JPMorgan launches ‘crypto exposure basket’ featuring MicroStrategy as Wall Street interest in bitcoin grows

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A growing number of institutions are warming to bitcoin. NurPhoto/Getty Images

JPMorgan’s new product will give buyers exposure to big bitcoin players like MicroStrategy and Square.

It is a sign of growing interest in cryptocurrencies on Wall Street, with BlackRock and Goldman also moving in.

JPMorgan’s product will also provide exposure to Riot Blockchain, Nvidia and PayPal.

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JPMorgan is launching a product to give investors exposure to cryptocurrencies, in the latest sign that bitcoin’s meteoric rise is drawing widespread interest on Wall Street.

An SEC filing on Tuesday by the bank showed it is creating a “basket of companies with exposure to cryptocurrency” that will be dominated by MicroStrategy, Square, Riot Blockchain and Nvidia.

MicroStrategy has over 90,000 bitcoins on its balance sheet, worth upwards of $4.9 billion based on Wednesday’s bitcoin price, while Square owns more than 8,000 bitcoins. Riot is focused on crypto mining, while Nvidia’s technology is commonly used in this activity.

The companies' shares often move as the bitcoin price rises or falls. JPMorgan will create debt products linked to the performance of the crypto basket, giving investors indirect exposure to the cryptocurrency market.

However, JPMorgan’s filing stressed “the notes do not provide direct exposure to cryptocurrencies and the performance of the basket may not be correlated with the price of any particular cryptocurrency, such as bitcoin.”

MicroStrategy will make up 20% of the crypto exposure basket, Square 18%, Riot 15% and Nvidia 15%. PayPal, Advanced Micro Devices, and CME Group, which are all linked to bitcoin exchanging or mining, are also in the basket.

The notes - essentially fixed-income products that do not pay interest - will come in denominations of $1,000 and payments will become due in May 2022. There will be a deduction of 1.5% from any gains, in effect a fee.

So if the companies in the basket gained 20%, investors would receive 18.5% on a $1,000 investment, amounting to $1,185.

JPMorgan’s creation of a crypto basket is more evidence of the growing allure on Wall Street of bitcoin, which has climbed more than 80% in 2021.

Goldman Sachs is restarting its crypto trading desk, and found in an internal survey of nearly 300 clients that 40% had exposure to cryptocurrencies.

BlackRock, the world’s biggest asset manager, has said two of its funds can invest in bitcoin futures, while BNY Mellon has announced intentions to manage cryptocurrencies.

JPMorgan SEC filing

JPMorgan to Offer ‘Crypto Exposure Basket’, but Criticized as Not ‘Crypto’

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Source: iStock/danielvfung

The news is out that major investment bank JPMorgan Chase is looking to offer its clients access to the crypto market - but not everybody see the offering in good light, or particularly crypto-related.

Dated March 9, the bank’s prospectus on the US Securities and Exchange Commission (SEC) website discusses a J.P. Morgan Cryptocurrency Exposure Basket - a “basket of companies with exposure to cryptocurrency due May 5, 2022.”

It goes on to say that the notes are designed for those investors who seek exposure to the performance of the basket of unequally weighted Reference Stocks, and “as reduced by the Basket Deduction of 1.50%.”

The unequally weighted basket consists of 11 Reference Stocks representing the common stocks / American depositary shares of US-listed companies that, according to the prospectus, “operate businesses that we believe to be, directly or indirectly, related to cryptocurrencies or other digital assets, including as a result of bitcoin holdings, cryptocurrency technology products, cryptocurrency mining products, digital payments or bitcoin trading.”

The companies listed in the prospectus, as well as their stock weight are:

The bank expects that the market value of the notes, as well as the payment at maturity, will depend to “a greater extent” on the performance of the first four reference stocks listed above, as they make up 68.00% of the basket.

The weights of these stocks were determined partly based on exposure to bitcoin (BTC), correlation to bitcoin, and liquidity. But the bank stressed that “the notes do not provide direct exposure to cryptocurrencies and the performance of the Basket may not be correlated with the price of any particular cryptocurrency,” including BTC.

It further warns that the basket may be influenced by extreme price volatility and “rapid and substantial decreases in price over the term of the notes.”

“Investors should be willing to forgo interest and dividend payments,” said the bank, as well as be willing “to lose some or all of their principal amount at maturity” in case the basket is flat, declines, or does not increase by at least 1.50%.

Price to the public per note is USD 1,000, it said. They are expected to price on or about March 31, 2021, to settle in April, and then mature in May next year. The estimated value of the notes will not be less than USD 900 per USD 1,000 principal amount note, added the prospectus.

The notes will not be listed on any securities exchange, so the price at which notes may be traded will likely “depend on the price, if any, at which JPMS is willing to buy the notes. You may not be able to sell your notes,” it says. The bank added that the notes are not designed to be short-term trading instruments and that they should be held to their maturity.

Some of the companies on JPMorgan’s list have been in the news often lately in connection to their crypto activities, so to say. Business intelligence company MicroStrategy became well-known for its series of bitcoin purchases, payments company Square invested in BTC too, payments giant PayPal started offering the option to buy and sell certain crypto and has agreed to acquire crypto custodian Curv, and major financial derivatives, including BTC futures, marketplace CME Group’s ethereum (ETH) futures offering went live last month - among other news.

That said, while some commenters saw certain companies on the list as good choices - with Coin Metrics' data scientist Kevin Lu naming BTC miner Riot and cryptoasset-focused bank Silvergate, for example, others were more critical towards this offering. For example, a few described it as “garbage.”

“The Wall Street crappy product machine is humming - JPM ain’t gonna sit back while trading fees explode around them,” said Jeff Dorman, Chief Investment Officer of US-based investment management firm Arca. “Introducing the “garbage crypto portfolio”, [with] companies that have nothing to do with crypto but JPM can trade & bank.”

A February Arca writeup predicted that Wall Street is “not set up to trade bitcoin directly, so they have to find other ways to insert themselves into the money grab.” Institutional investors will learn about other types of digital assets, after learning of BTC and crypto in 2020, and this will come in three stages, Arca said.

Other commenters similarly argued that the basket may offer little exposure to crypto.

It’s honestly incredible the mental gymnastics they go through to convince themselves to include these “crypto” names — Tom Shaughnessy 🦉 (@Shaughnessy119) March 10, 2021

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JPMorgan regulatory filings reveal ‘basket’ product tied to crypto-linked public companies

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A cluster of regulatory filings with the Securities and Exchange Commission indicate that Wall Street investment bank JPMorgan is giving its investor clients a way to gain exposure to crypto in the form of public-company stocks involved with digital assets.

The structured product documentation details so-called “Insight Notes Linked to the J.P. Morgan Basket of Companies with Exposure to Cryptocurrency.” The “basket” of companies includes names well-known in the crypto space, including market intelligence firm MicroStrategy, the Jack Dorsey-led payments company Square and PayPal, another payments company that is building support for crypto into its app and earlier this week announced its pending acquisition of crypto security firm Curv.

Other companies in the basket include Riot Blockchain, NVIDIA, AMD, semiconductor giant TSMC (in the form of American depository shares), Intercontinental Exchange, CME Group, Overstock and Silvergate.

JPM stresses in the product description that the exposure provided is not directly tied to any particular cryptocurrency, including bitcoin, and that performance of the notes is not tied to performance in the digital asset market itself. As the documentation explains:

“The notes are designed for investors who seek exposure to the performance of the J.P. Morgan Cryptocurrency Exposure Basket (Mar 2021) of unequally weighted Reference Stocks, which we refer to as the Basket, as reduced by the Basket Deduction of 3.00%. Notwithstanding the name of the Basket, the notes do not provide direct exposure to cryptocurrencies and the performance of the Basket may not be correlated with the price of any particular cryptocurrency, such as bitcoin.”

Per the documentation, the notes carry a pricing date of March 26, an original issue date of “on or about March 31, 2021” with observation and maturity dates on May 2, 2022 and May 5, 2022, respectively.

The existence of the structured product is perhaps another sign that demand among the Wall Street clientele for any kind of exposure to crypto, albeit indirect, is ascendant. A digital asset executive for Goldman Sachs recently spoke to this degree of investor interest around the asset class during a recent podcast appearance.

The developments come soon after JPMorgan distributed an educational deck to clients to help them understand the basics, risks and potential of bitcoin and cryptocurrencies. The distribution took place in February, as previously reported.

Hat tip @MacroScope17