Crypto Corner: Week Summary 15 Feb 2021

Tesla’s announcement of its $1.5bil Bitcoin (BTC) investment last week is still rippling through cryptocurrency markets, sending the BTC/USD price to new all-time-highs. The pair finally breached the $50,000 level, racing to $52,640 two days ago when Blackrock’s CIO Rick Rieder told CNBC that the asset manager started “to dabble a bit into” Bitcoin.

Blackrock has $8.676 trillion assets under management (AUM) as of the end of 2020: $4.4 trillions invested by institutions, $2.7 trillions by retail investors (mostly through ETFs), and the largest amount of cash in its history so far: $666.2bio. The investment potential is significant and without equivalent. A 1% investment in Bitcoin for the last two subcategories (institutions and cash) would largely exceed the total AUMs of the Grayscale fund.

The speculations around a 1% investment of Blackrock’s AUMs could be an overstatement. More realistically, we mentioned in January that Blackrock had only filed two statements for the SEC’s agreement to invest in crypto-related instruments for two of its funds including the $16bio global allocation fund. AUMs aside, Blackrock also holds close to $7bio in cash and cash equivalents. All in all, we might be far from the figures thrown out by the most optimistic speculators…

Rick Rieder did not do any recommendation, but he mentioned pragmatically that people are looking for stores of values, “places that could appreciate under the assumption that inflation would move higher”, and that technology and regulations have evolved. The key investment objective here is diversification. The funds allocation process is a long process: it ranges from initial analysis to the end of a typical medium to long-term investment horizon that is measured in years. During the initial selection process, the diversification criteria is at least as essential as the performance criteria. Performance is measured in years and risk-adjusted returns. The lower the volatility of Bitcoin, the more likely its allocation share would increase.

Like Blackrock, most investing institutions converge on one observation: Bitcoin is at least as valuable as cash. But holding Bitcoin to satisfy a customer demand is certainly more valuable than holding depreciating FIAT. As Elon Musk explained yesterday:

“when fiat currency has negative real interest, only a fool wouldn’t look elsewhere”

We could add:

• for the risk averse:

“if Bitcoin is a speculative bubble, but everything else is just one large balloon, would Bitcoin still be such a bad investment.”

• For the risk takers:

“When I see a bubble forming, I rush to buy, adding fuel to the fire.” Georges Soros

But more seriously… if most institutions are just following the herd, the phenomenon is giving the cryptocurrency projects an incredible boost. There is absolutely no limit to creativity in this area. On average, one new token is listed every day on coinmarketcap. Where traditional investors generally see substitutes and unpatented inventions, crypto projects simply bring communities together. They create local economies that are sometimes flawed or even fraudulent, but often ruled by a tamper-proof decentralised platform. Fully decentralised ecosystems have transparent “laws” that are clear like open source code, with no room for dubious interpretations. The cryptocurrency creative process is, for the best part, an accelerated search for perfection.

When it comes to creativity, it is difficult not to mention “crypto art” and the craze for Non Fungible Tokens (NFTs). NFTs are coins that are compatible with the Ethereum Blockchain, built on a specific ERC protocol (ERC-721) and typically used to verify digital ownership. In other words, every NFT can be traced to its owner. NFTs are also known as crypto-collectibles.

The famous Cryptokitties are NFTs, and like Cryptokitties in December 2017, NFTs have been taking the crypto space by storm in the last few months. Projects such as NBA Top Shot or Hashmasks found a demand such that art bought at the auction was sold hours later with huge profits. Hashmasks are now trading for several ETHs, or thousands of dollars.

DeFi and NFTs have largely contributed to the unprecedented increase of transaction fees on the Ethereum Blockchain since the end of 2020. In general, transaction fees remain persistently high on both the Ethereum and Bitcoin blockchains. The average transaction amount (in USD) is also increasing substantially, close now to $400K on the Bitcoin blockchain. The average transaction amount on the Ethereum blockchain is also two to four times higher than last year, evolving around $4.5K.

Paying transaction fees around 20 or 30 doesn’t really matter for such large transactions. However it does change the ecosystem, making the blockchain more affordable for “high-end” transactions, in the art or financial sectors for instance. It almost feels like Bitcoin and Ethereum are really shifting from “people’s money” to “digital gold”.

On the positive side, the new Ethereum PoS protocol (ETH2) would make transaction fees much more affordable, as it is expected to handle 100,000 transactions per second. As a result, the BTC-backed WBTC, an ERC-20 token, would also trade with low transaction fees on ETH2. In that sense, ETH2 would eventually turn the tables again, and give Ether and Bitcoin back to the people. This might well be the true power of creativity… don’t you think?

Written by: Yves, Head of Trading at Wirex