by Tom Luongo, Tom Luongo:
There was a lot of fanfare made recently over an investment note from JPMorgan Chase which seemed to elevate bitcoin over real estate and other traditional asset classes as the “alternative asset of choice.”
A May 25 investor note made the argument that bitcoin was around 28% undervalued and that the bank was targeting an upside price of around $38,000 per coin, in effect making an argument for bitcoin’s recent price weakness being overdone relative to real estate, private equity and private debt.
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On the surface this seemed to be a big change from the one major, money center U.S. bank whose CEO, Jamie Dimon, refuses categorically to jump on board the bitcoin bandwagon.
If anything, Dimon’s antipathy to bitcoin rivals only that of European Central Bank (ECB) President Christine Lagarde, who continues to peddle the idea that bitcoin has no value because, of course, it lacks the backing of a central bank and/or government.
This is Dimon’s public beef with bitcoin as well. He’s been very clear about this: Bitcoin doesn’t matter because it has no official support or backing. Since JPMorgan is one of the shareholders of the New York Federal Reserve Bank, you really can’t blame him for “talking his book,” just like Lagarde or another famous bitcoin hater, Charlie Munger of Berkshire Hathaway.
So, what about this investor’s note then? Well, as always, the devil is in the details.
The first thing to remember is that this is a so-called “sell side” analyst’s note, meaning it is the opinion of analysts within JPMorgan of where investors should put their money preferentially under current market conditions. It has nothing to do with the opinion of the CEO of the company.
Anyone who thinks Dimon would be mucking around in the depths of his investment banking sell-side division to grind his personal ax against bitcoin simply doesn’t understand how a company like JPMorgan Chase works.
Even Dimon himself has said as much. In an interview in May 2021, he said the following:
“I’m not a bitcoin supporter,” Dimon said during The Wall Street Journal CEO Council summit on Tuesday. “I don’t care about bitcoin. I have no interest in it.”
“On the other hand, clients are interested, and I don’t tell clients what to do,” he said.
“Blockchain is real. We use it,” according to Dimon. “But people have to remember that a currency is supported by the taxing authority of a country, the rule of law, a central bank.”
There are a lot of ideas in these quotes from Dimon. He’s the CEO of one of the largest, most powerful and influential banks in the world and he maintains that business by being smart enough to give his customers what they want, even if he himself is not interested in that product and/or is working on products which are, tangentially, its competition.
His sell-side analysts aren’t paid to be his mouthpiece, they are paid to see things clearly and present an investment thesis to clients and get them to sign over some funds to make the bank a broker’s fee.
It’s nothing more complicated than that.
That said, however, if that was all there was to this story, I wouldn’t be writing this article. There is more to it than that. JPMorgan, along with the rest of Wall Street, is in a real pickle. For the past 14 years, for the most part, the Federal Reserve has kept interest rates near the zero-bound.
At zero-bound interest rates traditional bank revenue models collapse to zero as well. Net interest margin, or NIM, is supposed to be the core business of a bank. NIM is simply the difference between what the bank pays you for your deposits to loan them out to investors at a higher rate.
The bank charges X, you get 30% to 50% of X and the bank keeps the rest. That “rest” is NIM. And NIM is a dead letter office on the quarterly earnings report of most major banks in the era of coordinated central bank policy.
Instead, the banks have engaged in ever more esoteric investment banking and trading schemes to make money while looking on their traditional depositor customers as some albatross they have to deal with in order to keep the regulators at bay.
As such, then, bitcoin and other digital assets have become just another source of funds for banks to tap to sell another structured product to high-value investors, which is where they make the bulk of the money anymore.
Enter the sell-side talking up bitcoin at crucial moments in the market. Honestly, when that investor note was published and bitcoin was clinging desperately to technical support around $29,000 per coin, I’m hard pressed not to believe that was the signal to the market that JPMorgan itself had decided it had accumulated enough bitcoin to stuff into some line item on its balance sheet.