Novum Digital Asset Alpha – Daily Analysis 31 August 2020 (8-Minute Read)

Welcome to the very last day of the month in what has been a year that many of us would soon rather forget. 

In brief (TL:DR)

  • U.S. stocks finished last week up, as the S&P 500 (+0.67%), blue-chip Dow Jones Industrial Average (+0.57%) and tech-heavy Nasdaq Composite (+0.60%) all ended the week in the green and with futures suggesting that the trading week is likely to kick off on a high note. 
  • Asian stocks started the week with gains as last week marked fresh highs for American indices. 
  • U.S. 10-year Treasuries rose slightly at the end of last week, with yields edging down slight to 0.724% from 0.744% – yields generally fall when prices rise. 
  • Oil remained more or less unchanged with WTI Crude Oil (Nymex) (+0.28%) up at US$43.09 from US$42.97 in the previous session, as Hurricane Laura in the U.S. Gulf Coast weakened and did little to threaten production facilities in the Gulf of Mexico region. 
  • The dollar continued its slide as loose Fed policy saw gains in stocks and other dollar-denominated assets as well as a flight to other currencies such as the Japanese yen and the Swiss franc. 
  • Gold continued its rise with Gold (Comex) (+2.19%) up at US$1,977.90 from US$1,974.90 in the previous session, on the back of a declining dollar and inflation concerns. 
  • Bitcoin (+1.62%) tracked gold and rose out of the weekend, up at US$11,700 from US$11,500 in the previous session, as inflows from exchanges continued to lead outflows as well as on the back of reduced trading volumes out of the weekend (inflows typically signal a preparation by investors to sell Bitcoin on exchanges and is normally a signal of price dropping). 

In today’s issue…

  1. Peak Flu Season Could Mean Peak Profits For Coronavirus Test Makers 
  2. An Ant Is About To Lift The World’s Biggest IPO 
  3. Fears Of Inflation Haven’t Inflated Bitcoin’s Price

Market Overview

Like a overchewed piece of gum, life for many these days, has pretty much lost all flavor. 
 
Social distancing and mask-wearing (for populations responsible enough to do so) has meant that that quintessential aspect of being human – being social – has been fundamentally tamped down. 
 
But of course there are many who have rejected such coronavirus pandemic restrictions, such as in America’s south, which has led to a new surge in coronavirus cases just as the northern hemisphere heads into peak flu season. 
 
Markets though needn’t worry as much because the world’s foremost central bank, the U.S. Federal Reserve, has pledged to do whatever it takes to shore up markets and to stave off unemployment – including tolerating higher levels of inflation. 
 
Asian stocks opened up on Monday, the last trading day of the month that coincides with a brand new week, with Seoul’s KOSPI (+0.41%), Hong Kong’s Hang Seng Index (+1.40%), Sydney’s ASX 200 (+0.30%) and Tokyo’s Nikkei 225 (+1.98%), all up strongly, buoyed by gains on Wall Street.   
 
Meanwhile the coronavirus pandemic continues to ripple through Europe and parts of the United States which had seen a decline in case numbers just as the northern hemisphere hurtles into peak flu season. 
 
And that will continue to be a risk that hovers over markets – an unpredictable surge in coronavirus infections at a time when flu cases (which bear similar symptoms) are also rising. 
 
The Fed has stepped in time and time again to shore up markets, but with the potential to inflate asset bubbles at a time when inflation may be rising, could the medicine be more deadly in the long run than the ailment itself? 

1. Peak Flu Season Could Mean Peak Profits For Coronavirus Test Makers

  • Peak flu season and the similarity between seasonal flu symptoms and the coronavirus means that the demand for virus testing will surge in the coming months 
  • Demand for test kits for the seasonal flu as well as the coronavirus, could provide a short term windfall for companies involved in manufacturing and processing virus test kits 
Like a tsunami looming over the horizon and with beachgoers doing nothing more than dipping their toes to check the water temperature, peak flu season may stress already stretched coronoavirus testing capabilities to the point of bursting. 
 
Because peak flu season is coming in the northern hemisphere, and with the coronavirus carrying many of the same symptoms as the seasonal flu, makers of coronavirus test kits are churning out rapid test kits as quickly as possible, including Abbott Laboratories (-0.45%).  
 
In the United States, many coronavirus test kits come from abroad, and there has been growing pressure on federal authorities to diversify the sources of coronavirus test kits, as well as to boost domestic production. 
 
Complicating testing procedures is that many of the same symptoms that mark the seasonal flu, such as fever, fatigue, and respiratory issues, are also the same symptoms that mark the coronavirus. 
 
And that means that more testing will be necessary, including for the seasonal flu. 
 
Quidel (-6.64%), for instance is ramping up production of its coronavirus rapid antigen test, which looks for virus proteins, and aims to introduce a test that simultaneously checks for coronavirus antigens and the flu by the end of next month. 
 
But supply shortages for chemicals crucial to producing coronavirus test kits is plaguing manufacturers, and these are likely to continue, in part because most flu tests rely on the same components, equipment and personnel as coronavirus test kit manufacture. 
 
With the coronavirus spreading like wildfire in states which had reopened, particularly in America’s south and west, diagnostic companies such as Quest Diagnostics (+0.67%) and Laboratory Corporation of America (+1.81%), are being overwhelmed with demand – and that’s even without the seasonal flu. 
 
And while as many as 45 million people in the U.S. get the seasonal flu every year, with over 34,000 deaths, according to the U.S. Center for Disease Control, not everyone typically gets tested for it. 
 
Given the similar symptoms with the seasonal flu, more people are likely to get themselves tested on coronavirus fears this year however, and that could mean a surge in demand for already short coronavirus test kits, or so-called multiplex test kits that can detect more than one virus antigen. 
 
Abbott has already been one of the first companies to receive a windfall from the relentless demand for test kits, having received emergency authorization last week to make a US$5 rapid antigen test for which the Trump administration has agreed to buy 150 million of.
 
And it’s not likely to be the last. 
 
Peak flu could also mean peak profits at some of America’s biggest virus testing companies. 

2. An Ant Is About To Lift The World’s Biggest IPO

  • Alibaba’s (+1.70%) Ant Group US$225 billion IPO likely to be the world’s largest 
  • IPO would make the firm world’s fourth largest financial services company
  • Ant Group owns many complementary businesses and IPO should do well on the day of opening, but longer term challenges remain 
Visitors to China (back in the day when travel was still a thing) will no doubt note that Alipay is as ubiquitous as the Volkswagen Santana and steamed pork buns. 
 
But while most tourists and more than a handful of Chinese know Alipay as a payment services provider, not many know that the company which owns it, Ant Group, is also one of the world’s biggest financial services companies. 
 
Ant Group is now set to be gunning for what could potentially be the world’s largest IPO ever, with a simultaneous listing in Hong Kong and Shanghai and a rumored valuation target of US$225 billion, which would make the firm the world’s fourth largest financial services company. 
 
Alipay, which was initially launched as an escrow service to facilitate payments on Alibaba’s e-commerce platform, has since become synonymous with mobile payments.
 
Having once held as much as 75% of the market, Alipay has since seen its dominance chipped away by Tencent’s (-1.11%) WeChat Pay and now garners some 55% of the payment market. 
 
Granted Alipay’s share may be smaller, but the market has also expanded in absolute numbers, with over 711 million active users (mainly in China) and processing some US$17 trillion in payments for everything from coffee to property. 
 
But Ant Group is so much more than Alipay. 
 
Ant Group also owns Huabei and Jiebei, two microlending platforms, with the former focusing on quick and small consumer loans for purchases of anything from electronics to home appliances and with the latter financing bigger ticket items like educational courses and travel. 
 
In 2013, Ant Group then created Yu’e Bao, a money market fund that allows clients to earn interest from cash that they parked in the Alipay app, investing as little as US$0.15. 
 
Yu’e Bao has since expanded to become one of the world’s largest money market funds of its kind, with a staggering US$173 billion in assets. 
 
Given Ant Group’s unparalleled access to user data, it created a credit scoring service in 2015 called Zhima Credit, with customers who have high enough of a credit score being able to avoid having to pay a deposit on anything from hiring a bike to booking a hotel room. 
 
Layer on top of that insurance with Xianghubao, which allows customers to pay a small monthly fee that is pooled to help cover medical treatments for a wide range of ailments, while also offering insurance premiums from third party insurers and taking a cut in the process. 
 
And while Ant Group had ambitious plans for expanding into the U.S., those plans have since been shelved as tensions between Washington and Beijing have escalated. 
 
The threat of app bans, the likes of which have threatened TikTok’s U.S. survival as well as WeChat, have also cooled the enthusiasm of Ant Group to venture westwards. 
 
And given the size and significance of the Ant Group, more than a few regulators have eyed Jack Ma’s Alibaba spin-off with some degree of suspicion. 
 
Ma has never shied away from his open support of Beijing and the Chinese Communist Party, being one of its highest profile members, which has unnerved some governments and put them off from providing too much access for Alibaba within their domestic markets. 
 
And although Alipay has reduced in significance in terms of contributing to Ant Group’s bottom line, it still contributes some 36% of revenues, a number that could come under threat as Beijing rolls out its digital yuan, which may or may not include Alipay as part of the processing ecosystem. 
 
As Ant Group’s home market comes under increasing competition, it’s ventures overseas may also attract greater scrutiny from governments wary at possible interference in domestic affairs from Beijing. 
 
Sanctions from Washington could also affect Ant Group’s businesses in Southeast Asia and India. 
 
Nonetheless, Ant Group’s IPO is likely to do well out the gates. 
 
With a frothy Chinese stock market, a good mix of technology and financial services feeding into Ant Group’s story, the IPO should pop, that is, if investors can even get their hands of shares of the financial services giant as it races off the blocks. 

3. Cryptocurrency’s Custody Premium – How much would you pay?

  • Institutional and retail demand for cryptocurrencies is driving huge premium for Grayscale’s cryptocurrency products 
  • Lack of institutional-grade options has seen triple-digit premiums over the cost of the underlying cryptocurrency being traded on Grayscale’s cryptocurrency trust products, with many investors possibly paying far more than they realize 
You’d pay more for an honest and reputable mechanic to maintain your car, but how much more? 
 
When it comes to cryptocurrency investing, it seems a whole lot more. 
 
Much has been made about how cryptocurrencies, in particular Bitcoin, have the potential to act as a hedge against inflation, especially given the seemingly relentless money printing by central banks. 
 
And Institutional and accredited investors have bought into the narrative in a big way, with over US$900 million pouring into institutional cryptocurrency investment vehicle Grayscale’s various cryptocurrency trusts in the second quarter of this year alone. 
 
Given the lack of institutional-grade investment options for cryptocurrencies, Grayscale, one of the few options on hand, has seen a surge in demand for its institutional-grade cryptocurrency trust products.  
 
Grayscale currently boasts over US$5 billion in assets under management, up around 40% since its last quarterly report in June and driven mainly by its flagship Bitcoin trust.
 
The way Grayscale’s trust products work is that institutional and accredited investors can invest using cash with Grayscale taking care of the rest – including custody. 
 
But a seeming lack of knowledge of the market price of some of the underlying cryptocurrencies that Grayscale’s products represent, has seen its Litecoin Trust and Bitcoin Cash Trust products launched last week command a premium of as much as 1,000% over the underlying price of the cryptocurrencies. 
 
Grayscale’s Litecoin Trust was briefly trading at a premium of over 1,200% over the price of Litecoin itself and both the Litecoin Trust and Bitcoin Cash Trust have been seen regularly trading at triple-digit premiums over their underlying cryptocurrencies. 
 
Those premiums have since been whittled down, but remain at an eye-watering 600%. 
 
But even Grayscale’s other cryptocurrency products which have longer vintages, such as its Bitcoin and Ethereum product, command hefty premiums over their underlying cryptocurrencies. 
 
Grayscale’s Bitcoin Trust trades at a premium of 20% over Bitcoin’s price, while Ethereum trades at just under 100%, down from 800% as recently as June this year. 
 
Part of the reason for these Grayscale premiums of course is that institutional investors who are either unfamiliar with, or prefer not to have to deal with the clunky self-custody of cryptocurrencies are willing to pay for it. 
 
The other reason of course is that public investors, who are either unaware of the premiums that they are paying, or prefer not to deal with the hassle of obtaining the underlying cryptocurrencies directly, are being sold these Grayscale products by institutional investors. 
 
In which case, the “smart” money may be moving out of these premiums, offloading them to new investors, and making a hefty chunk of change in the process. 
 
Grayscale’s products can be traded like stocks, allowing over-the-counter investors to gain exposure to cryptocurrencies without having to deal with the complexities involved in buying cryptocurrencies directly from cryptocurrency exchanges that to most American investors may appear flaky. 
 
But the huge and wildly swinging premiums for Grayscale’s cryptocurrency products (over which Grayscale has no control), has led to fresh calls for a full-fledged Bitcoin exchange-traded-fund product, that could allow regular investors to buy shares in an index that tracks either Bitcoin or a basket of cryptocurrencies with institutional custody. 
 
However, the U.S. Securities and Exchange Commission has repeatedly rejected proposals for a Bitcoin ETF, arguing that the price of cryptocurrencies is still vulnerable to manipulation.
 
Till then of course, investors looking for institutional grade custody and over-the-counter trading, will have to pay a premium, the question then is, is it worth it? 

Novum Digital Asset Alpha is a digital asset quantitative trading firm.

Exclusive access to Novum Digital Asset Alpha’s Daily Analysis is made in conjunction with Bitcoin Malaysia.

The information and thoughts laid out in this analysis are strictly for information purposes only and should not be regarded as an offer to sell or a solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be in violation of any local laws.

It does not constitute a recommendation or take into account the particular allocation objectives, financial conditions, or needs of specific individuals.

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