JPMorgan Maintains Caution on Bitcoin and Crypto Market Despite Recent Selloff

JPMorgan remains cautious about the cryptocurrency markets, even as they show signs of recovery following a significant decline, which was the worst experienced since the collapse of Sam Bankman-Fried’s FTX empire in November 2022.

The leading cryptocurrency experienced a sharp drop of over 15% on Monday but managed to rebound by approximately 5% the following day. The cause of this volatility was not tied specifically to the crypto sector but was part of a larger trend affecting traditional risk assets, such as stocks.

Recent weak payroll data from the US and rising jobless claims have amplified concerns about a potential recession. Additionally, the Bank of Japan’s recent rate hike has raised worries about an unwinding of the yen carry trade. This combination of factors has led to a correction in risk assets, including equities and cryptocurrencies, while safe-haven assets like government bonds and currencies such as the yen and Swiss franc saw gains.

JPMorgan analysts have indicated that one particular crypto trading firm contributed to the sell-off by liquidating significant amounts of ether. Retail investors also played a role in the market turbulence, with spot bitcoin exchange-traded funds (ETFs) experiencing their highest monthly outflow in August.

The report highlights that momentum traders, including Commodity Trading Advisors (CTAs), have been closing long positions and opening short positions, which further intensified the market downturn. In contrast, larger institutional investors in the futures market have shown limited de-risking activity. JPMorgan’s futures position indicator, which tracks total open interest in CME bitcoin futures contracts, supports this observation, as the positive futures curve indicates a relatively bullish sentiment among these investors.

Factors contributing to institutional optimism include Morgan Stanley’s new policy allowing wealth advisors to recommend spot bitcoin ETFs to clients. Furthermore, the majority of liquidations from the Mt. Gox and Genesis bankruptcies appear to be complete, and forthcoming cash payments from the FTX bankruptcy may increase demand in the crypto market. Both major US political parties have expressed intentions to support favorable regulations for cryptocurrencies in the coming years.

Bitcoin’s recent recovery from a low of around $49,000 aligns with JPMorgan’s estimated production cost for bitcoin. The bank noted that if prices had remained at or below this level for an extended period, it could have put pressure on bitcoin miners, potentially leading to additional price declines.

Despite these positive indicators, JPMorgan believes that many of these factors are already reflected in the current market conditions. With limited de-risking observed in the CME bitcoin futures space and equity markets still appearing vulnerable, the bank maintains a cautious outlook on the cryptocurrency market in light of the recent corrections.