Novum Alpha – Daily Analysis 3 February 2021 (10-Minute Read)

A wonderful Wednesday to you as markets look to be none the worst for wear. 

In brief (TL:DR)

  • U.S. stocks regained their footing with the S&P 500 (+1.39%), tech-centric Nasdaq Composite (+1.56%) and blue-chip Dow Jones Industrial Average (+1.57%) as the worst excesses of the retail-investor led volatility appears to have subsided.  
  • Asian stocks opened higher, extending a global rally amid a slew of bullish corporate earnings and a crumbling of the retail trading frenzy that fueled swings in heavily shorted shares.  
  • U.S. 10-year Treasury yields edged higher at 1.11% amid a move to fast track a U.S. stimulus plan (yields rise when bond prices fall). 
  • The dollar held on to losses as investors moved into other assets. 
  • Oil rose with March 2021 contracts for WTI Crude Oil (Nymex) (+0.24%) at US$54.89 as the dollar slid. 
  • Gold continued to rise with April 2021 contracts for Gold (Comex) (+0.49%) at US$1,842.40 mostly on the back of a declining dollar. 
  • Bitcoin (+7.03%) rose to US$36,123 as inflows into exchanges slowed with outflows and trading expected to continue being choppy this week (outflows typically suggest that traders are looking to hold Bitcoin in anticipation of higher prices). 

In today’s issue…

  1. GameStop Has Been Stopped, But Was It Any Surprise? 
  2. Google “Profits,” Get Google
  3. So Bitcoin Offers No Yield? Not Anymore

Market Overview

Markets regained their swagger this week as the grassroots-led movement of retail investors are drifting rudderless to find their next target. 
Like any revolution, once the protesters have stormed the capital and taken over the reigns of government – what happens next? 
It’s one thing to bomb capital into submission, but what do you do when you take over?
Retail investors evidently have not thought so far ahead as interest in propping up the shares of Reddit recommended shares wanes and investors felt safe enough to head back into the markets again. 
Over in Asia, investors saw a positive morning trading session with Tokyo’s Nikkei 225 (+0.85%), Hong Kong’s Hang Seng Index (+0.19%) , Seoul’s KOSPI (+0.22%) and Sydney’s ASX 200 (+1.04%) all up. 

1. GameStop Has Been Stopped, But Was It Any Surprise?

  • Frenzied rally in GameStop (-60.00%) finally recedes as grassroots movement to pump up the stock price of GameStop loses steam from trading limits by brokers 
  • Short interest in GameStop has all but evaporated, removing the primary reason for the Reddit rallying of the company’s shares 
The first hint that the grassroots-led movement to bid up the shares of companies like GameStop and AMC Entertainment (-41.20%) would come under pressure was the bipartisan support in Congress to investigate and potentially regulate the matter of retail investors funking up the financial system.
The next hint was popular retail trading app Robinhood putting limits on orders as well as tapping on billions of dollars’ worth of credit lines as market makers (who facilitate the sale and purchase of options) demanded greater amounts of settlement collateral.
And that was really all it took to end the possibly first attempt at a decentralized internet retail-led buying frenzy that minted fresh millionaires and punished hedge funds.
But really, what was anyone expecting?
Ironically, both GameStop and AMC Entertainment represent the exact type of business model that was never designed to withstand the Covid-19 economy – in-person retail and entertainment.
To be sure, fundamentals were never the primary driver of the rally in GameStop or AMC Entertainment, but as the platforms which retail traders use to buy these stocks choked access, both plunged.
GameStop’s retreat also coincided with a sharp reduction in short interest as investors appeared to have covered their positions.
And unlike the initial push to focus on GameStop shares on Reddit, the retail investor-led market machinations have now drawn global media attention – meaning that Reddit’s no secret anymore and forums touting anything from American Airlines (-1.48%) to BlackBerry (-21.05%) are actually diluting retail investor attention.
Because there are no barriers to posting on a Reddit forum, who’s to know which target is next or whether the retail investors will rally in sufficient numbers to pump it?
But investors in cryptocurrencies will note that none of this is new.
In the early days of initial coin offerings or ICOs, pump and dump Telegram groups were the norm – with faceless figures directing the various moves.
But just like in the heady days of ICO investing (gambling), investors thinking of speculating on the likes of GameStop or any other Reddit-touted share or asset should be cautioned that they could lose everything in a heartbeat and these are not shares of companies that are “value” buys for holding long term.
The rally behind GameStop was driven primarily by what’s known as a “short squeeze” – by getting retail investors to buy up bullish call options for GameStop and forcing hedge funds who bet against GameStop to cover their shorts.
But now that short sellers have lost interest in GameStop, essentially capitulating to retail investors, those who had stormed the citadel have found that taking power is one thing, but what do you do with it next? 

2. Google “Profits,” Get Google

  • Google (+1.38%) stomps analyst estimates by outperforming last quarter revenue projections 
  • Google’s cloud computing business reported separately for the first time, suggesting that the tech giant is concentrating more efforts on what is likely to be a key revenue generator and diversifier for its various assets in the coming days 
As Covid-19 vaccines started getting approved towards the end of last year, cautiously optimistic advertisers bumped up their ad spending and pushed Google’s ad revenues way beyond Wall Street estimates.
A holiday shopping season that was almost entirely online saw advertisers take the opportunity to advertise in the very medium that consumers were buying from – online.
Revenue at Google soared by 23% as the tech giant reported one of its strongest quarters in years as advertisers sought to reach customers in the most effective way during the pandemic.
And while a new dependence on e-commerce by retailers led the recovery, the last quarter of 2020 also featured firms in the hardest hit sectors including travel and entertainment, start to advertise again on optimism over vaccines and a gradual opening up of the global economy.
Significantly, Google reported the performance of its cloud computing division for the first time, suggesting that it may seek to highlight the importance of that segment as a key driver of growth in the coming days.
Google Cloud reported an operating loss of US$1.24 billion in the last quarter and US$5.6 billion for the year as it gains its footing and mounts a challenge to incumbent Amazon Web Services and Microsoft’s Azure cloud businesses.
Analysts were unperturbed by the losses at Google’s cloud division and while many had been expecting the business unit to turn a profit, most recognized the longer term value of its investments in the business with a backlog that stood at nearly US$30 billion.
As working from home becomes a durable business practice in the longer term, Google’s investment in cloud is likely to pay off, similar to the way Amazon Web Services division bled money for years before becoming a massive driver of their bottom line.
Google’s cloud division growth accelerated by 2% in the last quarter with revenue increasing a whopping 47% to US$3.8 billion and remains the fastest growing business unit under the Google umbrella.
Shares in Google rose some 8% in aftermarket trading and the tech giant could well shoot past US$2,000 in the medium term. 

3. So Bitcoin Offers No Yield? Not Anymore

  • New regulated Bitcoin deposit product now offered by Gemini Trust 
  • Higher yield for Bitcoin deposits comes at higher risk, with every deposit essentially a long bet on the cryptocurrency and without deposit insurance 
One of the biggest criticisms leveled against Bitcoin is that in generates no yield – and to steal a quote from a famous investor who leveled the same criticism at gold – “it just sits there and stares at you.”
Not anymore.
In an era of near-zero interest rates, a new crop of financial products revolving around Bitcoin and other cryptocurrencies are offering annual rates of return as high as 12%. 
Those familiar with the decentralized finance or DeFi bubble from last summer will yawn at the yields as in those heady days, deposits in cryptocurrencies were generating an unsustainable 5-digit annualized percentage yield.
But just as trees do not grow to the sky, there’s no such thing as money for nothing and thankfully yields have come down to more reasonable levels.
As competition between cryptocurrency exchanges heats up, cryptocurrency incentives have been rising again for depositors even as Bitcoin’s seven-fold surge since last March has seen more mainstream institutions and companies flooding into cryptocurrencies like never before.
Yesterday, Gemini Trust, a cryptocurrency exchange founded by the billionaire Winklevoss twins of Facebook (+1.94%) infamy, became the latest to offer interest rates ranging from 1.54% for Balancer to 7.4% for Filecoin, with Bitcoin deposits generating 3.05%.
The first of its kind account available across all fifty states of the U.S., the product currently isn’t available overseas.
The catch though is that the yields are paid for in the cryptocurrency of deposit, making depositors naturally long on any digital asset deposited.
And while the Gemini Earn account looks and acts a lot like a typical savings account – paying an adjustable interest rate on deposits, with accountholders able to withdraw their currency at any time with no fees or penalties, there’s no equivalent of deposit insurance should the account provider fail
Unlike dollar deposits, where the U.S. Federal Reserve sets benchmark interest rates in accordance with economic outlook, Gemini Trust and other deposit takers set their own interest rates based on internal supply and demand analysis.
Centralized cryptocurrency exchanges like Gemini Trust differ from decentralized exchanges like Compound Finance in that those platforms have what are known as “automated market makers” which seek to naturally set the yield on liquidity pools (which function similar to lending out a cryptocurrency) based on market demand in a more transparent manner.
These automated market makers then help to generate the interest yield on those deposits.
But DeFi platforms like Compound and the myriad other decentralized exchanges are far more complex to navigate and require interaction with Metamask, which most cryptocurrency initiates may not be entirely comfortable with.
For that reason, Gemini Trust’s plug-and-play solution may find some audience among those who own cryptocurrency but don’t necessarily want to be actively involved in the management of it.

With more institutional investors piling into the cryptocurrency markets though, demand for borrowing Bitcoin and other digital assets is surging and hedge funds, family offices and other investors, are borrowing cryptocurrencies to structure complex trades largely because it’s easier to borrow these assets then to buy and custody them.  


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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