We were amused (and noted as much) yesterday when we read that according to the latest BofA Fund Manager Survey, Wall Street professionals were convinced that "long bitcoin" was the most crowded trade in May.
As we explained, the simple reason why this is impossible is that most Wall Street institutions simply can not participate in bitcoin as a result of the asset class' structural limitations (no ETFs, limited Trust exposure, modest open interest in futures, etc).
Overnight, JPMorgan listed another reason why bitcoin is definitely not the most crowded trade: namely because over the past two quarters, "institutional investors appear to be shifting away from bitcoin and back into traditional gold, reversing the trend of the previous two quarters."
As JPM's quant Nick Panigirtzoglou explains, "the bitcoin flow picture continues to deteriorate and is pointing to continued retrenchment by institutional investors. Over the past month, bitcoin futures markets experienced their steepest and more sustained liquidation since the bitcoin ascent started last October." Needless to say, this is hardly the stuff of "most crowded trades", and is shown in the chart below which is JPM's bitcoin futures position proxy.
The dramatic reversal in the institutional flow picture is shown by JPM in the next two charts, which update the bank's usual summary tables of bitcoin demand in both dollar and bitcoin terms. The charts "proxy retail flows via estimated bitcoin purchases facilitated by Square and Paypal and institutional flows via the sum of our estimated flows via CME bitcoin futures, via bitcoin funds and various institutional announcements of bitcoin purchases via traditional digital wallets. According to Figure 7, in dollar terms, the retail flow had likely seen a big acceleration in Q1 relative to the previous quarter while the institutional flow had seen a more modest increase. Figure 8 converts these flows into number of bitcoins. In bitcoin terms, the retail flow appears to have been rather stable at close to 200k bitcoins in each of the previous three quarters. The institutional flow slowed considerably however in Q1 and turned negative in Q2!"
To be sure, this institutional pullback is hardly surprising in a world where everyone has become a momentum chaser, and sure enough, the JPM strategist writes that similar to previous episodes of futures position reduction, "it is likely that momentum traders, such as CTAs and crypto funds, were at least partly behind the unwinding over the past month" adding that such unwinding "likely took place in recent weeks as our short lookback period momentum signal for bitcoin declined further towards negative territory for the first time since March 2020, as shown in Figure 2."
This matters because as the liquidation flush in cryptos this morning suggests, everyone is desperately looking for the oversold point. Well, according to JPM, "when these momentum signals shift from positive to negative territory that we typically observe the most abrupt changes in asset prices. With the longer lookback period momentum signal still in pretty positive territory, it is perhaps too early to characterize bitcoin as oversold."
And while Panigirtzoglou suggests that "a decline in the bitcoin price to $26k for it to mechanically shift to negative territory" it is safe to say that after this morning's liquidation on huge volume, we are now deep into negative territory and bitcoin is drastically oversold.
While we wait for the JPM quant to update his charts, one other observation is notable, namely that "the recent outflows from bitcoin funds have been accompanied by inflows into gold ETFs in a reversal of the last quarter of 2020 and the beginning of this year, as shown in Figure 4. In fact, a similarly contrasting picture arises in the futures space with position unwinding in bitcoin futures and long position build up in gold futures, as shown in Figure 5."
To JPM, this suggests that institutional investors appear to be shifting away from bitcoin and back into traditional gold reversing the trend of the previous two quarters, even though "it is not clear what is driving this shift":
Perhaps institutional investors are fleeing bitcoin as they see its previous two quarter uptrend ending and thus seek the stability of traditional gold away from the rapid downshifting of digital gold. Or they perhaps view the current bitcoin price as too high relative to gold and thus do the opposite of what they did in the previous two quarters, i.e. they sell bitcoin and buy gold.
But perhaps the most notably observation from the JPM note which hit late last night and was circulated across trading desks this morning, is JPMorgan's estimation of bitcoin "fair value", which of course is a joke, but provides most lazy traders with a convenient numeric benchmark against which to gauge the price of bitcoin. This is what JPM said:
... our fair value model for bitcoin points to valuation overshooting. Our current fair value for bitcoin based on a volatility ratio of bitcoin to gold of around x4 would be 1/4th of $140k or $35k. $140k is the price of bitcoin that would equalize it with the private sector holdings of gold for investment purposes (of around $2.7tr at the moment). This $140k price should be thought of as a long-term theoretical target assuming a convergence of bitcoin volatility to that of gold and an equalization of bitcoin allocations to that of gold in investor portfolios. Needless to say such convergence or equalization of volatilities or allocations is unlikely in the near future.
No surprise then that after overshooting to the downside and dropping almost $14,000 overnight, and sliding as low as $30,000, bitcoin has now stabilized in the $34,000-$36,000 range.