On Wednesday, when both bitcoin and ethereum had soared well over 50% from their recent lows in just a few weeks, we took JPMorgan to task on twitter pointing out that it was "so strange: when crypto was dropping, JPM had a report literally every other day observing how momentum collapsed and it is going even lower. Shockingly, not a single report from JPM with bitcoin up 50% in 3 weeks."
So strange: when crypto was dropping, JPM had a report literally every other day observing how momentum collapsed and it is going even lower.— zerohedge (@zerohedge) August 11, 2021
Shockingly, not a single report from JPM with bitcoin up 50% in 3 weeks
It did not take JPMorgan's in house crypto quant, Nick Panigirtzoglou, long to respond and shortly after our tweet Panigirtzoglou - author of the popular Flows and Liquidity note - published his final report before a two week vacation, where in addition to several other topics, he touched on - drumroll - the powerful upward reversal in cryptos.
Elaborating on his view that institutional buying of crypto has reversed and after several months of muted activity has once again spiked, Panigirtzoglou writes that "the sharp rebound of crypto markets over the past three weeks caught most investors by surprise" - actually what he probably means is that it caught JPM and those who believed JPM by surprise - "raising questions about the drivers."
So, rushing to goalseek said "drivers", the same ones we have repeated week after week - that despite the muted price action, institutions had in fact been loading up - JPM now admits as much writing that "in futures we see a significant impulse as shown in Figure 5. Figure 5 depicts our assessment of the net positioning change by investors in CME Bitcoin and Ethereum futures (in number of contracts to remove price effects). Not only have our position proxies based on CME futures been reversing previous declines, they are also making new record highs for both bitcoin and ethereum."
But while institutional buying was to be expected, one notable reversal was the activity of CTAs, where according to the JPM quant, "momentum traders such as CTAs have likely amplified recent price increases. Not only has the decay in momentum signals stopped, but is being reversed inducing positioning built up by momentum traders."
Next, JPM charts its sestimate for shorter-term and longer-term momentum signals in bitcoin. Here Panigirtzoglou notes that he had argued previously that "the failure of bitcoin to break above the $60k threshold would see momentum signals turn mechanically more bearish and induce further position unwinds, and that this had likely been a significant factor during the previous months correction by inducing CTAs and other momentum-based investors to cut positions." However, now that CTA's have extracted as much profit as they could, these bitcoin momentum signals are now rising, especially the shorter look-back period momentum signal, which according to Figure 6 has been flipping from negative to positive territory. Typically, the Greek quant explains, "this is when momentum traders’ impact is mostly felt as they are forced to exit short positions and start building up long positions."
The next chart suggests that there has been a similar dynamic "with the shorter lookback period momentum signal for ethereum shifting from negative to positive territory."
One final reason why Panigirtzoglou had been bearish - until now - is because futures backwardation in cryptos, a bearish signal for bitcoin and crypto markets more generally, had again reappeared in crypto after dominating for most of 2018 according for most of the previous four months.
But no more, and as the JPM quant notes, "we had previously argued that the 21-day rolling average metric of Figure 8 should shift back into positive territory to be able to argue that the previous phase of demand weakness is over. This condition is now met with the 21-day rolling average metric of Figure 8 firmly into positive territory."
Putting all this together, Panigirtzoglou summarizes his bearish capitulation as follows:
"there are clear signs of demand improvement in futures markets pointing to rising institutional demand for crypto. Momentum traders such as CTAs have likely amplified recent moves as the shorter lookback period momentum signals shifted from negative to positive territory. Typically this is when momentum traders’ impact is mostly felt as they are forced to exit short positions and start building up long positions."
What is remarkable is that having lingered in the ether for hours, it took our tweet at exactly 4pm to spark a furious surge in crypto, sending bitcoin over $1000 higher and the rest of the sector surging alongside.
And one final point for those wondering whether to buy bitcoin or ether here, we would like to point that the ETH/BTC pennant has just broken out to the upside.