Crypto Mining Stocks Could Keep Beating Bitcoin in ‘Modern-Age Digital Gold Rush’

Crypto Mining Stocks Could Keep Beating Bitcoin in ‘Modern-Age Digital Gold Rush’

National Review

In 1999, Milton Friedman, the world’s foremost monetary luminary, foretold the rise of cryptocurrencies. Here’s what he had to say: I think that the Internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing, but that will soon be developed, is a reliable e-cash method whereby on the Internet you can transfer funds from A to B without A knowing B or B knowing A. The way I can take a $20 bill, hand it over to you, and then there’s no record of where it came from. You may get that without knowing who I am. That kind of thing will develop on the Internet and that will make it even easier for people using the Internet. Of course, it has its negative side. It means the gangsters, the people who are engaged in illegal transactions, will also have an easier way to carry on their business. More than 20 years after Friedman’s prediction, the speculative mania surrounding cryptocurrencies is breathtaking. Just consider that Bitcoin’s price has skyrocketed 1,030 percent in the past twelve months and that its market capitalization has soared to $1.1 trillion, which makes it the world’s sixth-most valuable asset. With Elon Musk’s announcement that Tesla would purchase $1.5 billion worth of Bitcoin in order to start “accepting bitcoin as a form of payment for [its] products in the near future,” the frequency of Bitcoin’s mentions on Google and its trading volume have risen sharply and in lockstep in 2021. Putting aside Bitcoin’s meteoric ascent in price, which has been punctuated by dramatic booms and busts, it is important to note that its designation as a “cryptocurrency” is a misnomer. A currency is characterized by four fundamental features. To qualify, it must be unit of account, must be a standard for deferred payment, must be a store of value, and must serve as a medium of exchange. Just how does Bitcoin stack up when it comes to these currency criteria? Bitcoin’s volatility turns out to be its Achilles’ heel. In 2020, Bitcoin’s annualized daily volatility was an astonishing 67 percent. If we look at the most important price in the world, the USD–euro exchange rate, and the world’s international currency, the U.S. dollar, the dollar’s annualized daily volatility in 2020 was only 7.8 percent. Since Bitcoin’s source code predetermines that Bitcoin’s supply will ultimately be fixed and totally inelastic, all market adjustments can take place only via price changes, not quantity changes. As a result, it is destined to be inherently subject to extreme price volatility. This means that Bitcoin will never serve as a reliable unit of account. You will rarely see items with Bitcoin price tags attached. You will also never see deferred contracts (contracts under which payment is made under a long-term credit arrangement) written in Bitcoin. Can you imagine someone writing a mortgage contract denominated in Bitcoin? Bitcoin’s volatility also renders it unattractive for most corporations to hold in lieu of cash reserves. Indeed, Bitcoin, which is considered an intangible (something, incidentally, that brings inconsistent and opaque accounting treatment in its wake), throws considerable risk on to balance sheets. In short, it is not a reliable store of value. It’s no surprise, therefore, that most corporations are unwilling to take on the risks associated with holding Bitcoin on their balance sheets. A recent survey found that roughly 5 percent of finance executives said that “they planned to hold bitcoin as a corporate asset in 2021” and “84 percent of respondents said they did not plan to ever hold bitcoin as a corporate asset,” citing volatility as their foremost concern. Furthermore, very few items are purchased with Bitcoin. Items are not only not priced in Bitcoin, but the transaction costs associated with Bitcoin are excessively high for both buyers and sellers. Bitcoin clearly falls short of meeting the four standard criteria to be designated as a currency. Accordingly, it should not be viewed as a currency but as a speculative asset with a fundamental value of zero. That being said, Bitcoin does have an objective market price. That price is determined by speculators operating in a whirlpool in which they are purchasing an asset with very little or no utility in the hope of selling it later at a higher price: greater fools and all that. If Bitcoin’s failure to meet the currency criteria isn’t bad enough, it even falls short of the aims of its architect (or architects), the pseudonymous Satoshi Nakamoto, who envisioned that Bitcoin would function as a currency. Nakamoto anticipated that Bitcoin would address three problems with “government” money, each of which Bitcoin fails to solve. First, Nakamoto asserted that Bitcoin would overcome the lack of trust associated with fiat monies issued by central banks. But Bitcoin, which is fiat, has a history defined by fraud and breaches of trust, illustrated by the Mt. Gox scandal. Second, Nakamoto designed Bitcoin to address privacy concerns. However, about 95 percent of all cryptocurrency trading occurs on centralized exchanges. These exchanges often collect identifying information from their users and have a history of failing to protect such information. Finally, Nakamoto complained of the “massive overhead costs” of commercial bank transactions that “make micropayments impossible.” Yet, due to technological limitations and fees charged by exchanges and crypto-payment providers, Bitcoin is impractical and too costly to facilitate most transactions. For example, popular cryptocurrency exchange Coinbase charges a “base rate for all purchase and sale transactions in the US [of] 4%.” Beyond Bitcoin, there is ample potential for innovation in private money, specifically a price-stable digital asset. Several attempts have been made, such as the popular stablecoin Tether and Facebook’s Libra, but these efforts have been fraught with problems. Tether claims to be “100% backed by our reserves.” However, in 2021 an investigation by New York Attorney General Letitia James found that “Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie.” Additionally, as reported by Bloomberg, JPMorgan Chase & Co. strategists including Josh Younger and Joyce Chang wrote in a report that Tether has “famously not produced an independent audit and has claimed in court filings that they need not maintain full backing.” This is less than reassuring. Libra failed to establish itself in its original form, and, renamed and restructured, is supposed to be relaunched in the near future. Thanks to ease of entry and competition, inferior cryptocurrency products will struggle, in the end, to survive. Just look at Bitcoin. Although its market capitalization has skyrocketed, Bitcoin’s share of the total crypto market has fallen from 94 percent in April 2013 to 61 percent today. Eventually, Bitcoin’s current limited use value will likely be eclipsed by the offerings of superior challengers. So, just what might an effective competitor look like? It would be in the form of a private cryptocurrency board. A traditional currency board issues a currency that is freely convertible at an absolutely fixed exchange rate with a foreign anchor currency or gold. Therefore, under a currency-board arrangement, there are no capital controls. The currency issued by a currency board is backed 100 percent with anchor-currency reserves. So, with a currency board, its currency is simply a clone of its anchor currency. Currency boards have existed in about 70 countries, and none have failed — including the North Russian currency board installed on November 11, 1918, during the Russian Civil War. What all currency boards — past and present — have in common is that they are public institutions, but there is no requirement that currency boards be publicly owned. A private cryptocurrency board would be the ideal institutional arrangement for the crypto world. For example, its home offices and reserves could be located in Switzerland, a safe-haven financial center, and it could be governed under Swiss law. It could be operated with a small staff, as is the case with all traditional currency boards. As for its anchor, it could be a currency issued by a central bank, or gold, which is not issued by a sovereign. Furthermore, given its digital nature, the balance-sheet information of a private cryptocurrency board, including its reserves, could be publicly available and audited by independent auditors on a regular basis. With such a system, the crypto world would finally have a product that is more than just a speculative house of cards. Steve H. Hanke is a professor of applied economics at the Johns Hopkins University in Baltimore. He is a senior fellow and the director of the Troubled Currencies Project at the Cato Institute in Washington, D.C. Robert J. Simon is chief of the economic intelligence group at the Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise.

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Crypto, ESG and office returns: Banks show when they would — and would not — rather be first

Morgan Stanley jumped to the front of the crypto line Wednesday when it told its financial advisers it is letting its wealth-management clients access three investment funds that enable ownership of Bitcoin, CNBC reported.

Individual clients would need at least $2 million in assets held by the bank, and an account that’s been open for at least six months. Investment firms can qualify with $5 million in assets held by Morgan Stanley and a 6-month-old account.

The bank will cap Bitcoin investments at 2.5% of a client’s net worth, CNBC reported, citing anonymous sources.

The offerings could be available as early as next month — once financial advisers take relevant training courses, the network’s sources said.

That timeline would make Morgan Stanley the nation’s first large bank to offer customers that level of crypto access. BNY Mellon said last month it is developing a client-facing prototype for a platform that would allow the bank to hold, transfer and issue cryptocurrencies, but that capability won’t be ready until later this year. However, it doubled down on its crypto presence Thursday, investing in Fireblocks, a startup that builds tools for the secure storage and transfer of digital assets, The Wall Street Journal reported.

Goldman Sachs restarted its cryptocurrency trading desk this month and was set to begin offering Bitcoin futures and other products by about now.

JPMorgan Chase this month filed documents for a debt-investment offering tied to a group of stocks with crypto exposure, such as MicroStrategy and Square, CNBC reported. The bank arguably forced a crypto tipping point on Wall Street last year, when it announced it would extend banking services to digital asset exchanges Coinbase and Gemini.

Even after that announcement, rival Goldman was skeptical, labeling Bitcoin an “unsuitable” investment for clients because of its volatility.

Morgan Stanley, by contrast, calls it suitable for clients with “an aggressive risk tolerance,” according to CNBC.

Summer: In the office or out?

What constitutes industry leadership in the crypto sphere may be clear to those jockeying for position. But on other matters, such as when banks should return to the office, the idea of leading depends on how the front office values the productivity that would be perceived to add versus the health and safety risks.

JPMorgan is planning to resume in-person internships in June, The New York Times reported Tuesday, citing anonymous sources. Bank of America, however, is conducting its 10-week internships virtually, Business Insider reported Thursday, citing an internal memo.

“We are encouraged by recent signs of progress around the world and will continue to assess the current environment to determine if it is appropriate to bring you in for an in-person experience at a later time, as we sincerely hope to do," the bank wrote.

The prospect of a second summer with virtual internships served as a primary driver for Goldman Sachs CEO David Solomon last week to tell the bank’s employees over Zoom that he hoped to set a midyear office-return date.

“Getting them in to the office is the best way to get them connected to Goldman Sachs,” Solomon said, according to Reuters. “We understand that until more of us are vaccinated, that is going to be a challenge. But based on the current pace of vaccinations, and where we hope to be by the summer, we believe that we are well-positioned and there is a good chance that we can meet that goal.”

Last month, Solomon called the year of remote work an “aberration” and groused more pointedly about the vaccine rollout. “This is not ideal for us, and it’s not a new normal,” he said.

Goldman and JPMorgan saw their office-return plans derailed last fall, when both banks sent New York-based staff home after employees tested COVID-positive.

Their summer-or-bust hard-charge comes as HSBC closed its main Hong Kong office this week after three people working in the building popped positive.

Nonetheless, JPMorgan has committed to letting its London-based employees return March 29, when the British government is set to end “stay-at-home” rules it imposed in December, according to The New York Times. In-person staffing, however, will be capped at 50%.

Citi, for its part, will begin inviting more workers back to its offices in July, expecting 30% of its North America employees to return over the summer, Bloomberg reported Wednesday.

Wells Fargo CEO Charlie Scharf, by contrast, struck a more reluctant tone.

“We’re going to bring people back when it’s safe, and we’re going to give people notice,” he told Bloomberg, adding that he’s “not interested in rushing people back.”

“We’re going to play it by ear, and it’s going to be city by city, state by state, and we’ll make those decisions when we think it’s safe,” Scharf said.

JPMorgan CEO Jamie Dimon told Bloomberg he anticipates branch and cash management personnel — and “probably most of the trading floor” will work permanently from the office, but others might split time between remote and office work.

Apollo Global Management is embracing the split. The company said it is giving employees the option of working remotely two days a week for the rest of the year.

Rob Dicks, talent and organization lead for capital markets at Accenture, said this is where he sees front-office opinion in the finance and tech spaces bifurcate. “Here’s where you see the split between the banks saying, ‘Yes, but we want to see you here,’ and the tech firms saying, ‘Hey, you’re probably right, you have proven, across teams and across individuals, you have the ability to work from home,'” Dicks told Bloomberg.

The ESG edge

While the concept of leadership on office-return timelines reveals a polarizing dichotomy, banks seem more in agreement that any advantage in the battle to show who’s most socially aware should be showcased. JPMorgan on Tuesday issued revised bylaws scrubbed of gender-specific pronouns — “he,” for example, might be replaced by the title of the executive in question.

Citi this month found itself ahead of the curve on gender representation in its board — thanks to its first female CEO who, in taking the seat once occupied by Michael Corbat, pushed the proportion of women on the bank’s 16-person board to 50%. That puts Citi ahead of previous gender diversity leaders Credit Agricole, BNP Paribas and Societe Generale among the world’s top 20 banks, Bloomberg reported Monday. (Large French companies are required by law to comprise at least 40% of their boards with women.)

“Jane Fraser is a bright spot, but there’s still a long way to go for banks to have gender diversity at the top and middle levels,” Marypat Smucker, who runs the Seattle-based research firm Parallelle Finance, told the wire service.

Still, Citi is no stranger to fighting gender inequity. In 2018, it became the first major U.S. bank to publish raw data concerning the gender pay gap.

Wells Fargo’s Scharf drew a line in the sand last June, when he said the bank would tie executives’ year-end compensation to their efforts to expand diversity. Canada’s six largest banks, likewise, are tying environmental, social and governance metrics into CEOs' pay packages — a standard held by only 9% of the 2,684 companies in the FTSE All World Index, Bloomberg reported Thursday.