Any leading bank publishing its first research piece on the cryptocurrency market needs to offer something meaty.
Alkesh Shah, a former tech sector strategist and analyst and now global crypto and digital asset strategist at Bank of America, proved himself up to the task on Monday, putting out a 141-page first note.
The opening sentence says everything. “With a $2 trillion plus market value and 200 million plus users, the digital asset universe is too large to ignore.” While Shah’s opening observation is aimed at investors, the same message is now finally getting through at the top of the banks, hence his own new role.
Candace Browning, head of BofA global research, says: “Digital assets are transforming the way in which markets, businesses and central banks operate. Bank of America offers a market-leading global payments platform and blockchain expertise, and the addition of digital asset research further strengthens the depth and breadth of our offerings for investors.”
Digital assets are much more than a form of money
Alkesh Shah, Bank of America
Market sources away from the bank tell Euromoney that BofA’s prime brokerage unit occasionally clears and settles cryptocurrency exchange-traded products (ETPs) for select clients. For now, presumably, it is still considering strategies for dealing in cryptocurrency and other digital assets for its institutional investor clients that would require running some inventory on balance sheet.
“Bitcoin is important, but the digital asset ecosystem is so much more,” says Shah.
For now, recommendations of how to invest in the theme focus on the equity of established companies playing an increasing role in the crypto market or adopting its technology.
Partnering with BofA’s predictive analytics team, Shah and his colleagues used natural language processing (NLP) to analyze 161,322 earnings call transcripts from the start of 2009 through to August 2, 2021. This found corporate interest in digital assets now at an all-time high, notably among banks and tech companies. These may be the most threatened and so, by extension, the likeliest early adopters among established companies.
BofA highlights PayPal, Coinbase, JPMorgan, Morgan Stanley and SVB Financial among 20 stocks to consider as a way to play the crypto theme.
There is a lot at stake here. The chief executive of one fintech tells Euromoney: “Banks have been experimenting for years now with blockchain and it could be transformative for their core technology. But the only way it’s going to become embedded at the banks is if they use it for dealing in the markets for which it was first created, cryptocurrencies themselves.
“They’ve been doing bonds on blockchain since 2018. But only if they deal in crypto at scale will they then be positioned to transition more conventional markets businesses onto it.”
Shah’s first note is a primer that sums up the current state of play and lays out some expectations. Even after China joined India in banning bitcoin trading recently, the leading crypto rallied from $41,000 on September 29 to $55,000 on October 8.
“Regulatory uncertainty is the largest near-term risk in our view, but regulation may drive increased investor participation over the long term once the rules of the road for digital assets are established,” says Shah.
He points to the SEC’s recent observation that the digital asset industry’s future lies in the public policy framework and suggests that regulatory headwinds could soon become tailwinds boosting adoption of the new asset class.
Just the beginning
Shah suggests that even after recent rallies the digital asset ecosystem, which began with what first looked like a new global currency away from central bank or government oversight, is only just getting started.
“Digital assets are much more than a form of money; the next wave of digital assets is likely decentralized finance (DeFi) code that builds internet-native contracts, loans, insurance, titles to real-world assets, unique digital goods (known as non-fungible tokens or NFTs), online corporate structures (such as digital autonomous organizations or DAOs) and on and on,” he says. “This is likely to be a major trend for the next 20 years.”
The most entertaining part of Shah’s note addresses the criticism that digital assets, which change incentive structures for users and stakeholders, are solutions without problems.
This, he suggests, recalls the attitude of William Orton, president of Western Union, when offered the opportunity to buy the patent for the telephone in 1876. “What use could this company make of an electrical toy?”
Shah also recalls Jim Keyes, chief executive of Blockbuster, in 2008, commenting on the threat from video streaming: “Neither RedBox nor Netflix are even on the radar screen in terms of competition.”
