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Must-read blockchain, crypto paper from JP Morgan asset manager

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Last week a senior asset manager at J.P. Morgan shared his refreshingly blunt views on blockchain and cryptocurrency.

Michael Cembalest, Chairman of Market and Investment Strategy for J.P. Morgan Asset & Wealth Management, opens the paper with the comment, “Yes, I am turning 60 this May. This obviously renders me too old to comment on this topic.”

For Bitcoin maximalists, he starts by agreeing with one of their core arguments. Cembalest is not alone in questioning the endurance of the U.S. dollar and other fiat currencies, given the scale of the national debt. And he rejects skeptics that say a digital currency can’t emerge as a viable store of value. “I don’t agree; such logic is too rooted in the past and does not account for rapid behavioral changes common in the post-war era,” he wrote.

But beyond that, Cembalest doesn’t see Bitcoin as the replacement, largely because of its volatility. And he’s not keen on its excessive wealth concentration compared to conventional assets. He notes that the only items denominated in Bitcoin are other cryptocurrencies.

The JPM asset manager also does a takedown of DeFi, noting that Uniswap, Synthetix and Compound “are not registered as securities even though they sure act like them. Stay tuned…”

He observed that most DeFi is insular with purely crypto use cases and may not endure a sustained valuation pricing dip. That’s as much observation as a prediction because recent crypto price dips have negatively impacted the value stored in DeFi. He also noted how DeFi solutions have benefited from Covid. “The real test will occur next time there’s a recession that is unaccompanied by supplemental income payments, foreclosure moratoria and PPP loans,” wrote Cembalest.

He’s a little more open to Ethereum with its planned move to Proof of Stake and as a platform for stablecoins. For him, the prospect of earning staking income offers a glimmer of potential. But Cembalest doesn’t give Ethereum a free ride. 

Another area where the asset manager is more optimistic is non-fungible tokens (NFTs). Mainly because the twentieth century saw several new art movements with substantial value. However, he failed to note that these NFTs – assuming they will be enduring – are frequently denominated in the native crypto prices, often Ether. 

On balance, the paper questioned the crypto theses but is supportive of enterprise blockchain and touted the JP Morgan repo solution that enables intraday settlement. For balance, Cembalest incorporated multiple rebuttals to his paper.

He concludes, “Some crypto use cases will endure but valuations assume broader and faster adoption. I’m tempted by the store of value thesis given the degradation of money but have no crypto valuation tools to time my investment, and its volatility and market concentration are hard to manage. Remittances and permissioned, private blockchains with little to no cryptocurrency impact are the use cases that seem most likely to survive in the world I inhabit.”

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