What did JPMorgan Chase do after the surge in Bitcoin? How can ordinary people learn?

According to Hong Kong Singularity Finance, JPMorgan Chase submitted sales materials for a cryptocurrency stock-linked note to the U.S. Securities and Exchange Commission (SEC) last week. The news excited many cryptocurrency investors around it.

Many people in the cryptocurrency circle forwarded the relevant news.

There is no other reason, because JPMorgan Chase has a history of more than 200 years and is one of the oldest commercial banks in the United States. It is a financial institution of the "too big to fail" level in the United States. In 2008, it acquired Bear Stearns and the commercial bank Washington Mutual, which greatly enhanced its investment banking business.

What excites people in the cryptocurrency circle is not only the industry status of JPMorgan Chase Bank itself, but also a very important reason. JPMorgan Chase CEO Jamie Dimon said in an interview with CNBC in 2017 that he would "close" any trader who traded Bitcoin in seconds.

At that time, the CEO seriously pointed out that trading Bitcoin violated regulations and was stupid. Today, although JPMorgan Chase does not trade Bitcoin directly, it has launched a basket of stocks that track Bitcoin performance. Many people speculate whether this means that the CEO has been slapped in the face and whether JPMorgan Chase also wants to enter the virtual asset management business.

Not long ago, when Bitcoin broke through the $50,000 mark, some radical figures even speculated that perhaps JPMorgan’s board of directors needed to fire Dimon first in order to fill the business gap in this area?

I think the above views may not have grasped the key points of JPMorgan's products, and therefore do not really understand what the attitude of a big bank like JPMorgan is towards Bitcoin.

Why did Dimon allow his department to issue such products? Is it really because he changed his attitude and began to be optimistic about Bitcoin? Could it be that the surge in Bitcoin since 2020 has not only changed the living habits of ordinary people, but also changed corporate executives like Jamie Dimon who have unique views on Bitcoin?

After reading the sales materials submitted by JPMorgan Chase to the SEC, I feel that JPMorgan Chase's stock-linked products actually have nothing to do with the CEO's attitude towards Bitcoin. Or more specifically, for the issuer of this note, this product is actually neutral in terms of position, neither bullish nor bearish on Bitcoin.

JPMorgan Chase takes almost no risk on its positions

This product is actually a special one-year linked note (also known as a "linked bond" in the industry). This is a structured product, and the underlying assets of the note are 11 baskets of stocks selected by JPMorgan Chase. The listed companies corresponding to these stock baskets have close ties with businesses related to cryptocurrencies, chips, blockchain, etc.

JPMorgan Chase named the product "JPMorgan's Cryptocurrency Exposure Basket". The main meaning is that it does not directly hold cryptocurrencies, but rather risk exposure related to cryptocurrencies (in this case, stocks).

At maturity, investors will receive a return on the underlying stock assets during the holding period, but the basket deduction of the note will need to be deducted.

According to JPMorgan Chase's explanatory materials, the intrinsic value of this note is determined by the basket of stocks it holds, but the issue price will be higher (because the subscription price also needs to take into account JPMorgan Chase's license, labor, and the profit level that the channel department should enjoy, etc.).

So, seeing this, we understand that it is not that JPMorgan Chase is optimistic about cryptocurrencies, but because it has taken a fancy to the alternative investment needs of some cryptocurrency investors - after all, direct investment in cryptocurrencies has certain risks, and the liquidity is not as good as that of ordinary stocks. Therefore, JPMorgan Chase hopes to create this product, and it does not need to have the position risk, because the return/loss of the entire portfolio is borne entirely by the investors, so the position risk is mainly held by the investors.

11 stocks revealed

I believe that most readers, like me, are most interested in the specific company names of these 11 stocks and their weights in the basket. Many people hope to follow JPMorgan Chase and learn how to participate in the performance of the cryptocurrency sector, but at the same time, they want to control the risks. Since the procedures for buying Bitcoin are complicated, if they can directly buy stocks to track the trend of Bitcoin, it will still attract many fans.

Let’s talk about the specific companies first. These 11 companies are as follows:

Secondly, let’s talk about the weight distribution of the stocks in this basket.

JPMorgan Chase has a 20% weighting in MicroStrategy Software Inc (NASDAQ:MSTR) and an additional 18% in Square Inc (NYSE:SQ) - both are reported to have large investments in Bitcoin.

According to public information, MicroStrategy is a company that makes business intelligence software. It has been listed on the Nasdaq for more than 20 years. Its products can support the world's mainstream databases or data sources. It is a hard-core technology company in the technology industry. In August 2020, MicroStrategy invested $250 million to buy Bitcoin as the company's reserve asset, considering that the return on cash was too low and the dollar was depreciating. In the following months, the company continued to increase its holdings, spending nearly $1 billion to buy Bitcoin that year - the cost price was $15,964 per coin.

As of 8:00 a.m. Beijing time on March 15, the price of Bitcoin was $59,979.82 per coin. This makes it easy to understand why JPMorgan Chase set this stock position to the maximum value.

Square is a financial technology company that mainly makes mobile payment products. It invested about 1% of its total assets (US$50 million) in Bitcoin in October 2020, and purchased about $170 million worth of Bitcoin in February 2021. Judging from this operation, its traders seem to have surpassed BYD's traders.

JPMorgan also has a 15% position in cryptocurrency mining company Riot Blockchain (NASDAQ: RIOT) and cryptocurrency mining chip maker Nvidia.

Riot Blockchain is the company most directly related to Bitcoin, as its business is dedicated to supporting the Bitcoin ecosystem through "proof of work" mining. The company claims to be one of the largest US-listed Bitcoin miners in North America and believes in the business opportunities of Bitcoin. Nvidia is one of the world's top companies in chip manufacturing.

Since the above four stocks account for 68% of the entire basket, JPMorgan Chase reminded investors in the sales documents of the linked notes that investors' returns will largely depend on the performance of the above stocks.

According to JPMorgan Chase's calculations, if the calculation starts from November 2019, the return of the above combination will exceed 6 times as of March 5, 2021, which is similar to Bitcoin. Of course, for simulated trading, when looking at the price of backtesting, the results may be different if different time points are selected.

Based on Wind data, the author selected the period from October 9, 2020 to March 12, 2021 and found that the combined return of the above stock basket was 3.9 times, lower than the 4.23-fold increase of Bitcoin.

Of course, investment is not only about returns, but also about risks. Since I am not making a product recommendation, I will not go into details here. I just want to remind readers that for structured products like JPMorgan Chase, you cannot simply look at the price as an indicator.

Cryptocurrency-linked product returns

Regarding this product of JPMorgan Chase, we are curious why they launched such a product at this time?

In fact, from the perspective of the product structure, it is quite similar to an exchange traded fund. Unfortunately, the US Securities and Exchange Commission has not approved any ETF products with cryptocurrency as the underlying direct asset. Therefore, this product of JPMorgan Chase can be regarded as an indirect "imitation" of the cryptocurrency ETF, that is, using a combination of 11 stocks whose price performance is closely related to Bitcoin to indirectly follow the trend of Bitcoin.

A question that follows is, can you buy the stocks you like based on JPMorgan’s weight definition?

The author believes that this is theoretically possible. However, when retail investors operate, they need to keep in mind the time to adjust positions, the timing of transfers, and find the best transaction commissions - these are not easy. Can retail investors cope with these things?

Industry insiders said that this product of JPMorgan Chase is a typical private bank product, mainly targeting high net worth individuals. For JPMorgan Chase, it actually does not hold any Bitcoin positions, and the risks are controllable. All the profits and risks of holding positions belong to investors.

It should be noted that JPMorgan Chase did not say that it would buy these underlying assets for its clients, keep them for the entire period, and pay them to investors upon maturity - it only provided a net profit/loss delivery arrangement for the basket portfolio. As listed in JPMorgan Chase's materials, theoretically, when this product expires in May 2022, if the basket of stocks falls by 98.5%, investors will theoretically lose all their invested funds.

Here, big banks, as experts, earn money from the scale of asset management, as well as the corresponding management fees and profit income (which will be reflected in the pricing of the products); while investors earn money from a convenient arrangement and a basket of trading opportunities.

Author: Shu Shi, a Hong Kong resident, PhD, and senior alternative investor. Former manager and investment director of Chinese asset management funds. New book: Redefining Finance: Cryptocurrency and Digital Assets.