Megabanks, Asset Managers Buy Up Coinbase Stock

What you need to know today in crypto and beyond

August 18, 2021

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Today's must-reads

Top Shelf

DOGGED BUNCH: The Dogecoin Foundation, a nonprofit organization that aims to support the development of the memecoin through advocacy, governance and trademark protection, has been re-established. The foundation boasts some well-known board members and advisers, including Ethereum co-founder Vitalik Buterin, who is serving as the foundation’s "blockchain and crypto adviser."

COINBASE WHALES: A new SEC filing reveals that a parade of megabanks, including Goldman Sachs, JPMorgan and Bank of America, asset managers such as BlackRock, Miller Value Partners and Bridgewater; and even states such as Tennessee’s Treasury, hold COIN, or Coinbase’s stock. The investments speak to the exploding demand for exposure to the crypto economy, not just the assets themselves. But not all crypto stocks are flying: Galaxy Digital, Mike Novogratz’s merchant bank with crypto exposure, posted a Q2 net loss of $175.8 million.

WHO’S WATCHING? The Bank of Jamaica, the country’s central bank, says it has the ability to trace digital dollar transactions using its CBDC but would require a court order to do so. Meanwhile in a boon to private mobile payments, MobileCoin, has raised $66 million in venture capital to build out its service tethered to private messaging app Signal. Sam Bankman-Fried’s Alameda Research, Coinbase Ventures, BlockTower Capital and others joined the round.

EMERGING MARKET: Crypto adoption has increased 23-fold globally over the past year with India, Pakistan, Ukraine and other emerging markets driving the surge, Chainalysis said in a report Wednesday. In its “2021 Global Crypto Adoption Index,” the surveillance firm found that Chinese and U.S. positions as crypto adoption leaders have waned amid an ongoing Chinese crackdown on crypto trading and the growing role of major financial institutions in crypto markets.

BLACK & WHITE: Paradigm’s research partner Sam Sun led an effort to find and plug a bug on SushiSwap’s token fundraising platform Miso, which could have resulted in a $350 million worth exploit. Meanwhile, the Poly Network cyberattack saga has dragged into its second week with the hacker now refusing to return to full $600 million worth of crypto.

–Helene Braun & D.K.

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Overheard on CoinDesk TV

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“The crypto industry really has not done a good job empowering their users to report natively within their platform.”

–Taxbit CEO Austin Woodward, on CoinDesk TV’s “First Mover.”

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Putting the news in perspective

The Takeaway

Cathie Wood vs. Michael Burry Isn’t About Tesla – It’s About Inflation
Two of America's most respected investors, each with their own claim on the affections of cryptocurrency fans, are locking horns over their conflicting views of the economic future. On one side is Cathie Wood, head of Ark Invest, whose ARKK Innovation ETF holds bullish positions on companies like Tesla and Coinbase. On the other side is Michael Burry, whose 2007 bet against the housing market, just before it triggered a financial crisis and the Great Recession, has turned him into a near-mythic doomsayer.

On Monday, it was reported that Burry, through his Scion Asset Management fund, is betting against the success of Wood’s innovation ETF, to the tune of 235,500 shares shorted, or about $31 million worth of put options. The conflict has been largely framed as one between data-driven fundamental investing and a more ideas-driven, big-picture approach. Analysts who agree with Burry’s bet have pointed out the massively inflated price-earnings ratio of ARKK holdings. (This Twitter fusillade from investor Christopher Bloomstran is a blistering must-read.)

That debate is exemplified by ARKK’s very large position in Tesla – an automaker whose market cap is larger than the next five largest auto companies combined, yet only occasionally turns a profit.

Wood, as chronicled in CoinDesk’s in-depth profile, was vaulted into the upper tier of investors by her unwavering faith in Tesla during the company’s dark stretch in 2018. Even before shorting ARKK, Burry had a huge $534 million short position against Tesla, aligning him with the “Tesla Q” skeptics who believe that Elon Musk’s big promises about things like full self-driving are hot air.

But this is just the sexy philosophical surface of the debate. Look closer, and the face-off between Wood and Burry is about something both simpler and bigger: their different thinking about inflation.

Burry, as befits his doomsaying reputation, is a notorious inflation hawk who in February compared U.S. monetary policy to Weimar Germany. That’s a widely shared perspective among Bitcoin advocates, though Burry believes inflation spells doom for the kinds of companies ARKK holds, including somewhat ironically Coinbase.

Inflation is a threat to the valuation of growth or “innovation” stocks largely because even moderate sustained inflation would lead the Federal Reserve to raise interest rates to rein in the money supply. Because so few of ARKK’s portfolio companies are profitable, they can be expected to need continued cash through loans or other financing as they grow. Higher base interest rates make that capital more expensive. (It would have a similar or even stronger effect on venture capital and private-equity hedge funds.)

Wood, meanwhile, says she now believes current inflation is transitory, correctly pointing out that commodity and used car prices are crashing back to earth. In a tweet thread responding to reports of Burry’s short position, she argued, “The equity market is likely to reward disruptive innovation strategies once again when headline inflation breaks and/or fears of recession increase.”

This is perhaps a bit surprising from Wood, who had supported the re-election of Donald Trump and so might be expected to join the mostly right-leaning inflation hawks. Her contrary position might show a flexible mind willing to reassess conditions on the ground. On the other hand, it might be a matter of convenience, since predicting low inflation makes her fund’s thesis look better.

And Wood certainly has a motive to talk her own book. After a sustained run of impressive annual returns around 30%, ARKK returned a staggering 150% in 2020, thanks to positions in companies like Zoom that saw outsized gains during the pandemic. That success has both grown the balance sheet and attracted more capital, and ARKK now manages $25.5 billion, up from $9 billion in October of last year.

But Wood’s impressive returns have, at least for the moment, dried up. ARKK is down 6% so far this year, while the Dow Jones big-cap index is up 20%. Ouch.

(Regardless of your current inflation expectations, there’s some universal investment wisdom to be gleaned here: If you’ve held ARKK for a while, you’re probably still laughing despite recent losses. But if you bought in after Wood’s stroke of 2020 pandemic good fortune, you are getting waaaaashed, brother.)

There is another angle on the inflation question, though, which lurks just under the surface of Wood’s position. Some argue that a loose money supply has been good for speculative investments as household saving rates increase and more participants enter the stock and crypto markets, a phenomenon often referred to as “asset inflation.” (Though there’s serious debate over whether calling this a form of “inflation” is accurate.)

One important implication of the asset inflation theory is that money going into bitcoin or Tesla stock isn’t making demands on real goods. That means rising asset prices could actually be reducing real inflation pressures and the threat of higher rates. That would mean capital could stay cheap for innovators, even as money printing pumped up speculative assets.

Wood signed off a long rebuttal of Burry with this: “I do not believe that [Burry] understands the fundamentals that are creating explosive growth and investment opportunities in the innovation space.” For ARKK, those fundamentals could actually include continued heavy U.S. public spending – as long as Wood and her fellow travellers can coax enough of that cash into their own high-risk bets.

–David Z. Morris

The CoinDesk DeFi Index (DFX), measuring the investable DeFi market, is now available for investors watching decentralized finance.

It is the latest index by CoinDesk Indexes, the market standard for crypto assets since 2014. The DFX provides a market-cap-weighted index for a representative basket of DeFi-sector cryptocurrencies that is designed to be investable and replicable for professional investors.

Find out more at coindesk.com/indexes/dfx, or email indexes@coindesk.com.

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