 March 7, 2020  Weekly insights, news and analysis for the professional investor Sponsored By:  By Noelle Acheson Managing Director of Research If you were forwarded this newsletter and would like to receive it, sign up here.
Hi everyone!
I'm not going to try to explain the movement in this newsletter just yet – I have a lot more digging to do myself. I do want to point out, though, that innovation is what this industry was founded on, and what this market needs to continue growing. A lot of what's going on may not make sense at first, but always, whenever commentators dismiss the noise, they overlook the substance.
– Noelle
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The Briefing (Note: We use Bitcoin with uppercase when referring to the protocol, and bitcoin with lowercase, or BTC, when referring to the asset. Similarly, Ethereum refers to the blockchain, and ether or ETH to the asset.)
ETH on Corporate Balance Sheets?
MicroStrategy, Tesla and Square have done it. So have many others, although more quietly.
I'm talking about holding corporate treasury reserves in bitcoin. This trend is attracting attention even from trade press. Consultancies and crypto companies are scrambling to launch services to help businesses navigate the process. "Mad Money" host Jim Cramer thinks it's "almost irresponsible" for companies to not do so. This week, sponsored content from Deloitte explaining the benefits and risks appeared in the Wall Street Journal.
Whether it's a good idea or not – that's up to each corporate treasurer to decide – one question we're starting to hear is: "What about ether?"
Would the native token of the Ethereum blockchain make a good corporate reserve asset?
Bitcoin on balance sheets
The main arguments for bitcoin as a corporate reserve asset are:
This last point is key, as the main role of the corporate treasury function is the preservation of capital. Here bitcoin's leading value proposition – as a store of value – comes into play.
Critics will point out that bitcoin is way too volatile to be a store of value. That's a short-term view of the concept, however. Over the next week, month, perhaps even year, bitcoin's price may fall relative to fiat currencies. Longer term, however, in an environment of money supply increasing much faster than demand, a fixed-supply bearer asset such as bitcoin is likely to appreciate in value relative to assets without a fixed supply, such as the U.S. dollar. As investor Paul Tudor Jones pointed out, even at only the 2% inflation target, cash is a "wasting asset."
Do these arguments hold for ether?
Not so much, no. But that doesn't mean ether won't end up on corporate balance sheets.
Store of value
Ether's supply has no limit. It is still considered a store of value, however, as its supply growth is modest (currently around 4%, expected to decrease over time) and likely to remain well below growth in demand.
Yet the store of value narrative is not – at this stage – the main driver behind ETH's investment case, especially in the eyes of institutional investors.
Ethereum is seen more as a technology play. More than that, it's one of the more liquid, experimental technology plays accessible to investors today. It's not just trying to build a faster rocket or streamline dentistry. It's aiming to reinvent the way automated applications of any type are run. Its goal is to build the ultimate base layer of a global digital economy. As well-known macro analyst Jim Bianco said earlier this week, decentralized finance is "recreating the entire financial system." Ethereum-based applications are also likely to impact markets, governance, energy, public services, perhaps even how identity is managed.
What's more, this will happen on a network that can reach anyone, anywhere, who can connect to a public network.
Bitcoin is also a technology bet – it unleashed on the world an entirely new way of transmitting value. But the basic parameters were baked in at conception. Meaningful upgrades are few and years in the making.
Ethereum is not only a bet on the growth of a decentralized economy, it's also a bet on a whole new type of connectivity and innovation layer. And its technology is not yet fully formed.
Because it is such an early bet on such a radical innovation, the risk is even higher than with bitcoin. This can be seen in its volatility:  If bitcoin's volatility is a deterrent for corporate treasurers, ether is understandably even more so.
Ether on balance sheets
This doesn't mean that ether won't end up on corporate balance sheets, however. Rather than as corporate reserves, it's more likely to do so in working capital.
Ether is needed to power applications on Ethereum, either as an input or for the transaction fees. Any company hoping to use the Ethereum platform for internal processes such as contract management, collateral allocation or yield optimization, or for client-facing services such as trading, lending or insurance, will need a steady supply.
The launch of ETH futures on the CME earlier this year will encourage this, as it offers tools to reduce the volatility risk. The maturation of ETH options will further support risk management.
The accumulation of ether as working capital may have already started. This week, Meitu – a software and social media app company listed on the Hong Kong Stock Exchange – disclosed purchases in bitcoin and ether of approximately $18 million and $22 million respectively, and had this to say about its ether purchase:
"The Group is currently evaluating the feasibility of integrating blockchain technologies to its various overseas businesses … the ether purchased would become the gas reserve for the Group's potential dAPP(s) to consume in the future."
It is early days yet as few companies outside the crypto industry have integrated Ethereum-based applications. Signs are emerging that interest is awakening, however. This week, multinational insurance company Aon Mutual, whose origins go back more than 100 years, embarked on a decentralized insurance pilot. Last month we reported that Deutsche Telekom, Europe's largest telecommunications company by revenue, was experimenting with decentralized data.
As Ethereum use cases begin to impact traditional businesses, and as even more crypto companies using decentralized applications grow to meaningful size, we will start to hear more mainstream conversations about ether on balance sheets.
Greater focus on the asset's role in powering digital processes will add another layer to its value proposition. As we saw above, ether is a technology play. It is also a store of value. Institutional investors are increasingly interested in ETH for these reasons. Going forward, ETH is likely to also benefit from a growing recognition of its role as a consumable commodity.
"Digital oil," if you will, to bitcoin's "digital gold."
(For more on this, download our free report "Bitcoin + Ether: An Investor's Perspective," which looks at the different value propositions of bitcoin and ether.)
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Chain Links According to sources, Goldman Sachs has relaunched its cryptocurrency trading desk after a three-year hiatus and plans to once again support bitcoin futures trading. TAKEAWAY: By this stage, we don't actually need further proof that the "institutions are here," but here it is anyway. Goldman wouldn't be doing this if its clients weren't asking for it. As if to emphasize the point, news came out this week about a Goldman client survey that shows that, out of 280 respondents, 40% have exposure to cryptocurrencies and 22% of respondents expect the price of bitcoin to be over $100,000 in 12 months.
Other surveys produce different results. JPMorgan surveyed 3,400 institutional investors, 78% of whom said it was unlikely their firm will invest in or offer trading services for crypto.
Galaxy Digital's institutional-grade ether funds have raised over $32 million since their February launch, according to documents filed this week with the SEC. TAKEAWAY: The distribution is still relatively narrow, but not insignificant – five institutional investors have placed sizeable bets on the evolution of the Ethereum blockchain. (See our special report on the differences between bitcoin and ether from an institutional investment perspective.)
Crypto custodian BitGo has received approval from the New York Department of Financial Services (NYDFS) for a New York trust charter. TAKEAWAY: This brings more crypto custody services, this time from one of the longest-standing businesses in the industry, to Wall Street hedge funds and, even more intriguingly, to Wall Street banks, who just might be interested in offering this service to their clients.
Crypto exchange Kraken is contemplating a public listing in 2022, according to an interview with the CEO Jesse Powell on Bloomberg TV. TAKEAWAY: As one of the largest exchanges in the industry, a Kraken listing would give us more valuable insight into market plumbing. So far, we only have the Coinbase filing documents to go by, and – eye-opening as they were – they don't yet paint a full picture of the industry's potential.
Cipher Mining Technologies, a newly formed U.S.-based bitcoin mining operation formed from bitcoin mining hardware giant Bitfury Top HoldCo and Good Works Acquisition, a special purpose acquisition company, have agreed to merge, with an enterprise value of $2.0 billion. TAKEAWAY: So far, mining businesses dominate the roster of listed crypto companies. The more, the merrier – better insight into industry fundamentals, as well as more flexibility in crypto exposure for portfolios.
The Bloomberg terminal now provides price data for six more crypto assets: orchid (OXT), omg network (OMG), EOS, chainlink (LINK), tezos (XTZ) and stellar lumens (XLM). TAKEAWAY: To be filed under "increasing institutional interest in decentralized finance."
 Bitcoin + Ether: An Investor's Perspective
What are bitcoin and ether's value propositions for investors? A new report by CoinDesk Research explains how the two most popular cryptocurrencies by market capitalization behave in the market, how their infrastructure differs, and what on-chain metrics say about them.
Download "Bitcoin + Ether: An Investor's Perspective" from the CoinDesk Research Hub.
Podcast episodes worth listening to:
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From the world leader in crypto news and events, the all-new CoinDesk TV covers the rapidly evolving world of digital finance and its role in the global economy. On Community Crypto, "Bitcoin and Black America" author Isaiah Jackson explores how crypto is creating and impacting communities.
Jackson will organize virtual meetups in the U.S. and around the world, then dive deeper into key themes, issues or questions that arise. Watch Community Crypto Thursdays at 5 p.m. ET on YouTube or CoinDesk.com.
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