Is ETH Coming to 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.
You’re reading Crypto Long & Short, a newsletter that looks closely at the forces driving cryptocurrency markets. Authored by CoinDesk’s head of research, Noelle Acheson, it goes out every Sunday and offers a recap of the week – with insights and analysis – from a professional investor’s point of view. You can subscribe here.
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:
The asymmetric risk return
As part of a future-first strategy
In preparation for accepting bitcoin as payment
It is more likely to hold its value going forward than the dollar
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.”
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.
Ethereum Price Prediction: $2000 back in ETH/USD’s sight as technicals scream buy
]
Ethereum bulls fight back control, eyes a break above $1700 and beyond.
The No. 2 coin confirms falling wedge breakout on the daily chart.
The ETH bulls need a strong foothold above the bearish 21-DMA.
ETH/USD has extended the recovery from a drop below $1500 into the third day on Sunday, starting out a new week on the front foot.
The world’s second-largest cryptocurrency tracks the optimism across the crypto markets, especially with Bitcoin back above the critical $50,000 level.
ETH/USD: Technical setup points to a potential rally towards $2000
Ethereum’s daily chart spotted a falling wedge breakout on Saturday, opening doors for a rally above the $1700 mark and beyond.
ETH/USD: Daily chart
However, for the potential surge to gain traction, the ETH bulls need to crack the bearish 21-daily moving average (DMA) at $1665 on a sustained basis.
Acceptance above the latter could trigger fresh demand, which is likely to drive the prices towards $1998, the pattern target. The next stop for the bulls is seen at the record highs of $2041.
The 14-day Relative Strength Index (RSI) has pierced through the 50 level, entering the bullish zone. This suggests that the upside is opening up for the no.2 coin.
An immediate downside could likely be capped by the bullish 50-DMA at $1564.
A failure to resist above the last could fuel a sharp drop towards patter support at $1241.
ETH/USD: Additional levels to watch
Is Ethereum competing with Bitcoin as a store of value?
Ethereum’s price is up by over 8 percent in the past 24 hours and is currently trading above the $1500 level. The increase in price comes at a time when Bitcoin is making a slow recovery. This puts Ethereum ahead of Bitcoin in terms of its recovery run.
What differentiates Ethereum from Bitcoin, is the fact that it is not as highly volatile as most Defi projects and altcoins that offer double-digit gains in the span of a few hours such as – SUSHI, YFI, LINK, etc. Instead, it is a close competitor to Bitcoin, and its price trends tend to be very close to Bitcoin. ETHBTC is usually a mid or high-time frame trade, putting it in direct competition with BTC. Just at the same time, where Bitcoin’s active addresses are increasing, Ethereum’s non-zero balance addresses (0.1+) have hit an ATH based on data from Glassnode.
The number of ETH transfers or transactions on the network has dropped, however, after recently hitting a local bottom the price is rebounding and may test the ATH if there is enough volatility. Based on the above chart from Glassnode, in 2020 the number of non-zero addresses increased significantly till it hit a high. In 2021, the growth is relatively faster.
The institutional investment flow that led to a surge in demand for Bitcoin, is now driving Ethereum’s price narrative as Grayscale increased its ETH holdings. With CME’s ETH futures launch, more institutions are buying Ethereum and adding to their holdings, at the same time, increasing the demand for ETH 2.0 in the short term. The price may have remained rangebound in the past, however, despite its correlation with Bitcoin it is no longer rangebound and is trading at $1550.
Due to its increased correlation with S&P 500, Bitcoin’s price may drop in the short-term, when stocks experience a sell-off, however that is not the case with Ethereum. With Vitalik’s latest announcement and institutions lining up to buy Ethereum, the price is likely to continue the upward trend. Investors may find ETH a better store of value since it does not have the same volatility as BTC but offers similar returns and CME ETH futures have made it mainstream for institutions. Ethereum 2.0’s price action and returns may prove to investors that it is a better store of value when compared to Bitcoin.