JPMorgan says crypto faces downside risk as bitcoin and ether futures show weak demand

Crypto markets face downside risk in the near term as institutional demand for CME bitcoin and ether futures has weakened, according to JPMorgan analysts.

The total crypto market cap has declined by 15% from its record high of $3.72 trillion on Dec. 17 to around $3.17 trillion, marking a significant correction. This downturn has seen CME bitcoin and ether futures nearing "backwardation" — where futures prices fall below spot prices — mirroring last June and July, JPMorgan analysts led by managing director Nikolaos Panigirtzoglou wrote in a report on Wednesday.

"This is a negative development and indicative of demand weakness by those institutional investors that use regulated CME futures contracts to gain exposure into these two cryptocurrencies," the analysts said.

They explained that when demand for bitcoin and ether futures is strong, they typically trade at a premium to spot prices, a state known as "contango." This premium, often above 10% annually, is likely due to the high "risk-free" rate in crypto markets, where lending USD typically yields 5%-10% per year, the analysts noted. However, they said that when demand and price expectations weaken, futures could slip below spot prices, as also seen last June and July.

'Lack of positive catalysts and momentum decay'

JPMorgan analysts attribute the weakening demand for CME bitcoin and ether futures to two key factors. First, some institutional investors appear to be taking profits due to a lack of immediate positive catalysts. The analysts said that major crypto-related initiatives from the new U.S. administration are unlikely before the second half of the year, leaving investors in a wait-and-see mode.

Second, momentum-driven funds such as commodity trading advisors have been reducing exposure, further weighing on demand. "Both bitcoin and ethereum momentum signals have been downshifting over the past couple of months with the ethereum momentum signal having shifted already into negative territory," the analysts said.

Given these trends, the analysts caution that crypto markets could face continued pressure in the near term.