Big Buyers Hit Pause Button as Bitcoin Surges

Flagging institutional interest in Bitcoin may slow the cryptocurrency's return to a price above $40,000, an analyst said.

Flows into Grayscale Bitcoin Trust, valued at about $20 billion, appear to have slowed, London-based JPMorgan analyst Nikolaos Panigirtzoglou said in a research note.

"At the moment, the institutional flow impulse behind the Grayscale Bitcoin Trust is not strong enough for Bitcoin to break out above $40,000," JPMorgan said.

JPMorgan Chase and Co. chairman and CEO Jamie Dimon speaks during the Fortune Global Forum on November 4, 2015 in San Francisco, California. Justin Sullivan

Bitcoin recently changed hands at $31,727.30, down 7.96% in the last 24 hours, CoinDesk reported. Bitcoin, the world's largest crypto-currency, peaked at close to $42,000 on Jan. 8.

Bitcoin's immediate prospects are further dampened because "momentum traders will continue to unwind Bitcoin futures positions," CoinDesk said.

That suggests profit-taking rather than buy-and-hold as a bet on future price appreciation. Through last Friday, the Grayscale Bitcoin fund has declined about 22% while Bitcoin has fallen about 17%.

Optimists believe that institutional backing has bolstered Bitcoin as a hedge against what some expect to be a weakening dollar due to the U.S. Federal Reserve's massive quantitative easing to stabilize the economy during the COVID-19 pandemic.

The fear: future inflation.

But skeptics argue that the recent bounce in Bitcoin's value is just another speculative bubble similar to 2017, when strong retail interest boosted prices. Critics argue that Bitcoin's price represents little beyond the desire of many to buy the cryptocurrency, much like Holland's tulip mania in the 1600s, the first documented investment bubble.

JPMorgan said it's appropriate to characterize Bitcoin as a "risk" asset rather than as a "safe" haven.

In the last year, the analyst said Bitcoin's correlation with the S&P 500, a major index of the U.S. stock market's performance, has increased. In addition, the correlation between the price of gold and the S&P 500 has been generally positive.

Therefore, JPMorgan said, "both Bitcoin and gold could be more characterized as 'risk' rather than 'safe' assets" because many investors appear to prefer the assets as an "alternative" to other investments rather than safe or "hedge" assets.

There also may be a generational split in how Bitcoin is viewed by potential buyers, but it's unclear how that might play into the crypto-currency's future price performance.

"The older cohorts preferred gold," JPMorgan said, "while the younger cohorts preferred Bitcoin as an 'alternative' currency."

The popularity of Bitcoin with Millenials has influenced how it performs as compared to the stock market, the report said.

"In addition, the simultaneous buying of U.S. equities and Bitcoin by Millennials has increased the correlation between Bitcoin and S&P 500 since last March," JPMorgan said.

Gold bars
Gold bars are seen at the Czech Central Bank on Sept. 5, 2011, in Prague. The average price of gold in 2020 was $1,773.73 per ounce, an increase of 24.43% over 2019. Michal Cizek/Getty

But additional institutional support for Bitcoin may be on the way.

In a registration statement filed with the U.S. Securities and Exchange Commission, BlackRock Global Allocation Fund and BlackRock Funds V said its managers may add Bitcoin to the list of derivatives used as part of the holdings.

"Each Fund may use instruments referred to as derivatives, which are financial instruments that derive their value from one or more securities, commodities (such as gold or oil), currencies (including Bitcoin), interest rates, credit events or indices (a measure of value or rates, such as the S&P 500 Index or the prime lending rate)," the SEC registration statement said.

"Derivatives may allow a Fund to increase or decrease the level of risk to which the Fund is exposed more quickly and efficiently than with other transactions," the SEC said.

That's far from a "buy" order, but if the funds include Bitcoin as part of the future mix of assets, it could strengthen interest in the crypto-currency—and that might drive prices.

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