Market may decline due to weak crypto futures demand
Why the market may fall
The cryptocurrency market may soon face a short-term downturn due to weakening institutional demand for Bitcoin and Ethereum futures on the Chicago Mercantile Exchange (CME), according to analysts from investment bank JPMorgan.
As The Block reports, since December, the total market capitalization of cryptocurrencies has dropped by 15%, falling from a record $3.72 trillion to $3.17 trillion, marking a significant correction. According to JPMorgan, Bitcoin and Ethereum futures on CME are approaching a state of "backwardation"—where futures prices fall below spot prices. A similar situation was observed in June and July of last year.
JPMorgan analysts, led by Managing Director Nikolaos Panigirtzoglou, explain that the weakening demand for regulated CME futures indicates a decline in institutional investor interest.
Under normal conditions, when futures demand is strong, they trade at a premium to spot prices—a market state known as "contango." This premium typically exceeds 10% annually due to the high risk-free rate in crypto markets, where USD lending yields 5%-10% per year. However, when demand and price expectations weaken, futures can trade below spot prices.
Why institutional demand Is declining
JPMorgan analysts identify two key reasons for the drop in institutional demand:
- Profit-taking. Large investors are locking in profits as there are no immediate positive catalysts in the market. According to forecasts, significant crypto-related initiatives from the new U.S. administration are unlikely to appear before the second half of the year, leaving investors in a wait-and-see mode.
- Exit of momentum-based traders. Funds that follow trend-based trading strategies have been reducing their exposure to cryptocurrencies, further pressuring the market. In recent months, momentum indicators for Bitcoin and Ethereum have weakened, with Ethereum’s signal already turning negative.
Given these trends, JPMorgan warns that downward pressure on the crypto market may persist in the short term.
Meanwhile, JPMorgan Chase has significantly increased its investments in cryptocurrency exchange-traded funds (ETFs), reaffirming its commitment to digital asset investments.
