CEO of NY Life is on the board of NYDIG.

Read more about this potentially transformative deal in this CNBC story. It is a Bitcoin-only effort as the CEO of NYDIG explains in this Coindesk podcast this week. If you are an advanced consumer of Bitocin/crypto, the podcast is highly recommended because it provides a glimpse into the leading edge of institutional discussion on the asset class.  “Banks are asking for bitcoin because they can see their customers sending dollars to Coinbase and other crypto exchanges”, said the President of NYDIG.   

Private sector Digital Dollar pilot projects coming

The non-profit Digital Dollar Project announced that it will launch five pilot projects over the coming 12 months. The Digital Dollar Project is a partnership between Accenture and Digital Dollar Foundation established to explore a US central bank digital currency (CBDC). There are more details about the pilot in this Reuters article, and the project’s mission statement is below. This effort comes as the Federal Reserve (Fed) has said they are in no hurry to launch a CBDC.

  • The Dispatch’s view remains that central bank digital currencies are merely an extension of the fiat money system. They pose little risk to the ongoing adoption of digital currencies like Bitcoin. Adoption is taking place because of the verifiable scarcity, payment mechanism and network effect. Fiat currency, in contrast, is losing relative purchasing power as more of it is created to support spending, and even more will be needed for pension obligations, social security and Medicare in the coming decades.

JP Morgan to offer Bitcoin fund, following Morgan Stanley’s footsteps

There has been no official release by the bank but these articles by Blockworks and Bloomberg provides some insights. As Dispatch #9 predicted, other large  banks will scramble to offer bitcoin access to wealth management clients, following Morgan Stanley’s lead. Bitcoin is a scarce asset, and we highly recommend owning actual coins directly at lower cost rather than owning shares in a fund and then paying two sets of fees. Access to the bitcoin payment system is the core value proposition.

Citibank weighs offering crypto services

The Financial Times broke this story on Thursday, and you can read the FT article here. Read this Reuters article about the FT story if you can’t get past the FT paywall. The FT headline below captures the essence of why Citi is considering this move.  

These are NOT rash moves as banks witness the rising adoption firsthand. On the retail side they see deposits leave via ACH and wire transfer to crypto exchanges. On the institutional side, clients just flat out say they are moving capital to invest in crypto. With these insights, you should not be surprised that Citi published a bullish 108-page report on Bitcoin, as Dispatch #7  highlighted back in March. Now they float a more forceful adoption story via the FT. The following three stories in the Bitcoin adoption corner validates their aspirations!

Bitcoin Adoption Corner!

#1 NFL draft pick Trevor Lawrence to invest in digital assets,

Trevor Lawrence’s tweet below promotes a crypto asset trading app. There’s probably an endorsement/sponsorship angle here, but he has skin in the game too: This Forbes article says Lawrence is investing his signing bonus (estimated at $22m) in digital assets.

  • Auto insurer Metromile will accept premiums, and payout claims in Bitcoin. Metromile is an insurance provider that offers pay-per-mile auto insurance, and IPOed via a SPAC last year. Mark Cuban and Chamath Palihapitya of Social Capital – both crypto adoptors – are investors in Metromile.  The company also announced that it would buy $10m worth of Bitcoin in 2nd quarter of 2021. More details on the plans in this Forbes article and the company release. The Dispatch continues to question the practicality of using Bitcoin for monthly payments when you have to track and report the capital gain/loss on each payment. However, we can see the benefits of receiving a claim in Bitcoin.  
  • Latin American e-commerce giant MercadoLibre disclosed $7.8m Bitcoin purchase. NY Stock exchange listed MercadoLibre (ticker MELI) is the Amazon of Latin American, and is a sizable company with a $72bn market capitalization. The Bitcoin investment was reported during the 1Q21 earnings report is small compared to $862bn cash on the balance sheet as of March 31st. The MELI has adopted Bitcoin as part of it’s treasury management is notable.

IRS wins court case to access Kraken’s (crypto exchange) client records

This particular summons is to obtain records of customers who have conducted at least $20,000 in transactions between 2016 and 2020. More details are in this The Block article and the official DoJ release. The snippet below from the DOJ release provides insights into the Government’s goals.

The IRS is increasing crypto tax compliance efforts. This Reuters article from last month flags a similar summons to another crypto platform. The dispatch continues to highlight the need for US tax residents to keep accurate records of crypto transactions to calculate capital gains. You are responsible for tracking the cost basis because exchanges are unable to do so as coins can be moved from one venue to another (pseudo anonymously).

Debt to GDP no longer meaningful!

This WSJ article headline caught my attention because the more we hear “this time is different” rhetoric, it’s a warning sign that we are pushing the limits. If the Fed weren’t buying a large share of US treasury debt each month, rates would be meaningfully higher. Watch the credit default spread and currency markets for pricing signals as the Fed has snuffed out signals in the treasury bond market.

BITCOIN SCHOOL Goes Ethereum!

Ethereum is handily outperforming Bitcoin at present

What follows is a summary of the narrative on Ethereum’s strong performance and a simplified explanation of some core features. Ether, often referred via the ticker ETH, is the token of the Ethereum protocol.

The Ethereum protocol dominates the market for powering the blockchain economy.

Most decentralized services, which are also called decentralized apps (dapps) are built on that protocol. The bulk of Stablecoins in circulation operates on the protocol; NFTs  are built on Ethereum, too. The biggest dapps are all decentralized Finance (Defi) services like exchange Uniswap and lending/borrowing dapps Compound or Aave. All of these dapps are built on the Ethereum network, which require locking up Ether to operate the service. The chart below illustrates the increasing Ether (ETH) locked up in dapps smart contracts and the consequent drop of ETH on exchanges like Coinbase.

Ethereum inflation set to fall

Furthermore, the protocol is set to implement revised rules in July 2021 that will reduce the new issuance of ETH. This has gotten ETH bulls excited as it’s set to reduce the inflation rate, as the chart below from coinmetric shows. If you would like to read more about the coming change, this Coinmetrics report has more details.

While the drop in new supply of Ether projected in the above chart is notable, it’s nothing like the exponential new supply decline (-50% every four years) built into the bitcoin protocol.

Ethereum bulls also make the case that ETH can appreciate more vs. Bitcoin. As the Dispatch is fond of saying, everything is going up in value vs USD. Therefore, the chart below shows ETH in BTC terms, which has been a volatile pair. The anecdotal observation from the chart below is that ETH strengthens against Bitcoin during bull markets and underperforms BTC in the bear market.

Source: Coinmetrics

CME futures launched in February 2021 have brought institutional flows into the protocol.  We have seen steadily increasing volumes.

Source: Coinmetrics

Additional points to note.

  • The Ethereum protocol is set to undergoing a drastic change as it goes from a Proof-of-Work(PoW) to Proof-of-Stake (PoS) transaction processing mechanism.
  • PoW is seen as more secure, but is energy intensive and has limited transaction processing capacity. PoS improves the latter two issues while trading off security.
  • This Blockgeeks post is a good primer on the difference.
  • Ethereum network needs to continually innovate as it provides a functional utility to the dapp community. Transaction processing speed/capacity and fees are some of the keys areas of focus.
  • Upstart protocols are nipping at Ethereum’s heels, offering many of the features of the Ethereum protocol but with faster and cheaper transaction processing.

While Bitcoin has greater verifiable scarcity base on deflationary supply built into the protocol, on the Ethereum protocol rapid growth of dapps could drive Ether scarcity. Just note that Defi volumes are highest during the bull market and could see sharp declines during a bear market (yet to be experienced by the Defi services). This alone should make Ether more cyclical than Bitcoin, in the Dispatches view. That should be taken into account when sizing the two assets in a digital asset portfolio.

Stay safe and do reach out if you have any questions or comments about the material in this Dispatch.

Asi

Important Disclosures

This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of RockDen Advisors LLC and are subject to change at any time based on market and other conditions. Past performance may not be indicative of future results.

By

Crypto taxes, Turkey bans crypto, Bitcoin acceptance, used auto price, vaccines & re-opening, diversifing beyond Bitcoin

Dispatch #11 -2021

April 16th, 2021

Let’s start with crypto taxes as it is traditional tax week. For 2020, IRS Form-1040 specifically asks if you had crypto transactions, illustrating the IRS’ growing focus on digital assets. You are expected to track the cost basis of your coins and report capital gains accurately. Other items discussed in this week’s Dispatch include:

  • Turkey bans crypto transactions
  • “Pay me in Bitcoin” – CNBC’s Jim Cramer
  • Mortgage originator to accept Bitcoin/crypto
  • Headlines juxtapose large banks’ Bitcoin embrace now vs. prior dismissal
  • Used auto prices hit a peak, but subprime auto delinquencies jump
  • Vaccine penetration & re-opening: Data from Israel is encouraging
  • Bitcoin School: Should you diversify your digital assets beyond Bitcoin?  

For a PDF version of Dispatch 11 click here

Crypto taxes

Source: https://www.irs.gov/pub/irs-pdf/f1040.pdf

The IRS is clearly paying attention to crypto assets and one can claim that this focus further legitimizes the asset class. On the enforcement side, the IRS is seeking client records from exchanges as this article  highlights.

Crypto taxes are a relatively new subject, and there aren’t too many subject matter experts. For example, The CFA Institute recently shared this Yahoo Money  video of an EY tax expert. Typically, the CFA institute has its own material, but not on crypto taxes. Regardless, this six minute video is well worth a watch, as the EY expert touches on the basics and some recent IRS actions on crypto assets.

  • You are expected to keep track of your coins’ cost basis even though exchanges/custodians/wallets are unable to because blockchains are decentralized.
  • For active traders, this Benzinga article has a list of firms that track crypto portfolios to monitor your cost basis. I don’t recommend these services for long-term investors.

This is NOT tax advice, so please consult a qualified tax lawyer/CPA for advice.

Turkey Bans crypto currency transactions

This WSJ headline, “Bitcoin payments to be banned in Turkey after confidence drops in Lira” sums up the condition in the country. Bitcoin did drop about 4% on the news, and expect countries with poor financial management to continue to restrict usage.

Bitcoin acceptance is growing

a) Salary in Bitcoin: Nothing further needs to be added to the tweet below.

Source: Twitter

I did hear Cramer live on TV and he was clear that he’ll take his salary denominated in Bitcoin (not denominated in US$ and converted to Bitcoin). I know Cramer is full of hot air, but he does have a powerful platform to transmit his view.

b) Mortgage company to accept Bitcoin as payment.

The Home Loan Expert LLC became the first US mortgage originator to accept Bitcoin as a verified asset and for down payments, as this release from the company explains.

This is a continuation of the Dispatch #10 discussion of the progress on Bitcoin acceptance for large ticket items. To give banks credit, they are no longer reporting clients with crypto to the Financial Crimes unit, as this 2018 story from the UK highlights.

As I conduct my own house search, I continue to discover first hand how digital assets assessed. My two observations to date:

  • I asked both my mortgage broker and real estate broker how underwriters treat crypto assets. Both say they have not been asked that question by a client previously. It’s a single data point but chalk up another point that we are early in the adoption curve.
  • I spoke to the mortgage lending department of a local bank. They require crypto assets to be liquidated and placed in US$ deposits to be considered one’s assets.

Decentralized blockchains do pose difficulties for underwriters. For example, I could well have borrowed the Bitcoin/crypto in my wallet from a parent, and the banks have limited means to verify. I will continue to report on this subject and my key advice is to keep good records of your transactions.

Banks’ changing opinions on Bitcoin 

The tweet below covers material I’ve flagged in earlier Dispatches (#9 – Morgan Stanley &  #7 – JPM & Citi), but I like seeing the contrast in print!

car prices hit record high despite rising delinquencies

Source: Manheim Auctions/Bianco Research via twitter

Source: Forbes article via Twitter

It’s unusual to see this divergence in two data points that are closely linked. Subprime borrowers mainly purchased used autos, so it’s interesting that used auto prices haven’t soften.

Perhaps falling new vehicle inventory due to a chip shortage (see WSJ article) is adding to the price move. Regardless, it’s fair to assume that used car price rise is a transitory effect.

Covid vaccine efficacy & re-opening: Israel is an encouraging leader

There is still a lot of debate over vaccines, virus variants and how quickly life should return to normal. I was delighted to see this chart that shows remarkably low daily new covid cases in Israel as vaccine penetration rose ­— this despite earlier worries about re-opening too quickly as this article in February highlights. The latest news is encouraging if you’d like life to return to normal.

Source: FundStrat, Johns Hopkins, via Twitter

Should you diversify you digital assets beyond Bitcoin?

I get asked this question frequently. It’s a longer discussion which also depends on the client profile. But I’ll leave you with a few snippets below that provide some context on the longer term performance. Most crypto currencies are likely to lose value vs. Bitcoin, and with more than 8K coins are in circulation, it is very hard to pick the handful of winners.

Source: https://twitter.com/jimmysong/status/1381797745292369922

Note: Jimmy Song is what’s known as a bitcoin Maximillialist (someone who believes other assets are far inferior to Bitcoin).

Picking the 4-year performance might be cherry picking the most supportive data. The following reply to Jimmy Song asserts that Ethereum (ETH) has done better than Bitcoin over different time frames.

Source: https://twitter.com/ViktorBunin/status/1381808196990476289

Let’s take the two sets of numbers at face value. I will only point out that there are thousands of new coins that have been created since Ethereum was launched, and few of them have come close to matching the performance of Bitcoin through a price cycle. Most haven’t seen a full cycle, which makes the analysis irrelevant. The key message is that it is hard to find the next Ethereum! Blockchains have winner-takes-all network effects, so unlike retail shopping and Amazon, I doubt we’ll get multiple large (market cap.) blockchains offering the same utility.

Stay safe and do reach out if you have any questions or comments about the material in this Dispatch.

Asi

Important Disclosures

This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of RockDen Advisors LLC and are subject to change at any time based on market and other conditions. Past performance may not be indicative of future results.