JPMAM’s Michael Cembalest Says He Won’t ‘Play the Sap’ for Crypto

The J.P. Morgan investment strategist admits he’s “tempted” to invest. Here’s why he won’t.

Michael Nagle/Bloomberg

Michael Nagle/Bloomberg

The 1941 movie The Maltese Falcon — based on the Dashiell Hammett novel — is about a desperate attempt to obtain a precious statue encrusted with rare jewels. But when the devious characters played by Sydney Greenstreet and Mary Astor finally obtain the Maltese Falcon, it turns out to be a fake.

The fervor over cryptocurrencies is something like that, according to Michael Cembalest, chairman of market and investment strategy for J.P. Morgan Asset Management.

In a new report called “The Maltese Falcoin: On Crypto and Blockchain,” Cembalest says he understands why people are interested in cryptocurrencies, given the levels of debt and fiat money since the financial crisis in 2008. “Central banks and Treasuries have created a massive confidence void,” he wrote, noting that venture capitalists “have been plowing money into crypto at an accelerating pace, rivaling other innovation categories.”

But Cembalest argued the main case for crypto — as a store of value — won’t hold water until more people use it, “its volatility settles into a range consistent with store of value investing,” and “it goes up or remains stable when systemic risks and/or inflation are rising.”

He noted that cryptocurrency volatility is much greater than either gold or the stock market, as its recent performance illustrates. Bitcoin now trades around $44,000 — down more than a third since its peak last fall of almost $68,000.


Cembalest said this volatility is partially driven by the pump and dump schemes that proliferate in the space. He quoted a 2021 paper from the University of Technology in Sydney and the Stockholm School of Economics that found 355 cases of pump and dump schemes in a six month period in 2018 involving 23 million people across two exchanges and 197 different currencies.

And that’s not the only other issue confronting cryptocurrencies, according to Cembalest, who pointed to front running by miners and their attacks on exchanges. Hacks and theft are also common.

The argument for bitcoin as a medium of exchange also doesn’t hold up, except in a few isolated cases, Cembalest said. When merchants accept bitcoin, he noted, the “bitcoin price simply adjusts to reflect the price of the goods or services in fiat currency terms, and most merchants quickly hedge their bitcoin exposure.”

Another promise of cryptocurrencies — that of a decentralized financial system where “uncollateralized lending” between participants will avoid bank fees, credit scoring, and other costs — is also suspect. Cembalest noted that while nonbank lending is on the rise, such lenders face higher delinquency rates despite operating in an environment of “rising household incomes, lots of government stimulus, and very low household delinquency rates.”

And while a lot of big financial institutions (including J.P. Morgan) are getting into this market, Cembalest said “the common denominator” is “very little principal risk in cryptocurrency, with the goal of profiting from increased adoption, trading, hedging, and lending by their customers.”

Cembalest’s 31-page report also discusses the pros and cons of NFTs, cross-border remittances, stablecoins, and the blockchain in some detail, ultimately tying it all back to the Maltese Falcon.

In the movie, Astor — playing a scheming protagonist after the statue —asks Humphrey Bogart’s detective Sam Spade to help her evade a murder charge, leading to Bogart’s famous lines: “I won’t play the sap for you… I won’t because all of me wants to… regardless of consequences — and because you’ve counted on that with me the same as you counted on that with all the others.”

Cembalest said that just about sums up how he feels about cryptocurrencies.

“I won’t be buying it even though part of me wants to, regardless of the consequences, since that’s what some crypto holders have been counting on since the beginning.”

For the time being, he said, “the most widely discussed use cases and the valuations at which they are trading are still” — as Bogart said at the end of the film — “‘the stuff dreams are made of.’”