Bitcoin’s big rally may not be all that it seems, said J.P. Morgan analysts.
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Bitcoin
and other cryptocurrencies fell Wednesday, underperforming other risk-sensitive assets and giving up some gains from a big rally over the past month. The very foundations of that rally may be less solid than they seem, said analysts at
J.P. Morgan.
The price of Bitcoin has retreated 2% over the past 24 hours to $35,800, having recently dipped as far as $35,250, the largest crypto’s lowest level in more than a week. Bitcoin continues to fall back from its recent, 18-month peak near $38,000, which marked the high point of a rally that carried prices one-third higher in a month, spurring calls of a new bull run and ending a multi-month period of calm in crypto markets.
“Bitcoin continued its correction … which at one point seemed to get out of control,” said Alex Kuptsikevich, an analyst at broker FxPro. “The burst of optimism in traditional markets bypassed cryptocurrencies … perhaps the most acute question is whether the cryptocurrency market’s counter-trend dynamic indicates risk demand exhaustion or an attempt at a quick correction to continue following equities.”
Indeed, Bitcoin missed out on a rally in the stock market that started on Tuesday and continued on Wednesday, with cryptos tumbling despite a catalyst that buoyed the
Dow Jones Industrial Average
and
S&P 500
—and should have also lifted token prices. Inflation data revealed that price growth is slowing significantly, reinforcing hopes that the Federal Reserve has finished raising interest rates that are sitting at generational highs and which have put pressure on risk-sensitive assets like stocks and cryptos.
Bitcoin’s remarkable underperformance after weeks of beating stocks raises questions about the foundations of the crypto rally, which has largely come on the back of catalysts specific to token markets. There is reason to believe the rally is overdone, analysts at J.P. Morgan led by Nikolaos Panigirtzoglou wrote in a recent note.
The key driver of the rally has been hopes that the Securities and Exchange Commission (SEC) will soon approve the first spot Bitcoin exchange-traded fund (ETF). The bull thesis is that, if approved, a spot Bitcoin ETF would usher in a fresh wave of investor interest—and capital flows—to crypto, as well as signal a regulatory softening towards the industry. But that might not stand up, said Panigirtzoglou and his team.
For one, “instead of fresh capital entering the crypto industry to be invested in the newly-approved ETFs, we see as a more likely scenario existing capital shifting from existing Bitcoin products such as the
Grayscale Bitcoin Trust,
Bitcoin futures ETFs and publicly listed Bitcoin mining companies, into the newly-approved spot bitcoin ETFs,” the J.P. Morgan analysts said.
In addition, Panigirtzoglou also pointed to evidence from existing spot Bitcoin ETFs in Canada and Europe as a reason for skepticism, because those funds “have gained little interest from investors since their inception,” he said.
Moreover, J.P. Morgan doesn’t buy the idea that the regulatory backdrop is softening, which some see as a result of the SEC’s legal defeats against Grayscale over converting its trust to an ETF and against Ripple over the classification of its token.
“It is far from clear that the regulatory tightening of the crypto industry will lessen significantly going forward given how unregulated this industry is,” Panigirtzoglou said. “U.S. crypto industry regulations are still pending and we do not believe U.S. lawmakers would shift their stance.”
J.P. Morgan also takes a muted view on Bitcoin’s so-called halving, a change to the blockchain network scheduled for next year that will reduce the issuance of tokens and tighten supply—a force that bulls see as supportive for crypto prices.
“The argument being that the upcoming halving event would create Bitcoin supply scarcity thus inducing further Bitcoin rally. This argument seems unconvincing as the Bitcoin halving event and its effect are predictable and in our opinion are well factored into Bitcoin price,” Panigirtzoglou said.
Finally, and perhaps most damning for the crypto rally, J.P. Morgan’s view is that the forces that contributed to Bitcoin’s brutal bear market continue to exist.
A chilling “crypto winter” began in earnest after the collapse of the Terra stablecoin network in May 2022, and reached a trough after crypto exchange FTX declared bankruptcy the following November. J.P. Morgan pointed to these meltdowns, in addition to regulatory uncertainty, muted interest among institutional investors, subdued activity on the widely-used Ethereum network, a shrinking stablecoin market, and a drying-up of venture capital funding.
“All these headwinds remain in place thus limiting crypto markets upside from here,” Panigirtzoglou said. “This coupled with our position indicators having shifted to pre-FTX/pre-Terra territory already, makes us cautious on crypto markets going forward.”
Beyond Bitcoin,
Ether
—the second-largest crypto—fell 3% to $1,890. Smaller tokens or altcoins were more muted, with
Cardano
and
Polygon
both trading around flat. Memecoins were in the red, with
Dogecoin
and
Shiba Inu
each shedding 1%.
Write to Jack Denton at [email protected]
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