JP Morgan Predicts ‘Limited Downside’ For Bitcoin

In a research note on Thursday, JP Morgan indicated a positive outlook for Bitcoin, suggesting that the digital currency has a “limited downside” from its current position. The financial giant’s analysis focuses on the dynamics involving the Grayscale Bitcoin Trust (GBTC) and the newly launched spot Bitcoin ETFs in the United States.

JP Morgan Foresees End Of Selling Pressure

The report acknowledges the recent 20% correction in BTC’s price over the past two weeks, attributing it largely to profit-taking on previous GBTC investments. JP Morgan analysts note, “Profit-taking on GBTC’s ‘discount to NAV trade’ has likely been a major driver behind Bitcoin’s correction; $4.3 billion has thus far exited GBTC since its conversion to ETF.”

They emphasize that this profit-taking is mostly responsible for the downward pressure on BTC’s price as funds exit the crypto space. However, the analysts are optimistic, stating, “We believe that most of this $4.3 billion GBTC outflow reflects profit taking rather than a shift towards cheaper spot Bitcoin ETFs.”

JP Morgan further estimates that the bulk of profit-taking on GBTC’s “discount to NAV trade“, approximately $3 billion, has already occurred, suggesting that the primary force driving the price down is largely exhausted.

The report also sheds light on the shifting landscape in the Bitcoin ETF market. It points out that while GBTC has been dominant, the emergence of cheaper and more competitive spot ETFs, particularly from Blackrock and Fidelity, is noteworthy. These new entrants have attracted significant inflows, totaling $1.9 billion and $1.8 billion respectively, and are challenging GBTC with substantially lower fees.

In this context, the analysts warn that “the current $3 billion per month shift from GBTC to cheaper newly created spot Bitcoin ETFs could even accelerate if other spot ETFs reach critical mass to start competing with GBTC in terms of size and liquidity.”

Notably, this competition is not only leading to a reallocation of funds within the ETF space but is also drawing capital from digital wallets held by retail investors, indicating a broader shift in investor preferences, JP Morgan claims.

Spot Bitcoin ETFs Improve Market Structure

Furthermore, the analysts highlight the structural impact of spot BTC ETFs on the market. They argue that the introduction of these ETFs is transforming the price discovery process, making it more akin to that of traditional financial systems, especially equities, where ETFs play a significant role. They posit, “The emergence of spot Bitcoin ETFs is likely to induce a significant change in the Bitcoin market structure.”

The report also discusses GBTC’s strategic move to introduce a covered call ETF, emphasizing its potential to enhance market depth and liquidity. “GBTC’s plan to introduce a covered call ETF is another step towards increasing market depth and liquidity for its ETF,” the analysts state.

This approach, commonly employed in equity markets, could offer investors exposure with reduced risk, potentially boosting both GBTC’s appeal and the broader Bitcoin derivatives market.

In essence, JP Morgan’s report paints a picture of a BTC market at a crossroads, influenced by a complex interplay of profit-taking, investor reallocation, and strategic product introductions. Despite recent downturns, the analysis suggests a “limited downside,” underpinned by the conclusion that most of the pressure from profit-taking may already be in the rearview.

At press time, the BTC price was once again attempting to overcome the crucial resistance level of $40,300.

Featured image from DALL·E, chart from TradingView.com