21Shares Research Newsletter - Issue 57

Market Outlook

By far the biggest and most important moment of the last week was the news and subsequent outrage at the murder of a 46-year old African American man, George Floyd, by police officers in Minneapolis following an attempted arrest. The New York Times produced a video which details the circumstances surrounding his murder by Derek Chauvin, the officer who can be seen most clearly in witness videos pinning Mr. Floyd to the ground before his passing. The officer has since had murder and manslaughter charges put forth against him and three other officers who were involved and complicit in George Floyd’s death remain under investigation, according to the New York Times.

George Floyd’s murder was the impetus behind widespread protests across America — in cities in Minneapolis but also in New York and California to name a few— to a degree commentators have argued has not been seen since the protests and riots following the assassination of Dr Martin Luther King Jr. in 1968. While the vast majority of protests over the murder of George Floyd have been peaceful, the intensity of the social unrest has risen recently (turning into full-scale riots) due to a heavy-handed police reaction to the protests and longstanding issues of police brutality and racism in America towards the African American community finally reaching its boiling point. The chart below from Vox helps demonstrate the issue, showing the lifetime risk of U.S. citizens killed by the police grouped by ethnicity.

The reaction from the White House and Donald Trump will only serve to aggravate existing tensions as we expect to see an increasingly militarized response to the protest. However, it’s important to remember that George Floyd’s unjust murder is not an edge case but just another example of ongoing issues with racism, police brutality, and inequality which have led to young black men having an estimated 1-in-1000 chance of dying at the hands of police in their lifetime.

You can learn more about George Floyd’s murder at the following link. In addition, if you feel strongly for the cause of preventing such incidents in the future, please have a read of this page to find out ways to contribute.

While this is not directly related to the research we normally share within this newsletter, it is important to understand. In addition, it helps demonstrate the large disconnect current capital markets have with the general state of the economy and society within the United States; despite growing social unrest and economic malaise due to the Coronavirus lockdowns, the S&P500 is up 7.49% over the last month. This is unlikely to end and helps display some of the serious issues with the political establishment’s ability to lead during these trying times.

An interesting thought experiment is to consider how an investor’s portfolio returns would have been affected if they had bought Bitcoin on different days throughout the year. Our research found that an investor would have profited if they invested in Bitcoin on all days except for four (Feb. 11 – 14) regardless of the day or price which they bought Bitcoin at.

Today the price of Bitcoin broke the $10,000 mark once again as the market increasingly takes on a bullish sentiment which has seen all large cap cryptoassets perform exceptionally well recently — BTC (15.43%), ETH (24%), XRP (9.14%), BCH (11.22%), and BSV (11.12%).

What Drives the Price of Bitcoin?

For those of you who have not had a chance to listen to our researcher Eliezer Ndinga’s breakdown of Bitcoin’s price drivers, now is a perfect time! In this webinar episode, Eliezer discusses the main factors that drive the price of Bitcoin.

Listen here.

News - US Economic Outlook & Implications of Current Policies for Inflation, Gold, and Bitcoin | Goldman Sachs

What Happened?

Last week, the US leading investment and financial services company, Goldman Sachs, held a conference call diving into the state of the US economy with a couple of slides focused on Bitcoin. Given current market uncertainty driven by the Coronavirus pandemic, Goldman Sachs held a bearish opinion on Bitcoin and cryptocurrencies overall. As such, the investment bank did not consider cryptoassets as a real asset class nor as a suitable investment for their clients. See the slide below summarizing the company-wide view on cryptoasssets.

Why Does It Matter?

Two years ago, due to rising demand by various clients such as hedge funds and endowment funds for holding Bitcoin as a virtual precious metal similar to gold, the New York Times reported that Goldman Sachs would be using its own money to trade Bitcoin derivatives contracts. On May 2, 2018 when the article was published by Nathaniel Popper, the price of Bitcoin was oscillating around $9,000. In the 4th quarter of the same year, the overall crypto asset industry experienced a market correction over the same time frame as the US equity market correction. While the S&P 500 Index nosedived by 17.5% from late September to December 2018, the price of Bitcoin lost almost half its value, at that time, dropping from $6,621 to $3,797.

Although the exact starting date of when Goldman Sachs’ Bitcoin trading began was not specified in the article, the general crypto market outlook in 2018 indicates their likely portfolio performance for their clients that year. For example, if Goldman Sachs started Bitcoin trading in June 2018, the investment bank would have lost exactly half of its Bitcoin holdings denominated in USD by late December 2018.

Due to a lack of strong understanding of the fundamentals and benefits of Bitcoin, the 21Shares Research team presumes that this has led Goldman Sachs to since cease trading Bitcoin. For example, one month after Goldman Sachs announced its Bitcoin trading operation, in an interview with CNBC, the SEC Chairman Jay Clayton specifically clarified that Bitcoin is not a security. However, as you can see in this above slide, the investment bank alluded to Bitcoin being a security nevertheless. On a final note, Rana Yared, one of the executives who used to oversee the creation of the Bitcoin trading operation at Goldman Sachs, confessed to the New York Times that she was not a true believer in Bitcoin and this likely influenced the company-wide view on cryptoassets as a whole.

Learn more here.

News - Coronavirus Accelerates Shift Away from Cash | The Financial Times

What Happened?

The consequences of the Coronavirus pandemic have started to reflect on consumers and businesses behaviours and future practices. Link, the UK's cash machine network, reported to the Financial Times (FT) a significant drop in ATM transaction volumes — falling as much as 62 percent year on year since the UK lockdown in late March this year. Since social-distancing restrictions have come upon us and are now part of our daily lives, in an attempt to reduce the chance of contamination, the FT suggested that consumers that previously used cash heavily prior to lockdown are now content with their more digitally based options.

Why Does It Matter?

The transmission of the virus, Sars-Cov-2, has led many people to rethink the way they greet, meet and do business with others. Although no scientific-based studies have not yet shown how contactless payments have helped reduce the potential virus transmission, consumers have made the switch to fully-fledged digital payment methods regardless. This shift in consumer behaviours has been accelerated thanks to a smooth user experience offered with credit cards and smartphones.

This trend is undeniably here to stay which, in the future, especially in cash-dominant nations will be beneficial in the cryptoasset industry’s effort to help others understand, access, trade or use cryptoassets. Although at this stage the user experience when it comes to own cryptoassets such as Bitcoin is still quite arcane, the 21Shares research team anticipates that current crypto-focused services will follow the lead of Fintech payment solutions to boost crypto adoption and Argent, the non-custodial Ethereum wallet is a good example for such endeavors.

Learn more here.