For much of the summer, when bitcoin was shedding its April 15 all time high of $63,000 by more than half, Wall Street was bombarded with weekly notes from JPMorgan's cross-asset strategist Nikolaos Panigirtzoglou who would encourage selling, telling institutional clients that upward momentum had fizzled and that the only logical direction for bitcoin was lower. Those notes ended abruptly in July when Bitcoin reversed sharply and start its latest upward trek, and were instead replaced with warnings that there is too much euphoria in the market and thus the only logical direction for bitcoin was... you can guess the rest.
Well, maybe not, because on Wednesday bitcoin soared higher, surging above $55,000 and once again sporting a market cap of over $1 trillion, and pushing the total market cap of all crypto markets above $2.3 trillion (still below the market cap of one Apple, Inc.), and suddenly the doom and gloom from JPM's Panigirtzoglou has done a 180, with the quant writing in his latest Flows and Liquidity report published overnight that "the increase in the share of bitcoin is a healthy development as it is more likely to reflect institutional participation than smaller cryptocurrencies."
Blindsided by the surge in bitcoin, the JPM strategist was also wrong about the institutional preference for bitcoin vs ethereum, writing two weeks ago that "JPMorgan: Institutional Investors Are Piling Into Ethereum, Leaving Bitcoin" - starting in early October, the two largest cryptos have decoupled with Bitcoin clearly outperforming its smaller peer.
Not surprisingly Panigirtzoglou addressed this latest flub, writing in his note that "we had argued before our position proxies based on CME futures had showed strong preference for ethereum vs. bitcoin by institutional investors during most of August and September. But as shown in Figure 16 this preference appears to be have been reversing since the end of September with a sharp rebound in the position proxy for bitcoin. This rebound reflects at least partly short covering as indicated by Figure 17 which depicts bitcoin futures liquidations across all futures exchanges. According to Figure 17 short bitcoin futures position liquidations appear to have picked up over the past week or two."
Having completed his damage control homework, Panigirtzoglou then shifted to the main thrust of his note, which was once again trying to explain why bitcoin was surging, where he offered three distinct reasons. While the first two have been extensively discussed here in the past few weeks, and we thus found them of marginal value, it was his third point that may have some insight especially when presented to gold bugs, namely that "institutional investors appear to be returning to bitcoin perhaps seeing it as a better inflation hedge than gold."
Here is what JPM believes has triggered the bitcoin recovery:
- the recent assurances by US policy makers that there is no intention to follow China’s steps towards banning the usage or mining of cryptocurrencies;
- the recent rise of the Lightning Network and 2nd layer payments solutions helped by El Salvador’s bitcoin adoption. According to President Bukele 2.7m Salvadorians had onboarded by early October the Chivo wallet which uses the Lightning Network. We have to admit we are skeptical of this second explanation; and
- the reemergence of inflation concerns among investors has renewed interest in the usage of bitcoin as an inflation hedge. Bitcoin’s allure as an inflation hedge has perhaps been strengthened by the failure of gold to respond in recent weeks to heightened concerns over inflation, behaving more as a real rate proxy rather than inflation hedge.
The last point is notable, especially since we have frequently noted the growing price divergence between actual gold and its digital counterpart, which while not only providing a credible diversification tool to risk assets (compared the return of bitcoin to any other asset class YTD) has also shown a strong correlation with soaring inflation expectations in recent months, unlike gold which is sharply lower for the year.
In the chart below, JPMorgan shows "tentative signs that the previous shift away from gold into bitcoin seen during most of Q4 2020 and the beginning of 2021 has started re-emerging in recent weeks."
If JPM is correct (this time) and if indeed bitcoin is emerging as not only an accepted inflation hedge - certainly better than gold - but as an asset JPM will push to its institutional clients, especially those sporting a balanced, 60/40 portfolio, the potential inflows into bitcoin and cryptos in general would be remarkable if even a small portion of the global 60/40 portfolio is reallocated toward the digital currency, an outcome One River's CIO Eric Peters has been predicting for a long time.