Why Jamie Dimon Distrusts Bitcoin

by: John Rhodes


- Jamie Dimon called Bitcoin a fraud.

- The deep problem isn't that Bitcoin lacks value but instead that banks like JPM don't have power and control.

- He's smart enough to see how blockchain could richly reward banks and investors even if Bitcoin must be ignored for being too speculative.

 
You probably already heard that Jamie Dimon called Bitcoin a fraud. Here are some relevant quotes that matter for investors, which I will address one by one below.
...separate blockchain, which is a technology, from Bitcoin, the currency...
This is a critical point. I've explained several times that blockchain is not going away. In fact, that technology is being exploited now. Here are a couple of examples with (IBM) demonstrating how this works and adds value:
So, while you might have zero interest in directly buying Bitcoin (e.g., Coinbase), and you can't buy "blockchain" directly, you can still invest in companies like IBM that are exploiting the technology.
 
Even if we agree with Jamie Dimon that Bitcoin is a fraud, nothing prevents us from agreeing that blockchain and cryptocurrency instantiations are here to stay.
 
Jamie Dimon likes blockchain. That's why he separated it from Bitcoin. He could have easily thrown out the baby with the bathwater. But, he didn't. That's significant because it demonstrates that he knows that blockchain is here to stay. It's important to him.
 
Now, here's a curveball. Did you know that JPMorgan (JPM) filed for a US patent for a virtual currency that resembles Bitcoin in 2013? What matters here is that JPM has been closely watching this space, working on control:

JPMorgan’s proposed system involves creating “virtual cash” that would sit in an online wallet, reminiscent of the computer files that hold Bitcoins on behalf of their users.
The JPMorgan system would also create a public record of transactions made using the technology – a feature that would appear to mirror Bitcoin’s use of “blockchain”, a massive block of code stored across a peer-to-peer network of computers that acts as a public ledger of all Bitcoin transactions.

It goes deeper; JPM is working with Zerocoin Electronic Coin Co., the folks behind Zcash:
...his team will use the same cryptographic techniques to add a “security layer” to Quorum, the system JPMorgan is developing to run smart contracts.
The key point is that Dimon really hates Bitcoin but he loves blockchain. We'll come back to this idea shortly because it's the number one thing you need to know as an investor.
Let's look at Dimon's next comment:
"I'm not saying go short."
As he said this, there was a wink and a smile. There's nothing that indicates that he's got a crystal ball about Bitcoin and that he's not clear on how to properly trade it. That's because he can't control it.
In fact, he even admits it could easily balloon upward:
"Bitcoin can go to $100,000 before it goes down."
 
The take away is that there is an uncertainty and volatility, with a total lack of control. This makes it very difficult to treat as a true and stable currency, in the mind of Jamie Dimon.
 
It's also clear Dimon doesn't see this as any opportunity for investment. But, those comments above are absolute indicators of a trading and speculation opportunity. This is a signal to traders; this won't trade sideways.
 
On the surface, there's seems to be a huge opportunity to facilitate trades and even market-making activity. JPM isn't shy about trading securities and is a dominant force in that space.
 
Uncertainty, volatility and speculation make JPM a lot of money so why wouldn't they jump into the fray in some way? It comes down to one word: control. With Bitcoin, JPM lacks power, authority and control.
 
Here's what came next from Dimon:
"Governments, the first thing they do, is to form a currency. They like to control the currency. They control it through a central bank. They also like to know who has it. Where it is. Where it's going."
I absolutely see this as a "projection" of Dimon's thinking. This isn't really about central banks. Instead, Dimon doesn't like what Dimon can't control. And, despite the profit opportunities via a trading desk set up, Dimon steps JPM away from the ledge. Without control, this is dangerous territory.

Just like a central bank, JPM loves knowing who has what money, where it comes from, and where it goes. Just like Wells Fargo (WFC), JPM likes to be able to cross sell and upsell. That's next to impossible with Bitcoin because it's anonymous. Again, we're talking about a lack of control.
 
To be balanced and fair, it's important to consider the investment risk that JPM would soak up by playing with Bitcoin. That's because if the U.S. government wanted to get aggressive about Bitcoin, it could crush an investment in trading opportunities like we've seen in China. That risk is high, or even quite high. While that still wouldn't drive Bitcoin to zero, it would harm JPM investors.
 
Let's keep going. here's what Jamie Dimon said next:
"[Central banks] look at [Bitcoin] as a novelty."
This is FALSE.
 
I cannot speak to Dimon's knowledge or ignorance, but I admit I'm skeptical that the CEO of JPM doesn't know more about this. Look here and here. The summary is that central banks love blockchain and cryptocurrency, even if they don't love Bitcoin.
 
The truth is that central banks don't think it's a novelty. Indeed, as I've already pointed out, the Bank of England says blockchain could:
...permanently raise GDP by as much as 3% [emphasis added], due to reductions in real interest rates, distortionary taxes, and monetary transaction costs.
Jamie Dimon is either being disingenuous or he's ignorant. I doubt that he's ignorant. Instead, it seems more likely that he dislikes Bitcoin because it disturbs the "natural" balance of power.
 
Or perhaps he's worried that it could drain money out JPM's control and into the anonymous ether of Bitcoin.
 
There's more to what Jamie Dimon says, right here:
"There's a good reason for it. If you're in Venezuela. Or Ecuador. Or North Korea. You're better off using Bitcoin than using their currency. It can't possibly be true in the United States. Unless you're speculating. And that isn't a reason to say something has value."
This is a really nuanced set of assumptions and conclusions. He's telling us Bitcoin is a fraud and yet it's a good thing for some countries that have runaway inflation or are in a state of chaos. That certainly sounds like Bitcoin has value, right? These are identified cases of where Bitcoin has utility as a currency. It has value; it's not a fraud. Put another way, Bitcoin seems to be an alternative to at least some fiat currencies and therefore has value.

Dimon also tells us that Bitcoin can't possibly make sense or be "true" in the United States.
 
What's odd to me, is that JPM heavily deals in derivatives which are used for hedging, and of course speculation. So derivatives have value because of the agreement between parties and the underlying value of the assets, at least in theory. But, Dimon's comment starts to unwind because you can agree to trade Bitcoin to buy "stuff" in the real world. It's digital, but it becomes real in a click or two.
 
The real point here is that JPM makes money with money. JPMorgan has understanding and control of money. However, that kind of control is next to impossible with Bitcoin. This, again, is why blockchain is beautiful in the eyes of all banks: faster transactions, lower transaction costs, data quality, more.
 
We end with one of Dimon's last comments:
"It's not a real thing."
 
In some sense, this is 100% accurate. But, it's accurate in the sense that little men running across my computer screen in a video game don't exist. When you see those little men, they only exist in the code, in the computer. They aren't real. Yet, we still react to them here in the real world as we play.
 
In roughly the same way, our U.S. dollars are just little men floating through our economy. We all agree they are real but they are merely paper and ink, or 0's and 1's. The only real value of the U.S. dollar is faith, not commodities, like silver or gold. Certainly, that faith is strong inside the U.S. and outside.
 
Allow me to stretch the idea a little. In a sense, if Bitcoin can never be real then U.S. dollars can never be real. Ultimately, faith and belief between humans drives the value of dollars but also Bitcoin. That faith in the value of the U.S. dollar is strong and relatively hard to manipulate. The faith in the value of Bitcoin is weak and easily manipulated.
 
Conclusion
 
Jamie Dimon very clearly dislikes Bitcoin but he likes blockchain. This is a great opportunity to understand that Bitcoin is a threat to banks like JPM and WFC since it's largely anonymous, highly distributed and low friction.

Therefore, JPM is right to consider Bitcoin a threat to their moat. At the same time, Dimon and JPM clearly have embraced blockchain, which is a key part of what makes Bitcoin work the way it works.
 
At issue here, fundamentally, is control. JPM would be foolish to embrace Bitcoin unless they felt free to operate with low risk and low regulation. Furthermore, they would also need to have the additional technology and "add ons" to really make Bitcoin work in their existing banking profit infrastructure. It's strategic and logical for JPM to attack Bitcoin to maintain their moat.
 
Speculators can make money trading Bitcoin. It's highly volatile and the risks are enormous, but Dimon makes no good case that Bitcoin is limited in going up, and up again. If he felt that it was doomed right now, he would have called for a short approach, but he's clear that shorting isn't a slam dunk. No doubt about it, the uncertainty is high.
 
Investors should look through Bitcoin and into blockchain. Those companies exploiting blockchain will gain advantages as outlined above. I've documented how both IBM and JPM are examples of how investors can tap into the rise of "Bitcoin" without directly putting money into Bitcoin. That's the conservative play here.

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