JPMorgan jeopardizes Bitcoin breakout above $37K with a bearish report

JPMorgan, JPMorgan jeopardizes Bitcoin breakout above $37K with a bearish report
Image by Willgard Krause from Pixabay 

Yerevan (CoinChapter.com) — A recent run-up in the Bitcoin market faltered right after JPMorgan analysts raised the alarm about the cryptocurrency’s declining demand among institutional investors.

The strategists led by Nikolaos Panigirtzoglou said Bitcoin is moving into backwardation. The ill-sounding term refers to a period when an asset’s spot price trades higher than its futures price. Analysts consider it as a signal to stay bearish for the concerned asset, believing that it points to a lack of institutional interest on the whole.

Bitcoin normally trades in contango — an opposite of backwardation, when the spot price goes higher above the futures price. In the flagship cryptocurrency’s case, the spot rate is typically 10% higher than the futures one on an annual basis.

“[It] is likely a function of the high ‘risk-free’ rate of opportunity cost implicit in crypto markets,” the JPMorgan strategists said.

“But when demand is [fragile], and price expectations turn bearish, the futures curve shifts into backwardation,”

they added.

Backwardation was mostly the case all across 2018, when the Bitcoin prices slipped to near $3,100 in December 2018 — a year after topping out at $20,000.

JPMorgan chart showing backwardation and contagion periods in the Bitcoin market
JPMorgan chart showing backwardation and contagion periods in the Bitcoin market. Source: Bloomberg

JPMorgan analysts said they believe that the return of backwardation in recent weeks points to a bear Bitcoin market ahead. Meanwhile, their outlook would remain the same until the spread over the spot rates moves back into a positive area.

Bitcoin-arassic World: Dominance

They also expected recovery in Bitcoin Dominance Index to improve the cryptocurrency’s bullish outlook against fading institutional demand.

“We believe the share of Bitcoin in the total crypto market would have to normalize and perhaps rise above 50% (as in 2018) to be more comfortable in arguing that the current bear market is behind us,”

the JPMorgan analysts wrote.
Bitcoin Dominance Index chart. Source: BTC.D on TradingView.com
Bitcoin Dominance Index chart. Source: BTC.D on TradingView.com

The report came as Bitcoin attempted another upside recovery towards $40,000. As of Thursday, the BTC/USD exchange rate was able to reach as high as $37,685. But the pair lost its bullish momentum midway, also as traders decided to secure their profits in anticipation of surprising turnarounds.

Earlier bullish cues for Bitcoin came after El Salvador, under the leadership of its president Nayib Bukele, passed a bill that made Bitcoin a legal tender in the country. Bukele also said that they would soon announce a plan that would assist in mining cryptocurrencies using excessive volcano energy.

Funda-Techno Setup

In May, Tesla CEO Elon Musk had reversed his decision to accept Bitcoin as payments for their electric vehicles, citing the cryptocurrency’s increasing carbon footprints. In retrospect, Bitcoin is mined using excessive computations, which requires electricity. Some reports indicated that mining Bitcoin consumes as much as power as Switzerland.

Musk’s criticism played a key role in crashing BTC/USD from near $65,000 in mid-April to $30,000 on May 19. The pair has been since attempting to resume its yearlong uptrend. Since March 2020, Bitcoin has rallied by more than 800%.

Bitcoin tests 20-day EMA as resistance
Bitcoin tests 20-day EMA as resistance. Source: BTCUSD on TradingView.com

BTC/USD now tests its 20-day exponential moving average as its interim resistance for a clear move towards $40,000. Nonetheless, the pair’s bullish momentum would mature only upon a clear breakout above $40K. So far, it has failed to sustain above the said level.

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