Investing.com -- JPMorgan (NYSE:JPM) strategists expect cryptocurrency markets to remain under pressure in the near term.
The market staged a short-lived rally spurred by former President Trump’s announcement to potentially include XRP, Solana (SOL), and Cardano (ADA) in a strategic crypto reserve alongside Bitcoin and Ethereum.
While the initial investor reaction was positive, the announcement was quickly met with skepticism, mainly about congressional approval and the feasibility of adding smaller, more volatile tokens to such reserves.
Similar state-level discussions about incorporating Bitcoin into strategic reserves have not garnered support either, with states like Montana, North Dakota, South Dakota, and Wyoming rejecting the idea due to concerns over risk and volatility.
Global central banks, including the Swiss National Bank and the National Bank of Poland, have also opted for more stable and secure reserve assets, with Poland choosing traditional assets like gold.
The European Central Bank (ECB) was also critical of Bitcoin reserves. This points to “the broader scepticism among policy makers about the adoption of cryptocurrencies as reserve assets,” JPMorgan strategists led by Nikolaos Panigirtzoglou noted.
The crypto market’s recent downturn was exemplified by February’s nearly 20% drop in Bitcoin’s price, accompanied by record outflows from spot Bitcoin ETFs, indicating significant retail investor involvement in the correction.
February saw a $3.5 billion outflow from these ETFs, the largest since their inception. Leveraged ETFs, such as those from Strategy (NASDAQ:MSTR) (formerly known as MicroStrategy), also experienced challenges last month due to limited capital inflows, resulting in significant market fluctuations.
Institutional investors have also shown a reduction in their positions, attributed to an absence of positive market catalysts and a decay in momentum.
This is evidenced by a modest decrease in open interest changes in CME futures contracts for Bitcoin and Ethereum, suggesting potential for further position unwinding, especially as momentum traders begin to accumulate short positions.
Another indicator of waning demand in the crypto sector is Strategy’s recent issuance of $2 billion in convertible debt, which has raised concerns about market saturation.
Since the U.S. election, companies like Strategy and Bitcoin mining firms have raised substantial capital through equity and debt offerings, contributing to Bitcoin’s price increase.
“However, the terms of these deals have become increasingly more investor-friendly over the past month or so, indicating that investors are becoming more cautious and more selective,” strategists said.
Strategy’s latest debt offering featured a lower conversion premium and a three-year put option, aimed at attracting investors amidst a 40% drop in its stock price since its November peak.
This drop, according to JPMorgan, alongside the broader crypto market weakness “will likely reduce even further the appetite for debt/equity issued by Strategy/bitcoin miners going forward.”
“Overall we believe that crypto markets are likely to remain under pressure over the near term,” the bank concluded.