The news is out that major investment bank JPMorgan Chase is looking to offer its clients access to the crypto market – but not everybody see the offering in good light, or particularly crypto-related.
Dated March 9, the bank’s prospectus on the US Securities and Exchange Commission (SEC) website discusses a J.P. Morgan Cryptocurrency Exposure Basket – a “basket of companies with exposure to cryptocurrency due May 5, 2022.”
It goes on to say that the notes are designed for those investors who seek exposure to the performance of the basket of unequally weighted Reference Stocks, and “as reduced by the Basket Deduction of 1.50%.”
The unequally weighted basket consists of 11 Reference Stocks representing the common stocks / American depositary shares of US-listed companies that, according to the prospectus, “operate businesses that we believe to be, directly or indirectly, related to cryptocurrencies or other digital assets, including as a result of bitcoin holdings, cryptocurrency technology products, cryptocurrency mining products, digital payments or bitcoin trading.”
The companies listed in the prospectus, as well as their stock weight are:
- MicroStrategy (20%)
- Square (18%)
- Riot Blockchain (15%)
- NVIDIA Corporation (15%)
- PayPal Holdings (10%)
- Advanced Micro Devices (5%)
- Taiwan Semiconductor Manufacturing Company Limited (5%)
- Intercontinental Exchange (4%)
- CME Group (4%)
- Overstock.com (2%)
- Silvergate Capital Corporation (2%).
The bank expects that the market value of the notes, as well as the payment at maturity, will depend to “a greater extent” on the performance of the first four reference stocks listed above, as they make up 68.00% of the basket.
The weights of these stocks were determined partly based on exposure to bitcoin (BTC), correlation to bitcoin, and liquidity. But the bank stressed that “the notes do not provide direct exposure to cryptocurrencies and the performance of the Basket may not be correlated with the price of any particular cryptocurrency,” including BTC.
It further warns that the basket may be influenced by extreme price volatility and “rapid and substantial decreases in price over the term of the notes.”
“Investors should be willing to forgo interest and dividend payments,” said the bank, as well as be willing “to lose some or all of their principal amount at maturity” in case the basket is flat, declines, or does not increase by at least 1.50%.
Price to the public per note is USD 1,000, it said. They are expected to price on or about March 31, 2021, to settle in April, and then mature in May next year. The estimated value of the notes will not be less than USD 900 per USD 1,000 principal amount note, added the prospectus.
The notes will not be listed on any securities exchange, so the price at which notes may be traded will likely “depend on the price, if any, at which JPMS is willing to buy the notes. You may not be able to sell your notes,” it says. The bank added that the notes are not designed to be short-term trading instruments and that they should be held to their maturity.
Some of the companies on JPMorgan’s list have been in the news often lately in connection to their crypto activities, so to say. Business intelligence company MicroStrategy became well-known for its series of bitcoin purchases, payments company Square invested in BTC too, payments giant PayPal started offering the option to buy and sell certain crypto and has agreed to acquire crypto custodian Curv, and major financial derivatives, including BTC futures, marketplace CME Group’s ethereum (ETH) futures offering went live last month – among other news.
That said, while some commenters saw certain companies on the list as good choices – with Coin Metrics‘ data scientist Kevin Lu naming BTC miner Riot and cryptoasset-focused bank Silvergate, for example, others were more critical towards this offering. For example, a few described it as “garbage.”
“The Wall Street crappy product machine is humming – JPM ain’t gonna sit back while trading fees explode around them,” said Jeff Dorman, Chief Investment Officer of US-based investment management firm Arca. “Introducing the “garbage crypto portfolio”, [with] companies that have nothing to do with crypto but JPM can trade & bank.”
A February Arca writeup predicted that Wall Street is “not set up to trade bitcoin directly, so they have to find other ways to insert themselves into the money grab.” Institutional investors will learn about other types of digital assets, after learning of BTC and crypto in 2020, and this will come in three stages, Arca said.
Other commenters similarly argued that the basket may offer little exposure to crypto.
It’s honestly incredible the mental gymnastics they go through to convince themselves to include these “crypto” names
— Tom Shaughnessy (@Shaughnessy119) March 10, 2021
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