BlackRock Has Entered the Chat

Insights, news and analysis for the professional investor

February 20, 2022

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Welcome to Crypto Long & Short.

BlackRock is reportedly looking at allowing its customers to transact with cryptocurrencies on its Aladdin platform. Bitcoin on exchanges have been falling steadily for nearly a month. Miners have sold a little bit of their bitcoin inventory in recent days. How are all three stories connected? That's what George Kaloudis, research analyst at CoinDesk, explores in this week's newsletter. George will be writing the weekly briefings going forward, where he'll use his sharp eye and strong quantitative skills to explain bitcoin and other cryptocurrencies from a markets professional's perspective. These will quickly become required reading on every crypto trading desk in the world!

– Lawrence Lewitinn, managing editor for global capital markets

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The Briefing

Like peering inside a house through different windows, reading any one news story or data point may offer a useful perspective on the crypto markets, but none on its own can give you the full picture. For Crypto Long & Short this week, I wanted to take three seemingly unconnected stories from the last week or so and tie them together.

Aladdin's magic carpet
CoinDesk's Ian Allison reports that BlackRock may be planning to offer crypto trading to its clients through Aladdin, the $10 trillion asset manager's integrated investment management platform. This cuts against what CEO Larry Fink said in July (which conveniently happened around the time I last wrote for this newsletter). Fink indicated there was "little demand" for crypto assets from clients, which wasn't really surprising given those clients include pension funds, endowments and other types of conservative capital with infinite time horizons. However, one of Ian's sources said of BlackRock: "They see all the flow that everyone else is getting and want to start making some money from this." Still, it is a bit surprising that the potential Aladdin offering appears to extend beyond bitcoin, though it's unclear which other "crypto assets" BlackRock would offer to clients. Bitcoin had solidified itself as crypto's "blue-chip" asset around the time MassMutual made a $100 million purchase in 2020.

Maybe crypto's total market cap settling somewhere between $1.5 trillion and $3.0 trillion for the last year or so changed minds at BlackRock. Maybe it was Jump Trading finally diving into crypto in September. Maybe enough Zoomers pestered their high-net-worth parents about cryptocurrencies at dinner tables until it hit a tipping point. Whatever the catalyst, I think the news is far more important than people are giving it credit for. BlackRock wouldn't explore something if there wasn't demand for it. On top of that, Aladdin powers the back office for at least $20 trillion of assets, equivalent to 10% of global stocks and bonds. Most importantly, you can't ignore the gravity that could eventually be BlackRock signaling that "crypto is OK."

I know investors are independent thinkers, but it sure helps when the $10 trillion giant corroborates your views.

Where is this bitcoin going?
The amount of bitcoin held on exchanges has gone down every day since Jan. 22 of this year. This caught my eye in Glassnode's weekly on-chain metrics report, which you should definitely check out if quality data analysis excites you.

This sort of stuff happens in cycles for bitcoin. Sometimes investors want to de-risk and sell coins, so inflows to exchanges spike. Other times, investors want to hold, so outflows from exchanges to more permanent ("cold") storage spike. It's no surprise that this three-week period of outflows happened during bitcoin's run-up from $33,000 to $45,000 because fewer bitcoins on exchanges theoretically eases selling pressure.

So is anyone selling bitcoin?
If someone is, it certainly isn't publicly traded bitcoin miner Marathon (NASDAQ: MARA). At least, that's according to a tweet the company sent out last Monday in response to a Bloomberg article that suggested miners were selling coins in a "worrying sign of a shakeout." In theory, miners make money by mining bitcoin and immediately selling it for the local currency in order to pay expenses (most utilities and landlords don't accept magic internet money). In reality, a number of these are well-capitalized firms that don't need to sell bitcoin continuously.

Yet, despite Marathon's tweet, miners did mostly sell coins starting Feb. 5 through this weekend following accumulation since Nov. 19. But to call this activity "worrying" seems mistaken. Shorter periods of net selling from miners isn't really associated with the type of price weakness that would worry a seasoned investor. To boot, the last prolonged period of net selling by miners was from January to March 2021, a period which was punctuated by astounding price performance and the first time bitcoin broke $60,000.

Everything is delicately tied together
The three preceding narratives are loosely tied together.

Some people think bitcoiners are attempting to rebuild the financial system with code, and that along the way these coders are learning why things are the way they are. I partially agree, but I mostly disagree. Bitcoin is different and the system these devs are building is in its own category. This is precisely why it makes total sense that BlackRock is getting involved in bitcoin and other cryptos.

Miners are the commercial infrastructure of Bitcoin. Without them, transactions couldn't happen and new bitcoin couldn't be issued. However, miners aren't the ones facilitating the order books that give it a price in dollars, ether, dogecoin or whatever. That's the job of exchanges, traders and market makers. Some may see miners as analogous to the U.S. Federal Reserve and Treasury Department, minting currency for circulation into the economy. However, miners are also likened to Visa because they enable transaction settlement. But also, not really. The point is, Bitcoin doesn't perfectly fit into any box we have right now.

Ancillary businesses around miners include the crypto exchanges that facilitate secondary market trading between crypto assets. Exchanges are important – they are among the most valuable companies in the space – in that they give relative value to bitcoin and by extension, the multitudes of alternative crypto assets that were inspired by it.

In its role as an asset manager, BlackRock counts itself as one of the most important parties in facilitating the government securities trading that gives U.S. monetary policy teeth. This is a vaunted position in the global economy not to be taken lightly. That said, beyond helping move financial instruments as needed for the Fed, BlackRock takes part in other ancillary businesses where it can make money, such as buying and selling equities, commodities and real estate on behalf of those businesses or its investors.

But BlackRock is still just that: an ancillary business around the Fed and the economic machine. An ancillary business with a whole lot of capital (and single-family homes). In all, crypto simply represents a new asset class that BlackRock hasn't had the pleasure of making money in yet. That's why it looks to be extending beyond bitcoin. BlackRock doesn't need crypto, yet, but it sure won't hurt it to get involved now.

– George Kaloudis, research analyst

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Takeaways

Venture giant Sequoia Capital is looking to raise $600 million for a crypto-focused fund. TAKEAWAY: While most crypto venture firms are focused on seed investments and presales, Sequoia's fund will invest in liquid tokens and post-launch projects. The approach includes becoming active within DeFi through staking, voting and providing liquidity for portfolio companies. While Sequoia invests across many industries, 20% of its investments went into crypto during 2021.

Backers of The Graph launched a $205 million ecosystem fund for builders utilizing the data indexing protocol. TAKEAWAY: Similar to how many layer 1 protocols have used ecosystem funds, The Graph is looking to incentivize developers to use its tooling throughout Web3. The protocol is currently expanding beyond Ethereum and looking to make a big push into decentralizing the back end of DeFi projects.

Circle doubled in value under a new Special Purpose Acquisition Company (SPAC) deal with Concord Acquisition Corp. TAKEAWAY: After initially agreeing to a $4.5 billion valuation in July 2021, Circle created a new deal that doubled its valuation in just over seven months. Circle's stablecoin, USDC, has also doubled in circulating supply and taken a large percent of market share from USDT.

Gary Gensler, chairman of the U.S. Securities and Exchange Commission, pitched his vision for regulating crypto to House Democrats. TAKEAWAY: Gensler doubled down on his claims that most tokens he sees are securities and that the SEC will work to close loopholes within the crypto industry. The chairman also compared cryptocurrencies to the subprime mortgage crisis and claimed the industry is "more centralized and less new" than it admits.

– Teddy Oosterbaan, research analyst