Home Crypto BANK OF AMERICA: Buy these 4 stocks that could benefit from the mass adoption of digital assets driven by the regulation of the $141 billion stablecoin industry

BANK OF AMERICA: Buy these 4 stocks that could benefit from the mass adoption of digital assets driven by the regulation of the $141 billion stablecoin industry

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BANK OF AMERICA: Buy these 4 stocks that could benefit from the mass adoption of digital assets driven by the regulation of the $141 billion stablecoin industry
  • With a market worth of about $141 billion, stablecoins have change into “too massive to disregard,” BofA says.
  • The financial institution views regulation as the catalyst for the mass adoption of stablecoins and digital assets.
  • It shares 4 stocks that could benefit as regulation leads extra gamers to the stablecoin industry.

In October, Bank of America’s digital asset strategists launched the agency’s crypto research with a report calling the $2.5 trillion industry “too massive to disregard.” Now, the similar phrases are getting used for the $141 billion stablecoin market. 

Stablecoins, which peg their costs to fiat currencies, commodities, or different cryptocurrencies, have change into a systemically vital asset, however they continue to be the “wild west,” analysts led by Alkesh Shah and Andrew Moss wrote in a November 23 analysis word. 

With quarterly transaction volumes reaching greater than $1 trillion this 12 months, stablecoins are extensively used by merchants and traders to switch cash between exchanges, transfer cash between exchanges and wallets, lock in buying and selling earnings, or “rotate into money” during times of volatility spikes. They are continuously used as collateral for leveraged digital asset merchandise, the analysts have noticed. 

The largest stablecoins are pegged to the US greenback. For instance, there are greater than 72 billion tether coins (USDT) in circulation, which implies over $72 billion is meant to be held in reserve to make sure that the cash are absolutely backed and liquid. The similar goes for USDC coins (USDC), which have over 37 billion in circulation. 

The implication is obvious: “digital assets and conventional monetary markets are extra linked than many understand,” the word mentioned.

Shah and Moss defined that if bitcoin have been to fall to zero, the influence on conventional monetary markets could be restricted. However, if a high stablecoin have been to change into unpegged, the liquidity of stablecoins, many of that are backed by securities akin to industrial paper as an alternative of FDIC-insured financial institution deposits, would change into severely strained as traders sprint for fiat currencies. 

The analysts are notably involved about the run dangers of tether given its measurement, asset high quality, and sure liquidity. They additionally query tether’s industrial paper holdings, that are “not clear.”

“If Tether have been to have inadequate liquidity, it’s doable that they might ship unknown securities in-kind or gate redemptions. Either motion is prone to speed up investor redemptions and could spill over into different stablecoins,” they wrote. 

In the case of a stablecoin run, the central financial institution is unlikely to come back to the rescue as it might do in conventional monetary markets as a result of the unclear regulatory jurisdiction and the Fed’s restricted capacity to transact in digital assets. 

“The Fed could arrange emergency amenities to restrict a stablecoin fallout in the fiat world, however could be unlikely to assist in the digital asset world,” Shah and Moss wrote. “To proceed the Wild West analogy, if there’s a stablecoin shootout, the sheriff won’t be coming.”

‘Regulation as a catalyst to mass adoption’

Given its fast development and important function in the crypto market, stablecoins could vastly benefit from a complete regulatory framework. In their view, applicable regulation could additionally catalyze the higher adoption of digital assets by establishments, retail traders, and banks. 

The analysts consider that the Treasury’s “Report on Stablecoin” on November 1 is an indication of the pressing want to control stablecoins, which could then change into a viable means of cost. Their analysis reveals that many establishments are ready for regulatory readability earlier than including publicity to digital assets. 

“Stablecoin regulation is a big first step towards a complete regulatory framework that encompasses the digital asset ecosystem,” they wrote.

Regulation could additionally permit funds corporations and banks to enter the digital asset industry, in line with Shah and Moss. Companies akin to Western Union (WU), which focuses on cross-border funds and worldwide remittances, could combine blockchain know-how and stablecoin funds into their platforms. Meanwhile, corporations together with Mastercard (MA) and Visa (V) have already partnered with digital-asset corporations and could additional broaden their choices below a transparent regulatory framework. 

The analysts additionally count on banks to benefit from stablecoin regulation. Specifically, digital-asset-focused banks akin to Signature Bank (SBNY), which have already entered the market, could additional differentiate themselves. The Treasury’s report, which recommends that “stablecoin issuers be insured depository establishments,” could additionally place banks as the “pure companions” in the stablecoin house, they added.  

The aforementioned US-listed buy-rated names could see market worth enlargement consequently of complete stablecoin regulation, in line with the word. Further danger and reward analyses of the stocks are listed under. 

1. Mastercard

Mastercard

Ticker: MA

Market cap: $315 billion 

Commentary: “We make the most of a mix of 34x ’23E GAAP EPS and our DCF mannequin to calculate our 12-month value goal of $416. We view the a number of as justified, given MA’s above common earnings development in a normalized surroundings, which we attribute to the high quality of its enterprise mannequin and aggressive place, in addition to a versatile price construction. Our discounted money movement (DCF) evaluation assumes a weighted common price of capital of 8.7% and a terminal development price of 4%.

Downside dangers to our value goal are: 1) weak shopper spending in the occasion of a macroeconomic downturn, 2) elevated buyer focus and consolidation, 3) legislative and regulatory adjustments, 4) potential litigation settlements, which could embrace financial damages, and/or lead to adjustments in enterprise practices, 5) loss of buyer contracts as a result of elevated competitors or new entrants, together with native/world cost networks, new start-ups and present massive and small know-how corporations, and 6) massive fluctuations in the worth of currencies/international change charges.”

Source: Bank of America

2. Signature Bank

Signature Bank

Ticker: SBNY

Market cap: $19 billion 

Commentary: “Our PO of $405 is predicated on a 75% weighting to 2023 P/E and 25% to P/YE22e TBV per share. The greater P/E weighting is justified in early phases of an financial cycle given investor concentrate on development and EPS upside from greater charges. We assigned 20.0x our 22E/2.3x our 2023E multiples, respectively, above friends as a result of stronger stability sheet development and a wholesome credit score profile. The above friends multiples are driven by our expectations for SBNY to ship above common development given important EPS sensitivity to greater charges.

Risks to our value goal are required provisioning at higher-than-forecast ranges, additional deterioration in rental earnings for industrial properties, and a longer-than- anticipated low-rate surroundings. Upside dangers are higher than anticipated macro surroundings and growing long run charges.”

Source: Bank of America

3. Visa

Visa

Ticker: V

Market cap: $415 billion 

Commentary: “We use a mix of 32x C’23E EPS (GAAP) and our discounted money movement (DCF) mannequin to calculate our 12-month value goal of $279. We view the a number of as justified given Visa’s development profile, execution observe file, and enormous addressable market alternative. The key assumptions in our DCF mannequin embrace a terminal development price of 3.5% and a weighted common price of capital (WACC) of 8.5%.

Downside dangers to our value goal are: 1) weak shopper spending in the occasion of a macroeconomic downturn, 2) elevated buyer focus and consolidation, 3) legislative and regulatory adjustments, 4) potential litigation settlements, which could embrace financial damages, and/or lead to adjustments in enterprise practices, 5) loss of buyer contracts as a result of elevated competitors or new entrants, together with native/world cost networks, new start-ups and present massive and small know-how corporations, and 6) massive fluctuations in the worth of currencies/international change charges.”

Source: Bank of America

4. Western Union

Western Union

Ticker: WU

Market cap: $6.8 billion 

Commentary: “We use 11x our ’22E adjusted EPS to calculate our 12-month value goal of $25. This a number of is a forty five% low cost to the S&P 500, as a result of WU’s decrease development and earnings high quality, in addition to aggressive threats.

Upside dangers to our value goal are: 1) C2C pricing proves more healthy than anticipated, 2) WU accelerates its progress in penetrating digital/on-line channels, thereby delivering significant and sustainable enhancements in top-line development, 3) WU will increase its return of money to shareholders extra considerably than anticipated.

Downside dangers to our value goal are: 1) C2C pricing stress intensifies, as the aggressive surroundings thickens, 2) new regulatory occasions trigger monetary/operational hurt, 3) money flows change into impaired and trigger WU to lower its share buyback and/or dividend.”

Source: Bank of America

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