New York, September 22, 2017

Dear Friends and Colleagues,

A month ago, I suggested to Web Begole, who manages Exante’s IT systems, to write down his thoughts on cryptocurrencies. Web has followed the space closely for years and I thought it was natural for us to comment on the topic, especially since we have occasionally looked at indicators derived from bitcoin pricing to complement our understanding of global capital flows.

Since then hell erupted. Not because Jamie Dimon came out trash-talking the innocent little digital coins; and not because China’s crackdown on bitcoin trading caused a weekly price drop of 20%. No, I am talking about the internal debate within the Exante team. I observed firsthand how views about bitcoin and other cryptocurrencies are so passionate and polarized that it is hard to reach consensus on anything on the topic. While a lively debate is healthy in a company focused on data science and macro analysis, the particular contention around this topic (as heated as the public discourse) gave me pause. I decided to delay the letter.

A few weeks have now passed, emotions have calmed internally (if not publicly).  My goal today is simply to write down a few basic (factual and hopefully not overly controversial) observations about cryptocurrencies. So here we go:

First, the rapidly rising global volume in cryptocurrencies makes them yet another relevant piece in the global capital flow puzzle. Over the last year, the global daily volume in Bitcoin and Ethereum has octupled (yes, that is a word!). Cryptocurrency trading volume is now more than of $3bn/day on average, and will likely soon surpass that of the world’s most liquid stock: Apple ($4bn/day).

Second, the value of existing cryptocurrencies is also becoming significant, surpassing $100bn recently. That is larger than gold holdings in ETF form (just below $100bn). Hence, the accumulated asset positions in cryptocurrencies have now reached a size where contagion effects (positive or negative) to other markets would not be surprising.

Third, there have been times when movements in cryptocurrencies provided signals about capital flight at the macro level. As Bitcoin volumes increased along with Chinese currency intervention in 2016, Chinese individuals were seemingly using virtual currency to circumvent government capital controls and escape a weakening currency (outside traditional capital market channels). This was the message from the premium on bitcoin traded on Chinese exchanges during 2016, and it was as an interesting real-time proxy of capital flight.

We want to be pragmatic in our analysis, and we are open-minded to embedding signals from cryptocurrency space in our capital flow analysis, if we find that those signals provide additional relevant information. We do not believe that one can predict with confidence at this point that any given cryptocurrency will continue to thrive and gain status as an alternative to traditional currencies in the long term. But we look forward to using the information from an increasingly active cryptocurrency market in our tracking of global capital flows, when appropriate. That should not be too controversial…

And now a paragraph on our business: We have recently finalized our work on a complex platform for analysis of global capital flows, covering 35 major markets. The platform is called Global Flow Analytics. This set of data and modeling tools focusses on cross-border capital flow movements and is aimed at improving currency forecasting and risk management. We will officially launch Global Flow Analytics in coming weeks. But if you want an early peek at the tools and learn about how we use it to improve macro strategy, please reach out here.

Jens Nordvig
Founder & CEO
Exante Data LLC