Banks are profoundly underestimating how big this will be.
So far, investors have primarily relied on crypto exchanges to buy Bitcoin. But now, the major banks in the US have announced plans to allow clients to play with the emerging asset class.
Let me break this down for you.
Last week, JPMorgan became the first major bank to provide all its clients with access to Bitcoin and other cryptocurrencies.
While it was inevitable, it was also surprising.
First, the announcement comes shortly after China’s ban on mining and banking crypto. That’s in stark contrast with the Chinese regulation of crypto. It’s a powerful signal to China that the US will continue with crypto adoption despite the Chinese ban.
Second, in 2017, JPMorgan’s CEO, Jamie Dimond, called cryptocurrencies “fraud,” and he also said he’d “fire in a second” any trader who was trading bitcoin.
Indeed he did an about-face.
JPMorgan not only offers access to Bitcoin but also recommends at least 2% allocation. And their report highlighted these three reasons for it: high equity valuations, low bond yields, and higher inflation.
It’s undeniable that this is a bullish signal for Bitcoin and crypto. JPMorgan has over $3 trillion in assets under management, and it is the largest bank in the US and the 4th largest in the world.
But here’s the interesting part.
Some US banks have recently offered access to Bitcoin. For example, Bank of America, Morgan Stanley, and Goldman Sachs opened crypto trading exclusively for wealthy clients.
What is important to remember is JPMorgan is the first major US bank to provide crypto services to all clients, including retail clients. By all means, JPMorgan’s bold move might force other banking giants to introduce crypto trading to their retail clients as well.
It is also undeniable, the banks lent credibility to digital assets and made it almost impossible for the skeptics to argue that Bitcoin is a pyramid scheme.
Be that as it may, banks are still not fans of crypto. They’re well aware cryptocurrencies exist to make them redundant.
So why are they doing that?
For better or worse, Bitcoin attracted so much attention that they’re merely forced to adapt to the new requests they have from investors and clients.
But more importantly, banks needed to stop the client outflows. In fact, in the last 12 months, banks witnessed the biggest outflows from existing accounts to exchanges. To put it another way, they are merely protecting their interests.
The most compelling evidence of this trend is in the latest Fidelity research. According to the survey, 70% of institutional investors find Bitcoin and cryptocurrencies tempting investment options. In other words, 7 out of 10 institutional investors asserted that they expect to purchase digital assets sometime in the future.
On the positive side, we are witnessing the creation of a new financial system, and there is no denying that Wall Street has finally embraced bitcoin.
On the negative side, the banks are not entering new businesses or some disruptive innovation. Instead, they are incorporating a new asset class into their existing business.
For one thing, they offer crypto through financial products such as futures or funds only. They don’t provide all features that come with the new financial medium, such as individual ownership, yield, lending, 24/7 trading, low fees, or fast transactions. That's as if the horse and buggy producers would replace a buggy for a car and still have it pulled by a horse.
It’s a superficial change.
Under the banking system, cryptocurrencies will end up like flowers without water; they might bloom and look pretty for some time but quickly wilt away.
The financial institutions will soon realize that new clients require more than just a wrapper for these new digital assets.
In a word, banks are profoundly underestimating how big this will be.