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Bitcoin, Blockchain and Digital Finance: Fintech
Goes Mainstream in the COVID-19 Era

J.P. Morgan Global Research examines the current trends in blockchain technology, the Bitcoin market, digital currencies and the rise of digital banking.

April 27, 2021

The COVID-19 pandemic has accelerated digitalization and technological change in finance. It has boosted demand for digital services and alternative currencies, with factors such as multiple rounds of stimulus, accommodative monetary policy and excess liquidity contributing to record inflows into Bitcoin. The ongoing progress in digital technology has given rise to online start-ups without a banking background and the expansion of social media and digital platforms into credit and payments, bringing fintech into the mainstream.

The Rise of Digital Finance

The real financial transformation story of the COVID-19 era is the increase in demand for digital services, as the shift away from in-person interactions is a lasting legacy of the pandemic.

Competition between “fin” and “tech” players lies ahead, with banks stepping up investment to narrow the technology gap. Regulation has been outpaced by innovation, creating an uneven playing field, as it is easier and cheaper for fintech companies to offer similar products and services.

“The market has fixated on the rally in Bitcoin, but the real economic and exciting action is in the new battle for digital supremacy between the banks and fintech,” said Joyce Chang, Chair of Global Research. “We expect to see intensifying competition and innovation with major IT capital expenditure (CapEx) forthcoming on both sides.”

Steven Alexopoulos, U.S. Mid- and Small-Cap Bank Analyst, believes that traditional regional banks could emerge as endgame winners in the digital age of banking. “Big Tech possesses the most potent digital platforms due to their access to customer data, but banks have an advantage from deposit franchise, risk management and regulation,” he noted.

Fintech in Asia Leading
the Transformation

Transformation is occurring most rapidly in Asia, which continues to drive third-party (noncash) global growth in payments. In China, the COVID-19 lockdown induced wider acceptance and usage of mobile banking, while J.P. Morgan estimated the total addressable market for third-party payments in the ASEAN 6 countries (Indonesia, Thailand, Singapore, Malaysia, Philippines, and Vietnam) at $1.5 trn. “There is tremendous scope for growth as penetration is low at only 2%,” according to Harsh Wardhan Modi, Co-Head of Asia ex-Japan Bank Research.

Is Bitcoin Here to Stay as an
Alternative Currency?

The rise in Bitcoin’s acceptance as an alternative currency is another phenomenon of the COVID-19 era. Demand for an unconventional and high-volatility hedge has been driven by rich equity and credit valuations; conventional hedges like developed-market bonds barely serve as insurance at current low yields. Concerns about cyberattacks, climate catastrophes and materially higher inflation also factor in, particularly with millennials, furthering demand for these unconventional financial channels.

“Bitcoin has already surpassed gold in risk capital terms,” according to Nikolaos Panigirtzoglou, Senior Global Markets Strategist. “Current prices are well above our most recent estimates of fair value based on mining cost and risk capital equivalence with gold.” He observed that just $14 billion of institutional inflows into Bitcoin since September 2020 have contributed to an $800 billion increase in its market cap. Some of this can be explained by low market liquidity.

Panigirtzoglou estimated that, at $100 billion, the daily trading volume of gold in spot and futures is 10 times the true trading volume of Bitcoin. Mika Inkinen, Global Markets Strategist, added “We estimate the long-term theoretical Bitcoin price at $146,000 to match the total private sector investment in gold via ETFs or bars and coins.” Reaching this would likely be a multi-year process that would depend on far greater institutional Bitcoin ownership and on the volatility of bitcoin converging to that of gold, he said. So far the opposite is happening, with the volatility of bitcoin rising while the volatility of gold is falling. At the current bitcoin to gold volatility ratio of around four times (in terms of six-month volatilities), the fair value for bitcoin in risk capital (i.e. risk-adjusted) terms drops to around $37,000.

The diversification benefits remain questionable at current prices so far above production costs, while the mainstreaming of cryptocurrency ownership is raising correlations with cyclical assets. “Crypto assets continue to rank as the poorest hedge for major drawdowns in equities, particularly to fiat currencies like the dollar which they seek to displace” notes John Normand, Head of Cross-Asset Fundamental Strategy. “To the extent that Bitcoin remains an investment vehicle rather than a funding currency, it will always lack the short base that sponsors USD, JPY and CHF strength during periods of acute market stress.”

Bitcoin’s Price: is it Built on
Solid Foundations?

Recurring Bitcoin price surges beyond intrinsic value (estimated mining costs) are one reason to expect long-term mean reversion.

Ratio of Bitcoin Graph 0.0 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 1.0 2.0 3.0 4.0 5.0 6.0 0 10000 20000 30000 40000 50000 60000 70000 Ratio of Bitcoin price to intrinsic value

Intrinsic value estimated using the cost of production approach following Hayes (2018)
Source: J.P. Morgan Flows & Liquidity by Panigirtzoglou

While on-screen liquidity in Bitcoin markets has continued to improve as acceptance has grown, Josh Younger, Head of US Interest Rate Derivatives Research, cautions that this has largely come from high-frequency traders who can quickly exit the market when volatility picks up. He highlights the tail risk to Bitcoin markets if there were to be a sudden loss of confidence in USDT, a Stablecoin issued by Tether Ltd; Bitcoin relies on this for 50-60% of trades. “Bitcoin is only as strong as the foundation and a sudden loss of confidence in USDT would likely generate a severe liquidity shock to Bitcoin markets, which could lose access to by far the largest pools of demand and liquidity,” Younger said.

Is Blockchain Technology Moving into
the Mainstream?

While blockchain technology could not be considered mainstream yet, it is moving beyond experimental early stages. In 2020, J.P. Morgan launched Onyx, a new model for financial innovation that incorporates blockchain technology, becoming the first global bank to create a dedicated unit to develop and scale blockchain-based products. Onyx’s mission is to reimagine business and the ways it can be transformed, with the new infrastructure, networks and services enabled by distributed ledger technology.

Onyx by J.P. Morgan: Developing and Scaling
Blockchain-Based Products

Onyx has a significant portfolio of new products, including:

A blockchain-based intraday repo application where J.P. Morgan executed the first live intraday repo trade on a Blockchain

Liink by J.P. MorganSM, the world’s largest blockchain-based institutional network with increasing membership and offerings

JPM Coin, a blockchain-based payment rail and account ledger

J.P. Morgan plans to continue increasing its investment in blockchain technology as many of these efforts mature and achieve scale at a global level.

The World’s Largest Bank-Led Blockchain Network

First piloted in 2017 as the Interbank Information Network® (IIN), Liink is the first bank-led, production-grade, scalable, peer-to-peer blockchain-based network. It addresses the longstanding challenges of sharing payments-related information across institutions. More than half of the world’s largest banks have signed up to join the new paradigm, using blockchain to simplify information exchange around money movement. Liink also enables banks to monetize their data assets by sharing information on the network and developing applications for it.*

Current applications on Liink include:

Confirm allows participants to exchange information to validate account information prior to payment initiation across geographies and most common payment types.

Resolve allows participants to exchange information to resolve compliance-related inquiries.

Smart check routing to streamline the processing of checks. J.P. Morgan enables check-originating financial service providers to directly transmit transactions to lockbox providers using digital means.*

*Future products and services under development; features and timelines are subject to change at J.P. Morgan’s sole discretion. Offering as live products subject to completion of internal review and obtaining any required consents.

Related Insights

This communication is provided for information purposes only. Please read J.P. Morgan research reports related to its contents for more information, including important disclosures. JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively, J.P. Morgan) normally make a market and trade as principal in securities, other financial products and other asset classes that may be discussed in this communication.

This communication has been prepared based upon information, including market prices, data and other information, from sources believed to be reliable, but J.P. Morgan does not warrant its completeness or accuracy except with respect to any disclosures relative to J.P. Morgan and/or its affiliates and an analyst's involvement with any company (or security, other financial product or other asset class) that may be the subject of this communication. Any opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This communication is not intended as an offer or solicitation for the purchase or sale of any financial instrument. J.P. Morgan Research does not provide individually tailored investment advice. Any opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. You must make your own independent decisions regarding any securities, financial instruments or strategies mentioned or related to the information herein. Periodic updates may be provided on companies, issuers or industries based on specific developments or announcements, market conditions or any other publicly available information. However, J.P. Morgan may be restricted from updating information contained in this communication for regulatory or other reasons. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or afliate in their home jurisdiction unless governing law permits otherwise.

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