Financial services giant JPMorgan states that crypto assets have now exceeded real estate in terms of growth potential and opportunities. The bank said that it was cautious on real estate in its note to investors in the past week and replaced real estate with crypto as the preferred alternative asset.
This move comes as increasing interest rates put upside pressure on commercial real estate cap rates and short-term choppiness arises in the investment markets as the sellers and buyers adjust their expectations, Wealth Management reports. The other pressures on CRE values include higher construction costs and many other fundamental questions on how these assets are valued.
Based on a new report by Fortune, JPMorgan strategists under the stewardship of Nikolaos Panigirtzoglou say leading digital asset Bitcoin (BTC) has some room to grow. The report also projected a slump in the real estate market will happen as a result of rising mortgage interest rates.
The strategists’ target price for Bitcoin is about $38,000, over a 25% increase from the biggest crypto asset by the market cap’s current valuation of $30,300.
“The past month’s crypto market correction looks more like capitulation relative to last January/February, and going forward, we see upside for Bitcoin and crypto markets more generally.”
Bitcoin’s recent drop left it well below its fair price, which has given it “significant upside” now. JPMorgan said that now is the perfect opportunity to invest in crypto. Earlier in May, Bitcoin plunged below $26,000 for the first time since December 2020. It seems to have been following the stock markets downward, fueled by inflation fears.
Although the JPMorgan strategists recently downgraded alternative asset classes from “overweight” to “underweight” as a result of persistent macroeconomic challenges, they now classify cryptocurrency assets as their favored alternative asset class over real estate.
The strategists also said that the most recent crypto space pullback, which saw the digital assets sector shed more than $1 trillion in market capitalization, has had minimal to no impact on the rate at which venture capital entities are investing money into virtual assets.
In recent weeks, venture capital firm Andreessen Horowitz said that the launch of two new cryptocurrency funds; one with a huge $6.5 billion for digital assets in general and another one that has $600 million for metaverse games.
In April, prominent crypto critic and JPMorgan CEO Jamie Dimon, who once called Bitcoin ‘useless,’ stated that blockchain and decentralized finance (DeFi) technologies have valid use cases.
“Decentralized finance and blockchain are real, new technologies that can be deployed in both public and private fashion, permissioned or not. JPMorgan Chase is at the forefront of this innovation.”
JPMorgan Believes Bitcoin Has Considerable Upside Potential
Cryptos have struggled to start this year as a lot of intriguing macroeconomic challenges from the war in Ukraine to inflation, imposed a sell-off in assets deemed by investors to be highly risky.
The crypto market has seen nearly $1 trillion in value wiped off since January, with the leading digital assets Bitcoin and Ether losing 38% and 48% year-to-date, respectively. Furthermore, the crumbling of the stablecoin TerraUSD earlier in May has just added to the bearish sentiment surrounding the sector, pushing many to ask whether we are already deep into a ‘crypto winter.’
However, the crypto investors are getting some of the much-needed support from an unlikely source this week, JPMorgan Chase. The investment bank’s strategists said in a May 25 note that they are convinced that Bitcoin has a considerable upside potential after its recent drop.
The strategists led by Panigirtzoglou maintained their $38,000 price target for Bitcoin. JPMorgan now sees digital assets and hedge funds as its ‘preferred’ alternative asset classes, with real estate now sidelined as mortgage rates surge.
Nonetheless, the JPMorgan strategists further downgraded alternative investments in general to “underweight” from “overweight,” citing stubborn macroeconomic challenges.
The Crypto Shift
JPMorgan has made considerable strides to get more involved in the crypto space since 2021, when it gave its wealth management clients maximal access to six crypto funds, including the Grayscale Bitcoin Trust.
The bank also said in February that it would make a “strategic investment” in TRM Labs, which is a blockchain analysis company. This investment came despite CEO Jamie Dimon’s long history as a vocal and high-profile crypto critic.
Dimon insisted that Bitcoin was a “fraud” in 2017, and even called it ‘worthless’ in October last year. But, the executive noted that his customers are ‘adults’ who can make their decisions independently. He said at an Institute of International Finance event in October:
“So if they want to have access to buy Bitcoin, we can’t custody it, but we can give them legitimately, as clean as possible, access.”
In May 2021, Dimon commented:
“I’m not a bitcoin supporter. 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.”
In the months that followed, Dimon’s tone on cryptos has remained significantly bearish, but at the Wall Street Journal’s CEO Summit in May 2022, he praised blockchain technology, mentioning that it has proven itself to be a highly useful innovation.
On May 25, JPMorgan’s strategists were also seen to strike a more upbeat tone, insisting that despite the recent crypto sell-off, there has been no tangible evidence that venture capital (VC) funding in the sector is dwindling.
To their point, also on May 25, the venture capital firm Andreessen Horowitz confirmed that it had raised around $4.5 billion for its fourth cryptocurrency fund hoping to take advantage of bargains and opportunities that arise in the crypto bear market.
Last summer, JPMorgan started giving wealth management clients access to six crypto funds to add some bitcoin exposure to their portfolios. That happened despite Dimon’s previous comments that BTC has “no intrinsic value” and that “regulators are going to regulate the hell out of it.”
On May 25, Securities and Exchange Commissioner Hester Peirce said that the United States has “dropped the regulatory ball” about cryptocurrency. She called on Congress to clarify the SEC’s regulatory role so that her agency can take more proactive steps against all forms of crypto fraud heading into the future.
“We’re not allowing innovation to develop and experimentation to happen healthily, and there are long-term consequences of that failure.”
JPMorgan Unveils New Use For Blockchain In Trading And Lending
The bank is using blockchain for collateral settlements, which is the latest Wall Street experimentation with the nascent technology in the trading of financial assets.
JPMorgan’s first such transaction was executed on May 20, when two of its entities transferred the token representation of BlackRock money market fund shares as collateral on its private blockchain. This effort will enable investors to pledge a huge range of assets as collateral and use them outside of the market operating hours, as highlighted by New York-based JPMorgan.
JPMorgan’s global head of trading services, Ben Challice, said in an interview:
“What we’ve achieved is the friction-less transfer of collateral assets on an instantaneous basis. While BlackRock wasn’t a counterparty, “they have been heavily involved since Day One, and are exploring use of this technology.”
Blockchain-based collateral settlement can be used for transactions like derivatives and repo trading, together with securities lending. In the months ahead, the bank wants to expand tokenized collaterals to include fixed income, equities, and other asset types.
Blockchain intelligence firm TRM Labs has added JPMorgan to its list of investors after the bank announced its strategic investment. The total amount invested by the bank was not announced. TRM offers blockchain intelligence to enable traditional financial organizations and crypto-focused businesses and public agencies to analyze and manage cryptocurrency-related crimes and fraud.
The co-founder and CEO of TRM, Esteban Castaño, said:
“I think it shows that financial institutions are not investing in just crypto and potential use cases but the technology to mitigate any associated risks. It reflects the long-term mindedness of the industry and figuring out what’s the right answer for crypto in terms of risk management, trust, and safety.”
The firm was launched in 2017 and it closed its $60 million Series B funding round in December 2021. That round was led by Tiger Global and it featured other major financial players like PayPal Ventures, Visal, American Express’ Amex Ventures, Block (formerly Square Inc.), Citi Ventures, and Jump Capital.
“People often cite that financial institutions are ‘here’ and I think that’s truer now than ever before. Today we see countless financial institutions that have tangible projects in flight for crypto-related projects and services and they’re making investments in risk management infrastructure so those products can be successful, trusted, and safe for consumers.”
JPMorgan spent the past six years exploring the potential and applicability of blockchain technology as explained by the CEO of Onyx by JPMorgan, Umar Farooq. TRM’s vision is seen to align with JPMorgan’s ambitions to create compliant and secure various blockchain products.
Elsewhere, two JPMorgan research analysts Reginald Smith and Kenneth Worthington stated in a report they see 2022 as “the year of the Blockchain Bridge …or the year of financial tokenization.”
Analysts also anticipate the evolution of crypto markets to accelerate in 2022, specifically for financial services, based on reports in January. Castaño said:
“Trust and safety is a prerequisite for crypto to be successful in the long run. Blockchain intelligence builds greater trust and safety and enables crypto to become the next dominant financial system of the world.”
JPMorgan has been a major proponent of blockchain technology and recently, it has increasingly embraced digital assets. Over time, its blockchain might work as a bridge that links institutional investors with decentralized finance (DeFi) platforms in the crypto economy, based on a statement by the head of JPMorgan’s Blockchain Launch and Onyx Digital Assets, Tyrone Lobban.
“As the crypto sector grows over time, there will be a growing set of financial activities that happen on the public blockchain, so we want to make sure that we cannot only support that but also be ready to provide related services.”
Since late 2020, the bank has utilized blockchain to do intraday repurchase, or repo, which is a type of near-term borrowing in fixed income. Today, over $300 billion of repo transactions have been processed on the network that counts BNP Paribas SA and Goldman Sachs Group Inc among its notable participants.
For many years, Wall Street institutions have been exploring the use of blockchain in their businesses, lie mortgage loans, interbank payments, and cross-border trades. State Street Corp and Vanguard have already traded foreign exchange forward contracts using blockchain technology to mitigate counterparty risks.
BlackRock and Goldman are also working on the tokenization of a range of traditional asset classes.