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A Cryptocurrency Stock for the Blockchain Arms Race

While it’s not a pure-play cryptocurrency stock, this financial major is making big investments and signaling its foray into crypto.

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The largest lender in the U.S. is now a cryptocurrency stock as it’s begun using blockchain technology. The bank also just announced they plan to hire about 2,000 more software developers worldwide by the end of the year according to Lori Beer, the Chief Information Officer. JPMorgan Chase (JPM) is making huge investments in computer science while other competitors have lagged or quite simply cannot invest at the same pace. JPMorgan plans to spend $14 billion dollar on technology this year.

We are keeping both eyes on Onyx Digital Assets – JPM’s blockchain arm. As recently as this summer, Bloomberg reported that JPM has developed a collateral management blockchain solution for traditional financial services. In May, JPM executed their first tokenized transactions including a tokenized version of the BlackRock money market fund. These blockchain-based digital tokens are now being used as collateral in traditional financial markets!

What are the implications of this?

Tokenization is the process of converting ownership rights into digital tokens on a blockchain. This acts as an immutable placeholder or statement of record that counterparties can both agree on. The powers here are quite clear – it will be possible to take physical assets that exist here in the real world – for example, rare pieces of art, tokenize them, and trade them 24/7. If done properly, this process will allow for faster verification and transfer of ownership. Much like derivatives operate today, there can be physical and nonphysical settlement over these assets.

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Currently, fractionalization is very difficult. You cannot easily sell 1/10 of an ownership stake in your house or rare art collection. However, selling 1/10 of a stake in a company is much more common – this shows a clear pathway to how future investing might look like with further adoption of tokenization.

JPMorgan has built a private blockchain for this to operate. This will allow investors to pledge assets as collateral and use them outside of market operating hours. Furthermore, JPM plans to increasingly embrace digital assets, potentially even connecting institutional investors with decentralized financial platforms in the crypto economy, according to Tyrone Lobban, head of Onyx Digital Assets.

“What we’ve achieved is the frictionless transfer of collateral assets on an instantaneous basis,” said Ben Challice, JPMorgan’s global head of trading services. While the asset was a money market fund in this case, it plans to tokenize equities, fixed income and other asset types on its enterprise blockchain network.

JPM, although not a pure-play cryptocurrency stock, is making inroads to the sector and plans to tokenize U.S. treasuries and money market fund shares to be used as collateral in DeFi pools. Over time, this should help the bank to bring trillions of dollars of new tokenized assets to DeFi.

The Thesis for Investing in JPM

At this valuation, we believe the risk/reward is compelling and it is a good entry point to begin a position in the stock if you are looking to increase exposure to financial services.

- JPM has consistently grown revenue y/y, the Company generates $132 billion in annual operating cash flow

- Forward PE ratio of 8.4 suggests a very fair value entry point

- $1.00 per share quarterly dividend, annual 3.8% yield

- Rising rates will help the bank generate interest income. Over the past 30 days, earnings estimates have risen by almost 1%

- The 2022 IPO market is currently on pause which has heavily impacted JPM’s investment banking division – this is now fully priced into the stock and there is upside going into 2023-2024

- JPM has been very oversold, RSI indicator at 37

- The stock is trading in a channel pattern over the past several days and just broke to the upside.

JPMorgan Chase (JPM) Price chart

If you are looking for exposure to a cryptocurrency stock to diversify your portfolio, JPM offers a more traditional way to play these thematic trends. If you’re interested in learning about more pure-play cryptocurrency investments, a subscription to Cabot SX Crypto Advisor will offer you both traditional equity investments in the crypto sphere as well as the best-performing cryptocurrencies.

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Ian Beaudoin is Chief Analyst of Cabot SX Crypto Advisor.